Morrison Comprehensive Learning Ctr., LLC v. Va. Dep't of Med. Assistance Servs.

• Decision Date: 12 April 2016
• Docket Number: Record No. 1518-15-1
• Court: Virginia Court of Appeals
• Parties: MORRISON COMPREHENSIVE LEARNING CENTER, LLC v. VIRGINIA DEPARTMENT OF MEDICAL ASSISTANCE SERVICES

MORRISON COMPREHENSIVE LEARNING CENTER, LLC v. VIRGINIA DEPARTMENT OF MEDICAL ASSISTANCE SERVICES

Record No. 1518-15-1

COURT OF APPEALS OF VIRGINIA

APRIL 12, 2016

UNPUBLISHED

Present: Judges Decker, AtLee and Senior Judge Frank

Argued at Norfolk, Virginia

MEMORANDUM OPINION^* BY JUDGE MARLA GRAFF DECKER

FROM THE CIRCUIT COURT OF THE CITY OF PORTSMOUTH

Walter W. Stout, III, Judge Designate

Paul R. Schmidt (Poole Brooke Plumlee P.C., on briefs), for appellant.

Abrar Azamuddin, Assistant Attorney General (Mark R. Herring, Attorney General; Cynthia V. Bailey, Deputy Attorney General; Kim F. Piner, Senior Assistant Attorney General, on brief), for appellee.

Morrison Comprehensive Learning Center appeals the decision of the circuit court affirming the determination of the Department of Medical Assistance Services (DMAS) that it was overpaid for services provided to Medicaid patients. The agency retroactively rejected charges and demanded that the appellant make repayment. The appellant contends that DMAS was not entitled to certain retroactive payments, arguing that neither the agreement between the parties nor the relevant law allowed the agency to demand reimbursement of payments based on those particular breaches of the agreement. The appellant also appeals the trial court's denial of its request for attorney's fees and costs. For the reasons that follow, we affirm the trial court.

I. BACKGROUND

DMAS is the state agency responsible for the administration of the Medicaid Program. See Psychiatric Sols. of Va., Inc. v. Finnerty, 54 Va. App. 173, 176, 676 S.E.2d 358, 360 (2009). Both the state and federal governments fund the program, which provides medical assistance to eligible citizens of the Commonwealth. Fralin v. Kozlowski, 18 Va. App. 697, 699, 447 S.E.2d 238, 239-40 (1994). The director of DMAS is required to administer the plan and "expend federal funds" in accordance with federal and state laws. Code § 32.1-325(D)(1). DMAS contracts with health care establishments to provide needed services. Code § 32.1-325(D)(2).

The appellant signed an agreement with DMAS to be a service provider for the program. The agreement between the parties obligated the appellant to "comply with all applicable state and federal laws, as well as administrative policies and procedures of DMAS." The written agreement provided that "[s]hould an audit by authorized state or federal officials result in disallowance of amounts previously paid to the provider by DMAS, the provider shall reimburse DMAS upon demand."

In 2012, a contractor acting on behalf of DMAS audited the appellant's records for the period from January 1, 2010, through March 31, 2011. In the course of the audit, numerous problems were identified. Auditors assigned an error code to each transaction that they identified as invalid. The errors on which DMAS based the retracted payments can be divided into three categories: inadequate documentation of services provided, failure to satisfactorily reevaluate plans of care, and untimely employee background checks. In total, the agency determined that the appellant was required to repay $164,655.89.

The appellant disagreed with DMAS's determination and filed an appeal with the agency appeals division. Following an informal fact-finding conference, the agency upheld the overpayment determination.

The appellant again appealed, and a hearing officer conducted the de novo hearing that followed. The hearing officer ultimately recommended that the overpayment determination be partially upheld and partially overturned.

DMAS made its final agency decision after considering the recommendations of the hearing officer. The agency upheld the entire overpayment determination.

The appellant pursued an additional appeal in the circuit court. The court affirmed the agency decision and denied the appellant's request for attorney's fees and costs. In rendering the decision, the court found that the facts supported the agency's decision, the decision was not arbitrary and capricious, and the language of the agreement between the parties controlled.

II. ANALYSIS

The appellant challenges the circuit court's affirmance of the agency's retraction of payments. The appellant's first three assignments of error stem from a single argument: that the contract principle of material breach should apply to its agreement with DMAS. It also contends that the circuit court erred by denying its request for attorney's fees and costs. DMAS counters that the contract requires strict compliance with all state laws, federal laws, and DMAS policies and procedures.

"The Virginia Administrative Process Act authorizes judicial review of agency decisions." DMAS v. Patient Transp. Sys., Inc., 58 Va. App. 328, 332, 709 S.E.2d 188, 190 (2011) (quoting Avante at Roanoke v. Finnerty, 56 Va. App. 190, 197, 692 S.E.2d 277, 280 (2010)). On appeal of an agency decision to a circuit court, that court acts in a manner that "is equivalent to an appellate court's role in an appeal from a trial court." LifeCare Med. Transps., Inc. v. DMAS, 63 Va. App. 538, 548, 759 S.E.2d 35, 40 (2014) (quoting Sch. Bd. of Cty. of York v. Nicely, 12 Va. App. 1051, 1062, 408 S.E.2d 545, 551 (1991)).

The "party complaining of agency action" bears the burden of "demonstrat[ing] an error of law." Code § 2.2-4027. Judicial review of an agency decision "is limited to determining (1) [w]hether the agency acted in accordance with law; (2) [w]hether the agency made a procedural error which was not harmless error; and (3) [w]hether the agency had sufficient evidential support for its findings of fact." Patient Transp. Sys., 58 Va. App. at 333, 709 S.E.2d at 190 (alterations in original) (quoting Avante, 56 Va. App. at 197, 692 S.E.2d at 280).

The standard of review for issues of law in the administrative context is well established.

"If the issue falls outside the area generally entrusted to the agency, and is one in which the courts have special competence, i.e., the common law or constitutional law," the court need not defer to the agency's interpretation. "However, where the question involves an interpretation which is within the specialized competence of the agency and the agency has been entrusted with wide discretion by the General Assembly, the agency's decision is entitled to special weight in the courts[, and] . . . judicial interference is permissible only for relief against the arbitrary or capricious action that constitutes a clear abuse of delegated discretion."

Psychiatric Sols., 54 Va. App. at 185, 676 S.E.2d at 364 (alterations in original) (quoting Johnston-Willis, Ltd. v. Kenley, 6 Va. App. 231, 243-44, 369 S.E.2d 1, 8 (1988)). In addition, "the [reviewing] court shall take due account of the presumption of official regularity." Code § 2.2-4027. See generally United States v. Armstrong, 517 U.S. 456, 464 (1996) (explaining that under the "presumption of regularity" doctrine, courts presume that public officials "have properly discharged their official duties" (quoting United States v. Chem. Found., Inc., 272 U.S. 1, 14-15 (1926))).

Contract principles apply to the agreement between the parties. Culpeper Reg'l Hosp. v. Jones, 64 Va. App. 207, 213, 767 S.E.2d 236, 239 (2015). "[A] number of default rules . . . govern contract interpretation." Id. However, a specific default rule applies to a particular contract only if the parties did not agree, through the contract, to displace the rule. See id.

The appellant invokes the contract principle of "material breach," arguing that because the breaches were minor, DMAS could not retract the payments. Under this principle, a party in breach of a contract "is not entitled to enforce the contract," unless the breach involves only "a minor part of the consideration." Id. (quoting Horton v. Horton, 254 Va. 111, 115, 487 S.E.2d 200, 203 (1997)); see also Countryside Orthopaedics, P.C. v. Peyton, 261 Va. 142, 154, 541 S.E.2d 279, 285-86 (2001) (concluding that the appellee's breach was material and therefore he could not enforce the contract). In other words, a breaching party is prevented from enforcing a contract if the breach is "material," that is, "something that is so fundamental to the contract that the failure to perform that obligation defeats an essential purpose of the contract." 1st Stop Health Servs. v. Dep't of Med. Assistance Servs., 63 Va. App. 266, 279, 756 S.E.2d 183, 190 (2014) (quoting Psychiatric Sols., 54 Va. App. at 190, 676 S.E.2d at 367). "Substantial compliance is the inverse of the proposition that a breach of the contract must be 'material' or significant before it will excuse non-performance." Culpeper, 64 Va. App. at 214, 767 S.E.2d at 240; see Psychiatric Sols., 54 Va. App. at 190 n.5, 676 S.E.2d at 367 n.5. As with other default contract rules, parties to a contract "may agree to displace" the principle of material breach. See Culpeper, 64 Va. App. at 213, 767 S.E.2d at 239.

The contract at issue here stated, in pertinent part, that "[t]he provider agrees to comply with all applicable state and federal laws, as well as administrative policies and procedures of DMAS." App. at 153. This reference to state laws, federal laws, DMAS policies, and DMAS procedures incorporated them into the agreement.¹ See, e.g., Condo. Servs., Inc. v. First Owners' Ass'n of Forty Six Hundred Condo., Inc., 281 Va. 561, 571, 709 S.E.2d 163, 169 (2011) (construing the homeowners' association bylaws as part of the contract based on the agreement's reference to them). The agreement to abide by "all DMAS policies and procedures"encompassed the DMAS manual containing its guidelines for how to comply with the applicable regulations. Psychiatric Sols., 54 Va. App. at 187, 676 S.E.2d at 365. The DMAS manual requires providers "to refund payments made by Medicaid if they are found to have billed Medicaid contrary to law or regulation, failed to maintain any record or adequate documentation to support their claims, or billed for medically unnecessary services." DMAS,...