Lutheran Home at Kane v. Dep't of Hum. Serv.

318 A.3d 164

LUTHERAN HOME AT KANE and Siemon’s Lakeview Manor Estate, Petitioners

v.DEPARTMENT OF HUMAN SERVICES, Respondent

No. 303 C.D. 2023

Commonwealth Court of Pennsylvania.

Argued May 7, 2024

Decided June 4, 2024

Appealed from Nos. 090-08-0200, 090-08-0187, 090-08-0158, 090-08-0113, 090-08-0164, 090-08-0174, 090-08-0170, 090-08-0159, 090-08-0157, 090-08-0134, 090-08-0130, 090-08-0188, 090-08-0176, 090-08,-0186, 090-08-0213, 090-08-0193 090-08-0192, Department of Human Services, Bureau of Hearings and Appeals.

Daniel K. Natirboff, Harrisburg, for Petitioners.

Daniel K. Natirboff, Harrisburg, for Intervenors Susquehanna Valley Nursing and Rehabilitation Center, Rheems Nursing & Rehabilitation Center, and Ellen Memorial Health Care Center.

Thomas J. Car, Assistant Counsel, Harrisburg, for Respondent.

BEFORE: HONORABLE ANNE E. COVEY, Judge, HONORABLE ELLEN GEISLER, Judge, HONORABLE MATTHEW S. WOLF, Judge

OPINION BY JUDGE COVEY

Lutheran Home at Kane (Lutheran Home) and Siemon’s Lakeview Manor Estate (Siemons) (collectively, Providers) petition this Court for review of the Department of Human Services’ (Department), Bureau of Hearings and Appeals’ (BHA), March 1, 2023 order adopting the Administrative Law Judge’s (ALJ) adjudication and recommendation (Recommendation) that denied their appeals. Providers essentially present three issues for this Court’s review: (1) whether the BHA erred by concluding that the Department’s interpretation of Section 1187.91(1)(iv) of the Department’s Regulations (Section 1187.91(1)(iv)), 55 Pa. Code § 1187.91(1)(iv), was entitled to deference; (2) whether the BHA’s order violated due process by changing an evidentiary ruling made at the hearing without prior notice; and (3) whether the BHA’s order should be reversed and remanded for final computations of amounts due to Providers consistent with their agreements and without adjustments to the Budget Adjustment Factor (BAF).¹ After review, this Court affirms.

Background²

The Medical Assistance (MA) Program is a health care payment program for the poor, elderly, and disabled, which is jointly funded by the federal government and the states. See Chapter 7, subchapter XIX of the Social Security Act (Act), 42 U.S.C. §§ 1396-1396v; see also Article 4, subsection (f) of the Human Services Code (Code),³ 62 P.S. §§ 441.1-449.2. To qualify for federal funds, the states must satisfy certain requirements under federal law relating to the state plans for MA. See generally Section 1902 of the Act, 42 U.S.C. § 1396a. A participating state must submit a state plan for MA and any proposed plan amendment to the federal Secretary of Health and Human Services (HHS) through the Centers for Medicare and Medicaid Services (CMS).⁴ See Christ the King Manor, Inc. v. Sec’y U.S. Dep’t of Health & Hum. Servs., 678 F. App’x 164 (3d Cir. 2016) (Christ the King II). Each state plan "must detail the state’s program and show its compliance with the [ ] Act." Christ the King II, 673 F. App’x at 167; see also Section 1902 of the Act, 42 U.S.C. § 1396a(a); Section 430.10 of the HHS’s Regulations, 42 C.F.R. § 430.10; Christ the King Manor, Inc. v. Sec’y U.S. Dep’t of Health & Hum. Servs., 730 F.3d 291 (3d Cir. 2013) (Christ the King I).

In particular,

[t]he Act sets out procedures and criteria for rates to pay participating providers. 42 U.S.C. § 1396a(a)(30)(A) [(Section 30(A))].Section 30(A) requires a state to "assure that payments to providers produce four outcomes: (1) ‘efficiency,’ (2) ‘economy,’ (3) ‘quality of care,’ and (4) adequate access to providers by Medicaid beneficiaries." P[a.] Pharmacists Ass’n [v. Houstoun], 283 F.3d [531,] 537 [(3d Cir. 2002)] (quoting [Section (30)(A)]. CMS is required to review state plans and proposed plan amendments to ensure compliance with [Section] 30(A). Christ the King I, 730 F.3d at 297.

Christ the King II, 673 F. App’x at 167.

The Department is the agency authorized to administer the MA Program in the Commonwealth and to take all necessary measures to obtain the federal participating funds, including issuance of regulations and submission of Pennsylvania’s MA state plan (State Plan) for CMS approval. See Section 201(1) and (2) of the Code, 62 P.S. § 201(1)-(2); see also Mulberry Square Elder Care & Rehab. Ctr. v. Dep’t of Hum. Servs., 191 A.3d 952 (Pa. Cmwlth. 2018).

Relevant here, the MA Program includes payment for nursing facility services. Providers are long-term care skilled nursing facilities certified to provide care to MA-participating residents. Since January 1996, the MA Program pays participating nursing facilities for MA services through an annual prospective payment rate often referred to as the case-mix rate. See MA Manual, Chapter 1187 (Nursing Facility Services) (Chapter 1187), subchapter G (Rate Setting), in the Department’s Regulations, 55 Pa. Code §§ 1187.91-1187.98. The annual case-mix rate is effective from July 1 of one year through June 30 of the next year, with quarterly adjustments for resident acuity (i.e., residents’ level of sickness). See id.

The calculation of the case-mix rate has three stages. At the first stage (First Stage), the Department’s Office of Long Term Living audits an MA-participating nursing facility’s cost report (MA-11)⁵ to verify the provider’s allowable costs for the fiscal year.⁶ See Sections 1187.22(12), 1187.71, 1187.73, and 1187.77 of the Department’s Regulations, 55 Pa. Code §§ 1187.22(12), 1187.71, 1187.73, 1187.77. An MA-participating nursing facility reports its costs for a 12-month fiscal year that ends either on June 30 or December 31, as designated by the nursing facility.⁷ See 55 Pa. Code § 1187.73. Once the Department audits the cost report, it issues an audit report to the nursing facility which both identifies any adjustments to, and disallowances or reported costs, and states the allowable costs.⁸ See 55 Pa. Code § 1187.77. The Department places the nursing facility’s audited allowable costs in the Nursing Information System (NIS) database to be used in later stages of the rate calculation. See Section 1187.91(1)(i) of the Department’s Regulations, 55 Pa. Code § 1187.91(1)(i).

The second stage (Second Stage) of the rate-setting process is the establishment of peer group prices in three net operating cost categories: resident care costs, other resident-related costs, and administrative costs. See Sections 1187.94 and 1187.95 of the Department’s Regulations, 55 Pa. Code §§ 1187.94-1187.95. The peer group prices serve to limit the individual nursing facility provider payment rate around the costs of the median nursing facility within a group of nursing facilities of similar size and geographic location, or similar resident population. See id. To establish peer group prices, the MA Program uses each nursing facility’s inflated allowable costs in the three most recent audited cost reports as found in the NIS database. See id.

The third stage (Third Stage) of the rate setting process is the calculation of each nursing facility’s individualized case-mix rate. See Section 1187.96 of the Department’s Regulations, 55 Pa. Code § 1187.96. To calculate the individualized case-mix rate, the Department takes the average of a nursing facility’s inflated allowable costs and applies any peer group price limitations. See id. In addition, the Department calculates an amount for reimbursement of capital costs based on a facility appraisal. See id.

A nursing facility’s individualized case-mix rate is adjusted quarterly by a case-mix index to allow for changes in its residents’ acuity level. See Sections 1187.91(1)(v) and 1187.96(a)(5) of the Department’s Regulations, 55 Pa. Code §§ 1187.91(1)(v) and 1187.96(a)(5). At the end of each quarterly adjustment, the Department determines a Budget Adjustment Factor (BAF). See Section 1187.96(e)(iv) of the Department’s Regulations, 55 Pa. Code § 1187.96(e)(iv).

To inflate costs for peer group price setting (Second Stage) and for setting the individualized nursing facility case-mix rate (Third Stage), the Department calculates an inflation factor (Inflation Factor) pursuant to Section 1187.91 of the Department’s Regulations, which states, in relevant part:

The Department will set rates for the case-mix payment system based on the following data:

(1) Net operating costs.

(i) The net operating prices will be established based on the following:

(A) Audited nursing facility costs for the [three] most recent years available in the NIS database adjusted for inflation. This database includes audited MA-11 cost reports that are issued by the Department on or before March 31 of each July 1 price setting period.

….

(iv) Prior to price setting, cost report information will be indexed forward to the 6th month of the 12-month period for which the prices are set. The index used is the 1st Quarter issue of the CMS Nursing Home Without Capital Market Basket Index [(Index)].⁹

55 Pa. Code § 1187.91 (emphasis added).

Facts

By February 6, 2008 notice, the Department issued Lutheran Home’s final and quarterly case-mix rate notice for July 1, 2007 to June 30, 2008 (Year 13) pursuant to Section 1187 of the Department’s Regulations, applying a .93194 BAF as the Stage Three rate setting calculation, as follows:

Effective Date	Final Rate
07/01/07	$160.10
10/01/07	$167.99
01/01/08	$170.36
04/01/08	$167.99

See Reproduced Record (R.R.) at 73a-81a.

That same day, the Department issued Siemens’s final and quarterly case-mix rate notice for Year 13, applying a .93194 BAF as the Stage Three rate setting calculation, as follows:

Effective Date	Final Rate
07/01/07	$166.34
10/01/07	$169.62
01/01/08	$171.26
04/01/08	$167.98

See R.R. at 107a.

On March 10, 2008, in response to the Department’s notices, Providers and numerous other affected nursing facilities filed Requests for Hearing raising three issues: (1) whether the Department’s audit adjustments to Providers’ costs were improper; (2) whether the BAF used to calculate the payment rates complied with federal requirements; and (3) whether...