St. Otto's Home v. Minnesota Dept. of Human Services

• Decision Date: 10 March 1989
• Docket Number: Nos. C7-87-2514,C2-88-3,s. C7-87-2514
• Citation: 437 N.W.2d 35
• Court: Minnesota Supreme Court
• Parties: Medicare & Medicaid Guide P 37,839 In the Matter of the Contested Cases of ST. OTTO'S HOME, Little Falls, Minnesota, and St. Francis Home, Breckenridge, Minnesota, Petitioners, Relators, v. MINNESOTA DEPARTMENT OF HUMAN SERVICES, Respondent. In the Matter of the Contested Case of LUTHER HAVEN NURSING HOME, Montevideo, Minnesota, Petitioner, Relator, v. MINNESOTA DEPARTMENT OF HUMAN SERVICES, Respondent.

Page 35

437 N.W.2d 35

Medicare & Medicaid Guide P 37,839

In the Matter of the Contested Cases of ST. OTTO'S HOME,

Little Falls, Minnesota, and St. Francis Home, Breckenridge, Minnesota, Petitioners, Relators, v. MINNESOTA DEPARTMENT OF HUMAN SERVICES, Respondent.

In the Matter of the Contested Case of LUTHER HAVEN NURSING

HOME, Montevideo, Minnesota, Petitioner, Relator, v. MINNESOTA DEPARTMENT OF HUMAN SERVICES, Respondent.

Nos. C7-87-2514, C2-88-3.

Supreme Court of Minnesota.

March 10, 1989.

Syllabus by the Court.

1. Department of Human Services' interpretation of Minn.R. 9549.0020, subp. 26 (Supp.1986), as amended in 1985, was unreasonable in light of its past interpretation of similar language in the pre-1985 version of the rule.

2. Department of Human Services' interpretation of Minn.R. 9549.0020, subp. 26 (Supp.1986) was improper because its definition of the terms within the rule constituted unpromulgated rulemaking.

3. Any error by the administrative law judge in considering a study not included in the record was harmless error.

Steve M. Mihalchik, Samuel D. Orbovich, Minneapolis, for petitioners, relators.

Hubert H. Humphrey, III, Atty. Gen., John L. Kirwin, Asst. Atty. Gen., St. Paul, for respondent.

Heard, considered and decided by the court en banc.

YETKA, Justice.

Relators, St. Otto's Home, St. Francis Home and Luther Haven Nursing Home, are appealing from a decision of the Minnesota Court of Appeals, which affirmed the Department of Human Services' (hereinafter DHS) determination that they were not "hospital-attached nursing homes" under Minn.R. 9549.0020, subp. 26 (Supp.1986) of the medical assistance rate setting rules. We reverse.

After denial of relators' request for hospital-attached status and the homes' subsequent appeal, DHS initiated two contested case proceedings pursuant to Minn.Stat. §§ 14.57-.62 (1986)--one for St. Otto's and St. Francis and another for Luther Haven. In each case, the administrative law judge recommended that the DHS's determinations be upheld. On December 3, 1987, the acting DHS Commissioner further modified the administrative law judge's rationale in favor of the DHS and agreed with the decision to deny relators hospital-attached status. The nursing homes appealed to the Minnesota Court of Appeals, which subsequently affirmed the commissioner's decision. St. Otto's Home v. Dep't of Human Serv., 425 N.W.2d 252 (Minn.App.1988); Luther Haven Nursing Home v. Dep't of Human Serv., 425 N.W.2d 260 (Minn.App.1988). This court granted relators' petition for review and ordered that the cases be consolidated.

The dispute in this case centers on the DHS's interpretation of Minn.R. 9549.0020, subp. 26 (Supp.1986) (promulgated in 1985; see 9 State Reg. 1716, 2659 (1985)). Relators are three Minnesota nursing homes which participate in the state's medical assistance (Medicaid) program. Through this program, homes which provide care for the needy and otherwise participate are reimbursed for their costs at payment rates set by the DHS pursuant to the state rate-setting rules. See Minn.R. 9549.0010-.0090 (1987). The total payment rate is a composite of several rates, including the operating cost payment rate. Minn.R. 9549.0020, subp. 44 (Supp.1986). Nursing homes which are classified as "hospital-attached" under Minn.R. 9549.0020, subp. 26 generally have higher operating costs and are given a higher cost rate limit than homes classified as "free standing." Hospital-attached nursing homes incur higher operating costs for several reasons. Relators point out that nursing homes attached to hospitals must pay their workers wages comparable to those of hospital workers and often have higher standards of care. The DHS does not dispute this, but contends that the primary reason for the higher costs is that the combined federal Medicare cost report used by most hospital-nursing home complexes shifts substantial hospital costs to the nursing homes.

Franciscan Sisters Health Care, Inc., a corporation formed by an order of Catholic nuns who provide a variety of health care services in Minnesota, own and operate St. Otto's Home and St. Gabriel's Hospital in Little Falls and St. Francis Home and Hospital in Breckenridge. Both nursing homes are physically attached to the respective hospitals by underground tunnels which are used to transport patients, supplies and personnel between the two. Both homes share services with their hospitals. Through Campus Services, an organization consisting of various administrators, St. Otto's Home and St. Gabriel's Hospital share a variety of services, including a power plant, laundry, maintenance, biomedical engineering, administration, security and management.

St. Francis Home and Hospital share a steam boiler furnace and a storage area for bulk supplies. Hospital personnel has provided the home with social service coordination, medical records consultation, drugs and drug consultation, dietary consultation and physical therapy services.

Prior to July 1, 1984, St. Otto's and St. Gabriel's had different boards of directors, administrators and financial officers. Since then, the home and the hospital have become progressively more integrated. Effective July 1, 1984, St. Otto's and St. Gabriel's were headed by a common president and chief executive officer and shared the same directors and staff for personnel, engineering and finance. The hospital and home began using the same computerized accounting system, materials management director and volunteer coordinator in February of 1985. On April 1, 1987, they began sharing all common operations under common directors and management and the integration between them was virtually complete.

Before January 1, 1986, the chief executive officers of St. Francis Home and Hospital were employees of Franciscan Sisters Health Care, Inc., and reported to its vice president of health operations. On January 1, 1986, the home and hospital were governed by the same board of directors and president. All departments common to both facilities were combined under common direction and other operations became further integrated.

Both St. Otto's and St. Francis exceeded operating cost limits for free-standing nursing homes during the two rate years (1985 and 1986) at issue. According to the assistant vice president of finance for Franciscan Sister's Health Care, denial of hospital-attached status would cost St. Otto's home approximately $3.71 per resident per day and St. Francis would lose $1.30 per resident per day.

Luther Haven is a non-profit corporation operating a nursing home in Montevideo, Minnesota. Prior to 1972, Luther Haven was classified as a "free standing" nursing home. Sometime that year, the City of Montevideo and Chippewa County informed Luther Haven of their intention to build a new hospital. Luther Haven agreed to provide services for the hospital and link its nursing home by tunnel to the hospital in exchange for the city's promise to approve and finance the nursing home's expansion and retire its existing debt by issuing revenue bonds. In order to obtain financing, Luther Haven conveyed the nursing home land and buildings to the city which then leased them back to Luther Haven for 25 years. During the lease term, Luther Haven is required to pay rent sufficient to cover the principal, interest and other costs on the bonds issued by the city. Luther Haven is authorized to purchase the land and buildings at any time for $100 plus the outstanding amount of revenue bond debt. Luther Haven's audit reports treated this sale and lease-back transaction as a financing arrangement.

In 1975, the Chippewa County-Montevideo Hospital was constructed adjacent to Luther Haven. The hospital is attached by a tunnel to Luther Haven to form a medical complex which also includes a clinic. Both the hospital and Luther Haven acknowledge that they are running a joint facility. They share a variety of services and facilities, including a boiler, water softener, staff dining area, laundry, garages, air-conditioning, materials management, employee lockers, connecting links, an employee parking lot and nurse education programs. Luther Haven and the hospital have separate boards of directors although each has a shared services committee. These two committees meet together to confer on shared services and matters of common interest between Luther Haven and the hospital.

St. Otto's, St. Francis and Luther Haven each, with their respective hospitals, participates in the federal Medicare program, which is administered by Blue Cross/Blue Shield of Minnesota. Medicare requires that all three hospitals file annual cost reports using a step-down methodology to allocate the cost of services shared with the nursing homes. A step-down is an accounting procedure which allocates the costs of non-revenue-producing cost operations to revenue-producing cost operations. None of the nursing homes' costs were included as separate cost centers in the step-down calculations of their hospitals' Medicare reports. This is in contrast to approximately 65 other Minnesota nursing homes which the DHS recognizes as hospital-attached--the step-down cost reports filed by those hospitals uniformly list the nursing home as a department of the hospital and all the home's costs are allocated in the hospital step-down. Those 65 nursing homes receive virtually all of their operating costs from their respective hospitals in these step-down reports, which are referred to as "combined" step-down reports.

While St. Francis Home was not listed as a cost center on the St. Francis Hospital Medicare cost report during the rate years in issue, it received a minor percentage of its costs by allocation from the hospital. St. Otto's did not receive any of its costs from St. Gabriel; instead, it received its portion of the cost of shared services by allocation from Campus Services, a separate entity, whose step-down reports were filed by the hospital. As the Medicare...