United Nursing Homes, Inc. v. McNutt

• Decision Date: 02 September 1983
• Docket Number: No. 5502-3-II,5502-3-II
• Citation: 35 Wn.App. 632,669 P.2d 476
• Court: Washington Court of Appeals
• Parties: , 2 Soc.Sec.Rep.Ser. 1434, Medicare & Medicaid Guide P 33,501 UNITED NURSING HOMES, INC., et al., Respondents, v. Dr. Harlan McNUTT, et al., Appellants.

Page 632

35 Wn.App. 632

669 P.2d 476, 2 Soc.Sec.Rep.Ser. 1434,

Medicare & Medicaid Guide P 33,501

UNITED NURSING HOMES, INC., et al., Respondents, v. Dr. Harlan McNUTT, et al., Appellants.

No. 5502-3-II.

Court of Appeals of Washington,

Division 2.

Sept. 2, 1983.

Review Denied Dec. 2, 1983.

George Kargianis and Mark E. Fortier, Seattle, for respondent United Nursing Homes.

Michael Hanbey, Asst. Atty. Gen., Olympia, for appellants.

John R. Fox, Battle Ground, for respondent Washington State Health Facilities Assoc.

WORSWICK, Judge.

The Department of Social and Health Services appeals a judgment of the Thurston County Superior Court that declared the rights of the parties and also awarded damages to respondent nursing homes. ¹ The nursing homes cross-appeal the trial court's refusal to award attorney's fees. Despite a complicated factual background and a multitude of contentions on appeal, the dispositive issue is whether the trial court erred in interpreting former RCW 74.09.590. We affirm.

Although a substantial part of its brief and oral presentation was devoted to arguing the facts, DSHS has not properly assigned error to any of the findings of fact. ² Therefore, they are verities on appeal. Marriage of Elam, 97 Wash.2d 811, 650 P.2d 213 (1982). A summary of the findings follows.

The federal medicaid program provides a medical assistance plan for the needy. When a state chooses to participate in the program, it does so by adopting a plan pursuant to 42 U.S.C. § 1396 et seq. Former RCW 74.09 granted DSHS authority to participate in the medicaid program; it governs the nursing home cost reimbursement system in this case. DSHS implemented the plan by adopting regulations codified in WAC 388-96.

The nursing homes contracted with DSHS to provide care to medicaid patients from January 1, 1978 to June 30, 1979. DSHS set payment rates prospectively for individual nursing homes. New rates were to be set each July 1st and adjustments for inflation were to be made each January 1st. The reimbursement system purported to predict and reimburse the actual allowable costs the homes would incur during the rate period. At the end of each rate period, DSHS conducted a meticulous audit of nursing home costs. Audited allowable costs did not include frills or extras. Rate payments in excess of the homes' audited allowable costs were recouped by the state. However, any deficit to a nursing home resulting from audited allowable costs exceeding the prospective rate was not reimbursed.

From January 1, 1978 to June 30, 1979, the reimbursement system failed realistically to take into account economic conditions and trends. It did not reimburse the homes for all expense items necessarily incurred to provide federally defined skilled nursing home care. The reimbursement system did not result in the setting of prospective rates at a level that could reasonably be expected to reimburse economically and efficiently operated nursing homes in full for actual allowable costs. DSHS knew of the deficiencies in the prospective rate-setting system, but continued to use it.

Upon these facts, the trial court rendered a declaratory judgment. The court held that former RCW 74.09.590 required DSHS to set prospective rates targeted on reimbursing the nursing homes in full for their actual allowable costs ³ and to make a periodic adjustment of the rates to assure that the targeted goal was realized. The court also held that DSHS had done neither and consequently that the nursing homes had suffered damages. In response to the nursing homes' prayer for damages, it also adopted a formula by which the damages sustained by each home would be determined and awarded. We hold that the trial court did not err.

DSHS contends that Congress intended the states to set prospective rates at a "reasonable" level; those rates then act as a budget within which the nursing homes must operate. It argues that former RCW 74.09.590 must be similarly interpreted in order to entitle the state to federal matching funds. See RCW 74.04.055. We disagree.

Congress intended the states to reimburse nursing homes in full for reasonable costs actually incurred. Former 42 U.S.C. § 1396a(a)(13)(E) requires states participating in the medicaid assistance program to provide:

(E) Effective July 1, 1976, for payment of the skilled nursing facility and intermediate care facility services provided under the plan on a reasonable cost related basis, as determined in accordance with methods and standards which shall be developed by the State on the basis of cost-finding methods approved and verified by the Secretary; ...

The legislative history for this section provided in part:

The committee bill would require States to reimburse skilled nursing and intermediate care facilities on a reasonable cost-related basis by July 1, 1974. [The year was later changed to 1976]. This approach is preferable to the arbitrary rate-setting currently in effect in some States which provide no incentive to facilities to upgrade the level of care provided. The States would use acceptable cost-finding techniques (not necessarily those utilized for medicare purposes) to determine reasonable reimbursement and apply to the results appropriate methodologies for determining payment.... States would be free to provide for retroactive adjustments of rates or costs to the extent necessary to prevent "windfalls" or unjustifiably low payment.

S.Rep. No. 92-1230, 92nd Cong., 2d Sess. 287 (1972). Thus it can be seen that federal law requires states to establish a plan for paying nursing homes their reasonable actual costs. Within that framework, states have discretion to define reasonable costs and to develop appropriate cost-finding techniques. The states may also determine how payments will be made. If prospective payment rates are established for a given period, the plan should provide for retroactive adjustment of rates to prevent windfalls or unjustifiably low payments. If a state chooses to set payment rates prospectively, retroactive adjustment of the rates is essential in order to assure that the homes are paid on a cost-related basis. Washington's plan, as the trial court interpreted it, is consistent with these objectives.

In interpreting statutory language, the court must ascertain and give effect to the intent and purpose of the Legislature, as expressed in the act. State v. McKim, 98 Wash.2d 111, 653 P.2d 1040 (1982). Former RCW 74.09.580 provided:

The nursing home payment system under this chapter shall provide for individually-based or class-based rates which shall be the maximum reimbursement for each nursing home for the period for which the rates are assigned. Operators of nursing homes shall refund all portions of payments received which exceed actual audited costs and all portions of payments received which are attributable to unreasonable or nonallowable costs as determined by federal or state regulations.

Former RCW 74.09.590 ⁴ provided:

Payment rates shall:

(1) Not be set lower prospectively than the level which may reasonably be expected to reimburse in full for actual allowable costs under federal regulations for a nursing home which is economically and efficiently operated;

(2) Realistically take into account economic conditions and trends during the time period covered by the rates;

(3) Be at least annually redetermined;

(4) Permit as allowable those expenses necessary to meet all items of expense which operators of nursing homes must incur to provide federally defined skilled or intermediate care services;

(5) Meet the reasonable cost of patient assessment activities as required by the department; and

(6) Meet the reasonable cost of accounting requirements.

Reasonable costs shall be determined independently of the level of funding available, in accordance with federal regulations and guidelines.

In our view, the Legislature intended that nursing homes be paid their actual allowable costs, because, in (1) and (4), it directed DSHS to set prospective rates at a level reasonably expected to do just that. It also intended retroactive adjustment of rates because, in (2), DSHS is required to consider economic conditions and trends "during the time period covered by the rates." This contemplates that DSHS will raise rates to prevent unjustifiably low payments. Windfalls are prevented by the provision in section .580 for repayment of money exceeding actual audited costs. It is unreasonable and illogical to suggest that the Legislature intended to recapture money from rate payments in excess of actual allowable costs and not reimburse homes for rates that fell below those costs. The trial court's interpretation of former RCW 74.09.590 is consistent with the federal mandate to pay nursing homes on a reasonable cost-related basis. It is also likely to satisfy federal laws entitling Washington to receive federal matching funds. See RCW 74.04.055; State ex rel. Living Services v. Thompson, 95 Wash.2d 753, 630 P.2d 925 (1981). ⁵ Cf. Child Care Agencies v. Thompson, 34 Wash.App. 225, 660 P.2d 1124 (1983); Child Care Agencies v. Thompson, 34 Wash.App. 235, 660 P.2d 1129 (1983).

DSHS argues with considerable vigor that the trial court's interpretation would open the door to payment of unreasonable costs. It offers, as a horrible example, the hypothetical nursing home which could overspend a reasonable budget by hiring only registered nurses instead of lower paid staff. In this, we believe DSHS reveals that it has fundamentally misperceived the law and its role. The law does not invest DSHS with power to determine nursing home budgets but imposes on it the responsibility of constructing and implementing a system of actual cost reimbursement. At the same time, the law contemplates--and the regulations properly provide--that costs will be kept reasonable because unreasonable costs simply will not be allowed. ⁶ As for the example, DSHS may refuse to pay all the costs of a home staffed...