Sunrise Retirement Community, Friendship Haven, Presbyterian Village, Rose Vista Home, Longview Home, United Presbyterian Home, Riceville Community Rest Home, Hubbard Care Center, and Happy Siesta Care Center v. Iowa Department of Human Services , 2013 Iowa Sup. LEXIS 79 ( 2013 )

IN THE SUPREME COURT OF IOWA
No. 11–1145
Filed June 28, 2013
SUNRISE RETIREMENT COMMUNITY, FRIENDSHIP HAVEN,
PRESBYTERIAN VILLAGE, ROSE VISTA HOME, LONGVIEW HOME,
UNITED PRESBYTERIAN HOME, RICEVILLE COMMUNITY REST
HOME, HUBBARD CARE CENTER, and HAPPY SIESTA CARE
CENTER,
Appellants,
vs.
IOWA DEPARTMENT OF HUMAN SERVICES,
Appellee.
On review from the Iowa Court of Appeals.
Appeal from the Iowa District Court for Polk County, Arthur E.
Gamble, Judge.
The Iowa Department of Human Services requested further review
of a decision of the court of appeals reversing the agency’s disallowance
of certain expenses from cost reports submitted by nursing homes.
DECISION OF COURT OF APPEALS AFFIRMED; DISTRICT COURT
JUDGMENT REVERSED AND REMANDED WITH INSTRUCTIONS.
Patrick B. White of White Law Office, P.C., Des Moines, for
appellants.
Thomas J. Miller, Attorney General, and Timothy L. Vavricek,
Assistant Attorney General, for appellee.
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HECHT, Justice.
Several nursing homes submitted annual reports disclosing their
income and expenses to the Iowa Department of Human Services (DHS).
The reports were used by DHS to calculate the Medicaid per diem
reimbursement rates for the nursing homes. Some of the nursing homes’
expenses were disallowed by DHS, which adjusted those reports and
reduced reimbursement rates accordingly. We must decide in this
appeal whether DHS properly interpreted and applied its departmental
rules in setting the rates. As we conclude the agency’s action was based
on an incorrect interpretation of its rules, we reverse and remand.
I. Background Facts and Proceedings.
Sunrise Retirement Community, Friendship Haven, Presbyterian
Village, Rose Vista Home, Longview Home, United Presbyterian Home,
Riceville Community Rest Home, Hubbard Care Center, and Happy
Siesta Care Center are long-term care facilities licensed in Iowa and
approved by DHS as Medicaid providers. Each of these facilities accepts
patients with different payment sources—e.g., private payment,
Medicare, and Medicaid.
To participate in Medicaid, each facility must submit a “Financial
and Statistical Report” annually to DHS. The report details the facility’s
overall operating costs and sources of revenue. The information
submitted on the report is used by DHS to calculate a per diem
reimbursement rate for each participating facility.
The per diem rate is not designed to reimburse nursing facilities for
their precise costs incurred in caring for Medicaid patients. Instead,
DHS calculates rates after determining a facility’s allowable costs, which
are derived from a facility-specific reporting system. In this system, each
facility reports all costs incurred and revenue received from all sources in
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its annual financial and statistical report. An accounting firm employed
by DHS then reviews the reports to determine which costs are allowable
under the agency’s rules when calculating the appropriate Medicaid
per diem rate.
In submitting their cost reports for the fiscal year ending
December 31, 2008, the appellant care facilities included in their reports
costs incurred for services provided to residents whose primary source of
payment was Medicare Part A. DHS deemed some of these costs
disallowed.
When a resident is admitted with Medicare Part A as a payor, a
facility bears up front all costs of treatment and care for the resident.
This is true even when the resident receives treatment or care outside the
facility, such as when he or she is sent to a local provider for an x-ray or
lab work. In these cases, the outside provider bills the nursing facility
directly for its services, including the three types of services at issue in
this case—prescription drugs, x-rays, and lab work. The outside
provider may not bill the resident directly and may not bill Medicare.
Instead, Medicare provides a per diem payment to the nursing facility for
each resident intended to cover all care, treatment, and services for that
resident. Medicaid, by contrast, pays the Medicaid patients’ outside
providers of prescription drugs, x-rays, and lab work directly.
In this case, most of the facilities included in their Medicaid cost
reports costs incurred on behalf of Medicare patients for x-rays, lab
work, and prescription drugs. DHS contends that including these
categories of costs in reports used to calculate the Medicaid per diem
reimbursement rate would result in “double-counting.” The facilities
maintain that DHS regulations allow, if not require, the inclusion of
these costs.
4
In 2008, DHS determined these costs were not allowable and
therefore excluded them from the cost reports. This marked a departure
from prior practice. Until the 2008 adjustments, DHS had allowed the
facilities to include in the cost reports the costs paid to third parties for
lab services, x-rays, and prescription drugs provided to Medicare
patients.1 The facilities appealed the adjustments, and a contested case
hearing was held. A proposed decision was issued by an administrative
law judge who concluded the costs incurred by the facilities for x-rays,
lab work, and prescription drugs provided to Medicare patients were
properly reported by the nursing homes. The ALJ elaborated:
At the hearing, the Department opined that [Medicare] Part A
costs should be excluded because the costs are covered/paid
for by the Medicare per diem and if the costs were included
in the Medicaid per diem calculation, it would artificially
inflate the Medicaid rate. This argument by the Department
lacks merit however since the Medicare Part A revenue is
also reported by the facility as a part of the cost report and
already part of the equation. Moreover, the Department
conceded that it could perform an offset to account for the
costs/revenue associated with costs for a Part A resident. As
such, the Department has a methodology for dealing with
this perceived “enrichment” without disallowing the costs on
the Medicaid cost report.
DHS requested intra-agency review, and the director of human
services issued a final decision which accepted the ALJ’s fact findings
but concluded the costs should be disallowed on the cost reports. The
facilities sought judicial review, and the district court affirmed the
director’s decision. The facilities appealed. The court of appeals reversed
the district court, concluding the DHS rules did not support the agency’s
1Although DHS had never objected to the reporting of prescription drug
expenses incurred for Medicare patients prior to 2008, it had apparently excluded those
expenses from its Medicaid per diem calculations for prior years.
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determination that the costs in question were not allowable. DHS
sought, and we granted, further review.
II. Standard of Review.
Final agency action is reviewed for corrections of errors at law.
Eyecare v. Dep’t of Human Servs., 770 N.W.2d 832, 835 (Iowa 2009). We
apply the standards of chapter 17A of the Iowa Administrative Procedure
Act to agency action to determine if our conclusions are the same as the
district court’s conclusions. Id. We are bound by the agency’s findings
of facts if they are supported by substantial evidence. Id. We will not,
however, defer to DHS’s interpretation of its rules and regulations, as it
has not been clearly vested with the authority to interpret them. Id. at
836; see also Iowa Code § 17A.19(10)(c) (2009).
III. Discussion.
Iowa Code chapter 249A governs Iowa’s Medicaid program.
Section 249A.4(1) instructs the director of DHS to
make rules, establish policies, and prescribe procedures to
. . . [d]etermine the greatest amount, duration, and scope of
assistance which may be provided, and the broadest range of
eligible individuals to whom assistance may effectively be
provided, under this chapter within the limitations of
available funds.
Iowa Code § 249A.4(1). Section 249A.4(9) directs DHS to adopt rules for
determining the method and level of reimbursement for all medical and
health services specified in section 249A.2 after considering the following
goals:
a. The promotion of efficient and cost-effective delivery
of medical and health services.
b. Compliance with federal law and regulations.
c. The level of state and federal appropriations for
medical assistance.
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d. Reimbursement at a level as near as possible to
actual costs and charges after priority is given to the
considerations in paragraphs “a”, “b”, and “c”.
Id. § 249A.4(9).
All nursing facilities wishing to participate in and receive funds
from the Medicaid program must submit an annual “Financial and
Statistical Report” to facilitate DHS’s calculation of the Medicaid
per diem rate. See Iowa Admin. Code r. 441—81.6 (2009). The report
must detail both revenues and costs associated with patient care
according to the subrules of rule 81.6. Id. Subrule 81.6(10) requires
that facilities report all revenues, as recorded in their general books and
records, associated with their provision of any routine daily services and
any ancillary services to patients. Id. r. 441—81.6(10)(a)–(b). The costs
portion of the report must be divided into categories of direct patient care
costs and support care costs.2 Id. r. 441—81.6. Subrule 81.6(11)
further provides that certain costs “not normally incurred in providing
patient care shall be eliminated or limited” according to a long list of
limitations, none of which make reference to direct care or Medicare-
related costs.3 Id. r. 441—81.6(11).
DHS determines per diem reimbursement rates based on a multi-
step calculation. Id. r. 441—81.6(16). First, DHS establishes per diem
direct care and nondirect care component cost bases for the facilities
based on the costs reported. Id. DHS then adjusts those component
bases for various purposes in subsequent steps having no bearing on the
2The parties appear to agree that costs incurred for x-rays, prescription drugs,
and labs constitute direct care costs.
3The enumerated limitations include, but are not limited to, federal and state
income taxes, fees paid to directors, bad debts, personal travel and entertainment, loan
acquisition fees, management fees, depreciation, and legal fees. Iowa Admin. Code r.
441—81.6(11).
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types of costs to be incorporated in establishing the bases. See id. To
establish the component cost bases, subrule 81.6(16) provides that each
facility’s “per diem allowable cost shall be arrived at by dividing total
reported allowable costs by total inpatient days during the reporting
period.” Id. r. 441—81.6(16)(a). Rule 81.1 defines “allowable costs” as
“the price a prudent, cost-conscious buyer would pay a willing seller for
goods or services in an arm’s-length transaction, not to exceed the
limitations set out in rules.” Id. r. 441—81.1. As we have noted, subrule
81.6(11) identifies fifteen different “limitations” of expenses—expenses
that must be limited or disallowed in some way—but fails to mention
Medicare expenses. See id. r. 441—81.6(11). In fact, no provision
anywhere in rule 81.6 makes any reference to Medicare in association
with the annual cost reports required of the nursing facilities.4 See id. r.
441—81.6. Instead, rule 81.6 tersely and generally directs that “costs for
patient care services shall be reported.” Id.
Interpreting these rules in the final agency action below, the
director of DHS affirmed the agency’s cost report adjustments disallowing
x-ray, lab, and prescription drug expenses on two grounds. First, the
director concluded the list of allowable cost limitations in subrule
81.6(11) did not constitute “an all-inclusive list of expenses disallowed in
the facility’s cost report.” Thus, the director concluded he could also
4Subrule 81.6(20) authorizes facilities’ claims “for Medicaid payment for
Medicare-covered nursing facility services rendered to a Medicare beneficiary who is
also eligible for Medicaid.” See id. r. 441—81.6(20)(a). This provision aims to insure
that (1) claims are adequately reimbursed if the Medicaid-allowable amounts for the
claims exceed the actual Medicare payments made, and (2) claims for services fully
reimbursed by Medicare receive no additional Medicaid reimbursement. See id. r.
441—81.6(20). The record does not reveal and the parties do not address what, if any,
bearing this provision may have on the propriety of incorporating costs for services
provided to Medicare patients that are not fully covered by Medicare reimbursement in
determining a facility’s Medicaid component cost bases under subrule 81.6(16).
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disallow costs for x-rays, labs, and drugs provided to Medicare patients
because Medicaid pays third-party vendors directly for those kinds of
services when they are provided to Medicaid patients. Second, the
director concluded that costs associated with x-rays, labs, and
prescription drugs for Medicare patients do not meet rule 81.1’s
definition of allowable costs because “they are not costs a prudent, cost-
conscious buyer would pay a willing seller.” The district court affirmed
the director’s decision, agreeing that x-rays, labs, and drugs “are not
properly included in the cost that a prudent, cost-conscious buyer would
pay for nursing care services at [appellants’] facilities in an arm’s-length
transaction.”
Addressing first the director’s subrule 81.6(11) justification, we
take no position as to whether the expenses enumerated as excludable
under the rule constitute an exhaustive list. Regardless, we cannot
conclude that a determination of whether the list is exhaustive is
dispositive of the cost question here. Instead, we note that the language
of the subrule expressly limits the types of costs that shall be “eliminated
or limited” in confining its reach to “[c]ertain expenses that are not
normally incurred in providing patient care . . . .” Id. r. 441—81.6(11).
We think it straightforward to conclude, and the parties agreed both
below and on appeal, that the lab, x-ray, and drug expenses at issue here
are normally incurred in providing patient care. Indeed, DHS’s
accountant testified in the agency proceeding below that facilities do and
must regularly provide these services, regardless of payor type, to meet
DHS’s minimum requirements for provision of essential services to their
patients. Thus, regardless whether subrule 81.6(11) may contemplate
the elimination of costs not normally incurred in providing patient care
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and not expressly enumerated, we cannot conclude the subrule has any
bearing on the question of the regularly incurred costs here.
If the director’s conclusion may be read to suggest implicitly that
subrule 81.6(11) requires elimination of all expenses not normally
incurred in providing “Medicaid patient care,” as opposed to the broader
category of “patient care” expressly set forth in the subrule, we find no
support for that contention in the language of the subrule, the language
of rule 81.6 more generally, or in the standard practices of DHS.
Subrule 81.6(11) mentions Medicaid only in the context of allowing legal
fees related to defending threatened Medicaid decertification and, as
noted, makes no mention of Medicare.5 See id. r. 441—81.6(11).
Further, given the specific references in rule 81.6 to Medicaid and
Medicare where necessary to distinguish them as payment systems, we
are not persuaded that the silence of subrule 81.6(11) envisages an
unwritten Medicaid limitation. Instead, we think the structure of rule
81.6 compels the broader reading—namely, that facilities report all
revenues regardless of payor type, as conceded by the parties and
contemplated by subrule 81.6(10), and likewise facilities report all costs
regardless of payor type as contemplated by the introductory paragraph
of rule 81.6 before certain limitations are applied in accordance with
subrule 81.6(11). Finally, we note that DHS concedes it does not exclude
from cost reports expenses incurred for other services provided to
Medicare patients, including, for example, various therapy services. We
thus cannot conclude, as the director did, that rule 81.6 supports
5The subrule also never distinguishes between types of payors in establishing its
various limitations. See, e.g., id. r. 441—81.6(11)(f) (allowing expenses for
entertainment provided for “participation of all residents who are physically and
mentally able to participate” and eliminating only expenses for entertainment for which
patient is required to pay); id. r. 441—81.6(11)(h) (allowing reasonable costs for services
provided by immediate relatives and remaining silent regarding payor type).
10
excluding the costs of the challenged services provided to Medicare
patients.
Turning to the director’s second ground for affirming the
elimination of the costs in question here, we find no support for the
elimination in the definition of “allowable costs” in rule 81.1. Because
the definition refers only to the “price a prudent, cost-conscious buyer
would pay a willing seller for goods or services in an arm’s-length
transaction” and specifies that the price cannot “exceed the limitations
set out in rules,” we cannot conclude the definition has anything to say
about elimination of the entire category of Medicare patient-related costs
or, more importantly, a specific subset of that category of costs including
x-ray, lab, and prescription drug costs. Id. r. 441—81.1 (emphasis
added). The director supported his conclusion with the rationale—and
DHS has raised the argument again on appeal—that because the x-ray,
lab, and drug costs are costs for Medicare patients, “they are not costs a
prudent, cost-conscious buyer would pay a willing seller” for services to
Medicaid patients. This rationale, in our view, relies either on adding
modifying language to the definition expressly set out in the rule, or on a
general assumption that the definition applies only to costs of services
provided to Medicaid patients. Given the structure of rule 81.6 and the
Department’s concession that “allowable costs” in some instances
encompass non-Medicaid costs, we are not persuaded the definition can
be read to imply a general limitation of its applicability to costs provided
to Medicaid patients. As for the possibility of implicit modifying
language, we note two additional problems with the position advanced by
DHS.
First, the definition of “allowable cost” makes no distinction
between Medicaid and Medicare services and no distinction between
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buyers and sellers of Medicaid and Medicare services. We find it
instructive that various other definitions in rule 81.1 make no such
distinction. For example, the definitions of “case mix” and “case-mix
index,” integral to the per diem calculation in subrule 81.6(16), are silent
regarding payor types. See id. r. 441—81.1. Moreover, as explained, rule
81.6 largely lumps all services together for reporting and per diem
calculation purposes. We cannot discern any reason in the language or
structure of rules 81.1 or 81.6 to import the director’s “buyer of Medicaid
services” limitation into the definition.
Second, in adopting the ALJ’s conclusions of law, the director
conceded both that (1) subrule 81.10(5)(c) expressly provides that the
Medicaid program will provide direct payment to facilities for the
provision of some services required by Medicare; and (2) subrule 81.10(2)
expressly requires that a facility must, when applicable, first exhaust all
Medicare benefits to remain eligible for any Medicaid payment. We
cannot conclude, based on these rules, that the Medicaid program is to
be treated as a buyer of strictly Medicare or strictly Medicaid services—
rather, we think the rules explicitly envision that the program may
reimburse facilities for provision of both Medicare and Medicaid services
and that any specific instance of a service for which a facility receives
reimbursement may simultaneously constitute a “Medicare” and
“Medicaid” service. These propositions, taken together with the
concession that facilities must provide lab, x-ray, and drug services
regardless of payment type, compel our conclusion that the definition of
“allowable costs” is silent regarding the inclusion or exclusion of a class
of Medicare costs, and cannot be read to incorporate the Medicaid
limitation the director advanced.
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We think it prudent to note that whether an expense is reported
may not be dispositive of whether DHS incorporates that expense in its
component base-rate calculation. The ALJ noted the availability of an
“offset” that could occur between facility cost reporting and DHS rate-
setting.6 As we conclude here, however, the director’s interpretation of
the rules as written cannot support the agency’s decision to exclude the
Medicare costs at issue from the facilities’ cost reporting.
We recognize the cost-containment concerns driving the agency
action here. We also acknowledge the significant challenges underlying
the director’s statutorily prescribed duty to “[d]etermine the greatest
amount, duration, and scope of assistance which may be provided, and
the broadest range of eligible individuals to whom assistance may
effectively be provided” in administering the Medicaid program. Iowa
Code § 249A.4(1). The difference between the meaning the director has
assigned to the rules and the meaning we are able to discern clearly
engages these policy concerns and raises questions as to what costs
should be considered in calculating Medicaid reimbursement rates.
Nevertheless, our task in this case is to determine the meaning of the
rules at issue and decide whether the director has erred in interpreting
them. Given the agency’s abrupt about-face in its practice regarding
exclusion of certain costs from reports, and the substantial disparity
between what the rules plainly say and what the director now suggests
they mean, we think DHS’s new interpretation of rule 81.6’s cost
reporting and per diem calculation procedures is akin to the creation of a
new rule. The appropriate course of action here cannot involve assigning
6Thenursing homes concede that to the extent Medicare prescription drug, x-
ray, and lab costs are properly reportable, the reports should also include the
corresponding Medicare revenue for those services.
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new meanings to rules not fairly evident from the language of the rules
themselves. Instead, in our view, the appropriate course requires new
rulemaking according to the procedures set forth in Iowa Code chapter
17A, which allows all relevant stakeholders adequate notice and
meaningful opportunity to address and help resolve the important policy
questions at stake.
IV. Conclusion.
The director’s conclusion affirming the agency’s exclusion of the
facilities’ lab, x-ray, and prescription drug costs from the nursing homes’
reports was erroneous. We affirm the decision of the court of appeals,
reverse the district court judgment, and remand to the district court.
The district court shall enter judgment remanding this matter to DHS for
further proceedings consistent with this opinion.
DECISION OF COURT OF APPEALS AFFIRMED; DISTRICT
COURT JUDGMENT REVERSED AND REMANDED WITH
INSTRUCTIONS.