Roanoke v. Finnerty

• Decision Date: 04 May 2010
• Docket Number: Record No. 2869-08-3.
• Citation: 56 Va.App. 190,692 S.E.2d 277
• Court: Virginia Court of Appeals
• Parties: AVANTE AT ROANOKE, Avante at Lynchburg, Avante at Waynesboro and Avante at Harrisonburgv.Patrick W. FINNERTY, Director Virginia Department of Medical Assistance Services.

56 Va.App. 190

692 S.E.2d 277

AVANTE AT ROANOKE, Avante at Lynchburg, Avante at Waynesboro and Avante at Harrisonburgv.Patrick W. FINNERTY, Director Virginia Department of Medical Assistance Services.

Record No. 2869-08-3.

Court of Appeals of Virginia Richmond.

May 4, 2010.

Susan A. Turner (James P. Holloway; Ober Kaler Grimes & Shriver, PC, on briefs), for appellants.

Allen T. Wilson, Senior Assistant Attorney General (William C. Mims, Attorney General; David E. Johnson, Deputy Attorney General; Kim F. Piner, Senior Assistant Attorney General, on brief), for appellee.

Present: FRANK, McCLANAHAN and PETTY, JJ.

McCLANAHAN, Judge.

In this administrative appeal, four affiliated nursing home facilities, Avante at Roanoke, Avante at Lynchburg, Avante at Waynesboro, and Avante at Harrisonburg (collectively “Avante” ¹), appeal the circuit court's affirmance of two related decisions of the Virginia Department of Medical Assistance Services (“DMAS”), the state agency responsible for administering Virginia's Medicaid program. In those decisions, DMAS denied Avante's claims for additional reimbursement of costs (in the form of year-end settlement adjustments) for respiratory therapy services rendered to Medicaid eligible patients over a two-year period. Because of DMAS's erroneous interpretation and application of certain governing state and federal regulations, we agree with Avante that DMAS made errors of law in adjudicating Avante's claims. We thus reverse the circuit court in affirming DMAS's decisions, and remand the case to the circuit court with instructions to remand to DMAS for reconsideration.

I.

Avante, as a Medicaid services provider, established in the mid-1990's specialized care units at its four Virginia nursing facilities, located in Roanoke, Lynchburg, Waynesboro, and Harrisonburg, for the treatment of, among others, ventilator and tracheostomy dependent patients who were eligible for Medicaid benefits. See 12 VAC 30-60-40(H) and 12 VAC 30-60-320 (setting forth Medicaid criteria for “ventilation/tracheostomy specialized care”). Those patients “require[d] comprehensive respiratory therapy services” as part of their specialized care. 12 VAC 30-60-320(B). Avante contracted with the University of Virginia Medical Center to perform the respiratory therapy services. See 42 C.F.R. § 413.106 (regulating cost reimbursements to nursing facilities for Medicare and Medicaid specialized care services provided “under arrangements” with outside entities). Avante received reimbursement for the cost of the services from DMAS, through its administration of the Medicaid program in Virginia. See Code § 32.1-325 (establishing DMAS as the agency in Virginia to administer the Medicaid program).²

The University of Virginia Medical Center eventually stopped performing respiratory therapy services for patients at nursing facilities under the Medicaid program, at which time Avante began performing the services “in-house,” managing “the program on [its] own.” After a year of doing so Avante, in 2001, again contracted with an outside entity, Southern Healthcare Services (“Southern”), to perform the respiratory therapy services for Avante's Medicaid eligible ventilator and tracheostomy dependent patients. This arrangement with Southern extended for at least the next two fiscal years ending May 31, 2002 (FY 2002) and May 31, 2003 (FY 2003), which are the two years in dispute in this appeal.

The respiratory therapy services provided to Avante's above-referenced Medicaid eligible patients fell within the definition of “ancillary services” under the Medicaid payment system for nursing facilities. 12 VAC 30-90-264. The costs of those services were, in turn, categorized as “[s]pecialized care ancillary costs.” Id. Therefore, to the extent Avante's costs for providing those services were “reasonable,” Avante was entitled to payment from DMAS for the costs “on a pass-through basis.” Id. That is, there was no pre-determined annual “ceiling” or limitation on the total actual costs that were subject to reimbursement (unlike, for example, certain Medicaid reimbursement limits for Avante's “routine operating costs”). Id. DMAS paid Avante for the costs of such ancillary services under a prospective payment system. Under that system, DMAS would pay a provider like Avante an “interim rate” or per diem throughout the current year based on the provider's actual “settled” costs for the services in the previous year, and at the end of the current year DMAS would determine what “settle[ment]” was required between it and the provider after reconciling the per diem payments with the provider's actual costs incurred in the current year.³ Id.

In FY 2002, DMAS thus paid to Avante a per diem throughout the year for the respiratory therapy services provided to Avante's Medicaid eligible ventilator and tracheostomy dependent patients based on DMAS's payment to Avante for the costs of such services in the previous year (FY 2001). ⁴ At the end of FY 2002, Avante submitted to DMAS, as required, annual cost reports setting forth inter alia, the actual costs it incurred for those respiratory therapy services in FY 2002-services provided to Avante's patients through its first year contract with Southern. See 12 VAC 30-90-70. Avante indicated in the reports that it had been underpaid for the services, as established by comparing the total of its actual costs for FY 2002 to the total of its interim per diem payments received in FY 2002. Avante's actual costs for the respiratory therapy services in FY 2002 were, in fact, substantially more than its costs “as settled” for the services in the previous year-the year Avante provided the services through its own employees. Accordingly, Avante further indicated in the FY 2002 cost reports that it was claiming, as part of its year-end settlement with DMAS, reimbursement in the amount of its underpayment for the actual costs of the respiratory therapy services incurred in FY 2002.

In the next step of this “cost settlement process,” DMAS evaluated Avante's cost reports, conducted an audit, and decided that Avante's actual costs in FY 2002 for the respiratory therapy services were not reasonable. See 12 VAC 30-90-20; 12 VAC 30-90-70; 12 VAC 30-90-120. Having reached that decision, DMAS determined Avante's reimbursable costs for those services by calculating a “per patient/per day allowance” based on Avante's FY 2001 settled costs. As a result of this calculation, which became the basis of DMAS's FY 2002 cost settlement for Avante, Avante's reimbursable costs were much less than the actual costs it incurred that year in providing the services to its Medicaid patients under its contract with Southern.

Avante pursued its claim for additional Medicaid reimbursement for the costs of its respiratory therapy services provided in FY 2002 by challenging DMAS's FY 2002 cost settlement in an administrative appeal. Following a formal administrative hearing, DMAS issued a final agency decision dated June 30, 2004, rejecting Avante's claim.

The subsequent FY 2003 cost settlement process between DMAS and Avante was essentially the same, both procedurally and substantively, as the process had been for FY 2002. The total of the per diem paid by DMAS to Avante in FY 2003 for the respiratory therapy services provided that year to Avante's Medicaid eligible ventilator and tracheostomy dependent patients-through Avante's second year contract with Southern-was much less than Avante's actual costs for providing the services. After Avante made a claim for the difference, as reflected in its FY 2003 cost reports, DMAS again decided that Avante's actual costs for the services were not reasonable, and determined Avante's reimbursable costs for those services by calculating a “per patient/per day allowance” based on Avante's FY 2001 settled costs. DMAS's FY 2003 cost settlement for Avante thus again resulted in Medicaid cost reimbursement to Avante for respiratory therapy services that was substantially below Avante's actual costs for providing the services in FY 2003. Avante sought additional reimbursement from DMAS through another administrative appeal, and, again, following a formal administrative hearing, DMAS rejected Avante's claim in a final agency decision dated December 2, 2005.

Avante appealed to the circuit court DMAS's final agency decisions on Avante's respective FY 2002 and FY 2003 claims for additional Medicaid reimbursement for the costs of its respiratory therapy services. The two appeals were eventually consolidated for consideration because of the similarity of the issues presented. By letter opinion dated November 5, 2008, the court denied Avante's claims. The court then “sustained” DMAS's two agency decisions and dismissed Avante's appeals by final order entered on December 2, 2008.

This appeal followed.

II.

The Virginia Administrative Process Act authorizes judicial review of agency decisions. See Code § 2.2-4027. Under well established principles governing the appeal of such decisions, “the burden is upon the appealing party to demonstrate error.” Carter v. Gordon, 28 Va.App. 133, 141, 502 S.E.2d 697, 700-01 (1998). Our review 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.” Johnston-Willis, Ltd. v. Kenley, 6 Va.App. 231, 242, 369 S.E.2d 1, 7 (1988). Further, with regard to claims of regulatory interpretive error, we are to “give ‘great deference’ to an agency's interpretation of its own regulations.” Bd. of Supervisors v. State Bldg. Code Tech. Review Bd., 52 Va.App. 460, 466, 663 S.E.2d 571, 574 (2008). “This deference stems from Code § 2.2-4027, which requires that reviewing courts ‘take due account’ of the ‘experience and specialized competence of the agency’ promulgating the regulation.” Id. (quoting Real Estate...