N. Ky. Mental Health-Mental Retardation Reg'l Bd., Inc. v. Commonwealth

• Citation: 538 S.W.3d 298
• Decision Date: 17 March 2017
• Docket Number: NO. 2014-CA-000756-MR,2014-CA-000756-MR
• Parties: NORTHERN KENTUCKY MENTAL HEALTH-MENTAL RETARDATION REGIONAL BOARD, INC. d/b/a Northkey Community Care, Appellant v. COMMONWEALTH of Kentucky, CABINET FOR HEALTH AND FAMILY SERVICES; and Audrey Tayse Haynes, in Her Official Capacity as Secretary of the Cabinet , Appellees
• Court: Court of Appeals of Kentucky

538 S.W.3d 298

NORTHERN KENTUCKY MENTAL HEALTH-MENTAL RETARDATION REGIONAL BOARD, INC. d/b/a Northkey Community Care, Appellant

v.COMMONWEALTH of Kentucky, CABINET FOR HEALTH AND FAMILY SERVICES; and Audrey Tayse Haynes, in Her Official Capacity as Secretary of the Cabinet ¹ , Appellees

NO. 2014-CA-000756-MR

Court of Appeals of Kentucky.

MARCH 17, 2017; 10:00 A.M. Discretionary Review Denied by Supreme Court February 7, 2018

BRIEF FOR APPELLANT: Carole D. Christian, Stephen R. Price, Sr., John William Woodard, Jr., Louisville, Kentucky.

BRIEF FOR APPELLEE: Ann T. Hunsaker, D. Brent Irvin, Frankfort, Kentucky.

BEFORE: COMBS, DIXON, AND JONES, JUDGES.

OPINION

DIXON, JUDGE:

Northkey Community Care (Northkey), a psychiatric children's hospital, appeals from an Order of the Franklin Circuit Court, which rejected its request for an adjustment to its Medicaid reimbursement rate. At issue in this case is the unfortunate and inevitable friction between the needs of the disadvantaged and vulnerable children of this Commonwealth and the government's efforts to spend tax dollars wisely. Such has placed Northkey squarely between the proverbial rock and its attendant hard place. The Cabinet for Health and Family Services (Cabinet), pursuant to its regulations, used a "parity adjustment factor" to reduce Medicaid reimbursement amounts to Northkey. Because we hold this methodology fails to comply with KRS ² 204.560(2), in that it is not based on a calculation specifically related to similar psychiatric hospitals as required by the statute, it is therefore arbitrary. We therefore reverse and remand this matter to the Franklin Circuit Court.

FACTS

Northkey is a small, non-profit, inpatient psychiatric hospital in Covington, Kentucky, which has been in operation for over thirty years. It is exclusively dedicated to providing acute, short-term mental health care to children and adolescents—the vast majority of whom rely on Medicaid to pay for their care. Medicaid is a cooperative federal-state program which provides reimbursement to health care facilities and practitioners who furnish covered healthcare services to individuals deemed to be eligible for Medicaid.

In order to be paid for the specialized services it offers to these children, Northkey must seek reimbursement of the cost of treatment from the Cabinet after services have been rendered. The federal government supplies approximately 70% of the funds reimbursed, and the Commonwealth ponies up the balance. (HR³ at 64).

The Department of Medicaid Services—a division of the Cabinet—has been tasked, pursuant to the Kentucky Medical Assistance Act, KRS 205.510 et seq. , with the responsibility for overseeing Kentucky's Medicaid program, including distribution of all federal funds. As part of these duties, the Cabinet must determine all Medicaid reimbursement rates to qualifying Medicaid providers. The legislature's intent as to distribution of these funds is set out in KRS 205.560(2), which provides in relevant part, "[p]ayments for hospital care ... shall be on bases which relate the amount of the payment to the cost of providing the services or supplies." The exact meaning of these words has been hotly contested over the years.

Apparently in an attempt to carry out the authority given it by the legislature, the Cabinet promulgated regulations originally requiring a "lesser-of" reimbursement formula. Under these regulations, the Cabinet would set rates at the lesser of the calculated rate or the previous year's rate. This reimbursement method was eventually scrapped in 2007, after a judicial determination that it did not comply with the legislature's mandate in KRS 205.560.⁴

Thereafter, the Cabinet issued the current regulations which now determine how Medicaid reimbursements will be calculated. Specifically, 907 KAR ⁵ 1:815 § 3⁶ governs payments to "In-State Freestanding Psychiatric Hospital Care," as well as to "Long-term Acute Care Hospitals," and "In-State Freestanding Rehabilitation Hospital Care." Subsection (e) requires a "parity factor equivalent" to be applied to "aggregate cost coverage," in order to determine the reimbursement rate.

In November of 2007, the Cabinet determined Northkey's base rate per diem to be $653.58, which is their actual cost of services. There is no allegation or indication that this amount is in any way inflated, but rather reflects, in fact, the actual cost of patient care. Nevertheless, applying the formula set out in its regulations, the Cabinet reduced the actual amount of Medicaid reimbursement to Northkey to $571.74 per patient, per day, to be effective November, 15, 2007. Subsequently, the Cabinet calculated Northkey's rate from July 1, 2008, to June 30, 2009, the same way with a minor adjustment for inflation. Northkey's per diem cost was calculated to be $672.34, but was paid $570.86 per day, an amount actually less than the previous year's reimbursement even after adjusting for inflation. These payments constituted 87.5% and 84.5%, respectively, of Northkey's actual costs for patient care.

Upon receiving notification of the Cabinet's reimbursement rate, Northkey requested a Dispute Resolution Meeting seeking reimbursement of its actual total costs for the periods outlined above. The request was summarily denied, however. Northkey then requested and received an administrative hearing to appeal this decision. Based upon the extensive evidence presented at this hearing, the Administrative Hearing Officer rendered a thorough twenty-six-page Recommended Order determining Northkey's reimbursement rate had been arbitrarily established. While acknowledging statutory provisions do not require 100% reimbursement of operating costs, the Hearing Officer concluded the methodology established by the Cabinet must nevertheless relate to the actual costs incurred by the provider. The Hearing Officer determined that in this case the 19.5% parity adjustment was arbitrary when applied to Northkey's base rate. The Officer further found:

The application of the adjustment to Northkey's base rate per diem has no reasonable relationship to its costs of providing services because the adjustment amount was not determined with any consideration for the actual costs for operating a free-standing psychiatric facility for treatment of children and adolescents in general or Northkey in particular. It was based upon a calculation related to acute care hospitals for which a different methodology from that used for a free-standing psychiatric facility is applied to establish rates.

In the December 8, 2009 Order the Hearing Officer awarded Northkey its full allowable costs of $653.58 for the period beginning November 15, 2007, and $682.50 for the rate period beginning July 1, 2008. On December 22, 2009, the Cabinet timely filed exceptions with the Cabinet Secretary, seeking reversal of the Hearing Officer's Recommended Order.

More than two years later, on March 7, 2012, the Interim Secretary for the Cabinet finally issued a six-page Final Order reversing the Recommended Order.⁷ Therein, while taking no issue with any factual finding made by the Hearing Officer, the Secretary opined that the " ‘parity adjustment’ ... established equivalency between acute care hospitals and private psychiatric hospitals [because] they both pay into the provider tax on their gross revenues and receive distributions based on their cost reports." Because Northkey was properly classified under the regulations, and the parity adjustment was properly applied, the Interim Secretary found there was no law, regulation or policy that would allow it any higher reimbursement rate than that provided by 907 KAR 1:815 § 3, and deduced, "[t]his meets the statutory requirements set for (sic) in KRS 205.560(1)(2)(3) and (5)."

Northkey's appeal of the Interim Secretary's Order to the Franklin Circuit Court was likewise unsuccessful. The Circuit Court summarily approved the Acting Secretary's Final Order, concluding that substantial evidence supported the order. Northkey thereafter filed its appeal with this court.

STANDARD OF REVIEW

"Basically, judicial review of administrative action is concerned with the question of arbitrariness. " American Beauty Homes Corp. v. Louisville & Jefferson County Planning & Zoning Comm'n , 379 S.W.2d 450, 456 (Ky. 1964). "There is an inherent right of appeal from orders of administrative agencies where constitutional rights are involved, and section (2) of the Constitution prohibits the exercise of arbitrary power." Id. (internal footnotes omitted).

The scope of judicial review of administrative agency decisions is set forth in KRS 13B.150(2). Therein, the statute provides that a reviewing court "shall not substitute its judgment for that of the agency as to the weight of the evidence on questions of fact." "It is the function of [appellate courts] to ensure that the decision of an administrative agency is supported by substantial evidence. We are not permitted to retry the case or to review the evidence de novo. " Commonwealth of Kentucky Cabinet for Human Res. v. Bridewell, 62 S.W.3d 370, 373 (Ky. 2001) (citing Kentucky State Racing Comm'n v. Fuller , 481 S.W.2d 298 (Ky. 1972) ). "On factual issues, [an appellate court] reviewing the agency's decision is confined to the record of proceedings held before the administrative body and is bound by the administrative decision if it is supported by substantial evidence." Commonwealth of Kentucky Transp. Cabinet Dep't of Vehicle Regulation v. Cornell, 796 S.W.2d 591, 594 (Ky. App. 1990) (citations omitted).

However, as to issues of law we have held:

The Court of Appeals is authorized to review issues of law involving an administrative agency decision on a de novo basis. Aubrey v. Office of the Attorney General, [–––] Ky. App. [––––], 994 S.W.2d 516 (1998). In particular, an interpretation of a statute is a question of law and a reviewing court is not bound by the agency's interpretation of that statute. Halls Hardwood Floor Co. v. Stapleton, [–––

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