Ciena Healthcare Management v. Dept of Health and Human Services ( 2015 )

STATE OF MICHIGAN
COURT OF APPEALS
CIENA HEALTHCARE MANAGEMENT, UNPUBLISHED
DIMONDALE NURSING CARE CENTER, July 14, 2015
WEST OAKS SENIOR CARE AND REHAB
CENTER, THE COURTS OF HOLT, SAGINAW
HOME OF COMPASSIONATE CARE,
DURAND SENIOR CARE AND REHAB
CENTER, EVERGREEN MANOR SENIOR
CARE CENTER, FAITH HAVEN LIVING
CENTER, LIVONIA WOODS NURSING AND
REHAB, NORTHFIELD PLACE, ROYAL
NURSING CENTER, EASTWOOD NURSING
CENTER, GOLDEN OAKS MEDICAL CARE
FACILITY, and ROYALTON MANOR,
Petitioners-Appellees,
v No. 321027
Shiawassee Circuit Court
DEPARTMENT OF HEALTH AND HUMAN LC No. 13-004740-AA
SERVICES,
Respondent-Appellant.
CIENA HEALTHCARE MANAGEMENT,
NORTHFIELD PLACE, ROYAL NURSING
CENTER, EASTWOOD NURSING CENTER,
GOLDEN OAKS MEDICAL CARE FACILITY,
and ROYALTON MANOR,
Petitioners-Appellants,
and
DIMONDALE NURSING CARE CENTER,
WEST OAKS SENIOR CARE AND REHAB
CENTER, THE COURTS OF HOLT, SAGINAW
HOME OF COMPASSIONATE CARE,
DURAND SENIOR CARE AND REHAB
CENTER, EVERGREEN MANOR SENIOR
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CARE CENTER, FAITH HAVEN LIVING
CENTER, and LIVONIA WOODS NURSING
AND REHAB,
Petitioners,
v No. 321066
Shiawassee Circuit Court
DEPARTMENT OF HEALTH AND HUMAN LC No. 13-004740-AA
SERVICES,
Respondent-Appellee.
Before: O’CONNELL, P.J., and OWENS and M. J. KELLY, JJ.
PER CURIAM.
In these consolidated appeals involving a dispute over Medicaid reimbursement, the
parties appeal by leave granted the circuit court’s order following review of an administrative
decision. In docket number 321027, respondent, Department of Health and Human Services,
appeals the circuit court’s decision to reverse the agency’s order with respect to the nursing
homes managed by NexCare Health Systems, LLC.1 In docket number 321066, petitioners
appeal the circuit court’s decision to affirm the agency’s final order with respect to Ciena
Healthcare Management, Inc. and the nursing homes it operates.2 For the reasons more fully
explained below, we affirm the circuit court’s order with respect to Ciena, but reverse in part
with respect to the NexCare nursing homes.
1
Dimondale Nursing Care Center, West Oaks Senior Care Rehab Center, The Courts of Holt,
Saginaw Home of Compassionate Care, Durand Senior Care and Rehab Center, Evergreen
Manor Senior Care Center, Faith Haven Living Center, and Livonia Woods Nursing and Rehab
are NexCare facilities. The management company, NexCare Health Systems, LLC, is not a party
to this appeal.
2
Ciena operates Northfield Place, Royal Nursing Center, Eastwood Nursing Center, Golden
Oaks Medical Care Facility, and Royalton Manor.
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I. BASIC FACTS AND PROCEDURAL HISTORY
Ciena and NexCare are unrelated Michigan corporations that operate several nursing
homes, each of which is a legal entity distinct from its managing corporation. Ciena and
NexCare contract with the Department3 to provide nursing home services to eligible individuals
under the joint state and federal Medicaid program. 42 USC 1396 et seq.; MCL 400.1 et seq. In
order to be reimbursed for the services, Ciena and NexCare submit annual cost reports to the
Department itemizing the costs each facility spent to serve Medicaid beneficiaries. If the
Department’s audit reveals that a cost report contains incorrect data, such as non-allowable
expenses, it will use corrected information to set future repayment rates and, under certain
circumstances, will retroactively change a previously applied rate. Apart from some exceptions
that do not apply to this case, a provider who disputes an adverse audit may request a formal
hearing. MCL 24.271 et seq.
The Department audited petitioners’ cost reports for fiscal years 2007 and 2008, and
disallowed $547,318 in interest expenses claimed by Ciena’s home office, and more than $1
million in combined interest expenses claimed by the individual NexCare homes. In both cases,
the Department disallowed the expense under § 8.8 of Michigan’s Medicaid Provider Manual:4
Working capital borrowings are considered funds borrowed for a relatively short
period to meet current normal operating expenses. Interest on current
indebtedness—loan amounts meeting program working capital criteria is
allowable, whereas interest expense for long-term working capital indebtedness is
not considered allowable. The nursing facility must document the reason(s) and
need for the working capital loan. The use must be to meet normal operating
expenses and must be supported by an application of funds analysis
demonstrating the use of loan proceeds for nursing facility expenses. The loan
must include/require repayment of the principle [sic] balance within a prescribed
time period, including regular scheduled repayment amounts applying to the
principle [sic] borrowings amount. The loan must meet allowable cost principles.
[Provider Manual at 46.]
At issue for Ciena is the interest on 21 promissory notes securing loans from individuals,
couples, and trusts, most of which were issued in 2004 and 2005. The interest rates on the loans
ranged from 11% to 12%, and the notes required monthly interest-only payments. Ciena
deposited the borrowed funds into its home account and then disbursed them to the individual
homes as needed to cover losses and, among other things, to make capital improvements.
3
At the time of the proceedings below, the applicable department was the Department of
Community Health, but its responsibilities were later transferred to the Department of Health and
Human Services. See Executive Order 2015-4.
4
We refer to Michigan’s Medicaid Provider Manual as the Provider Manual. During the time at
issue, the federal government issued an analogous Provider Reimbursement Manual, which we
refer to as the Reimbursement Manual.
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At issue for the NexCare petitioners is interest claimed on eight lines of credit taken out
by individual homes between March 2002 and January 2007. The oldest line of credit was
converted into a 3-year note in 2006, and six more lines of credit were bundled into an obligated
group debt instrument issued by Bank of America in December 2008. The eighth facility opened
a $1 million line of credit in 2004 and at the time of the audit had not converted it into some
other type of debt instrument. The Department allowed the interest expense on these lines of
credit in 2005 and 2006, but disallowed the interest expense in 2007 and 2008, reasoning that the
lines of credit became long-term debt when converted into the debt instruments.
After receiving the adverse results, Ciena and NexCare separately requested formal
hearings. At their request, the hearing officer consolidated their appeals, and the parties filed a
joint stipulation of issues, law, and facts. After three hearings and review of the parties’ briefs
and evidence, the hearing referee found against petitioners on every issue and confirmed the
Department’s decision to disallow the interest expenses. The hearing officer specifically
determined:
1. The Department applied the proper tests of allowability when it disallowed the
interest expense on (1) the Ciena promissory notes and (2) the lines of credit of
the NexCare Homes. . . .
2. The [] Provider Manual . . . appl[ies] to the Ciena promissory notes and the
lines of credit of the NexCare homes . . . in the cost reporting periods that are the
subject of this appeal.
3. The interest on the Ciena [and] NexCare . . . borrowings is not an “allowable
cost” pursuant to [Reimbursement Manual]-15 Section 202.1.
4. The [Provider Manual] was properly promulgated as part of the state plan
pursuant to 42 USC 1396a and its implementing regulations.
***
8. The Office of Audit is not barred from applying policies introduced into the
[Provider Manual] in a subsequent cost reporting period to interest expense on
borrowings that have not been disallowed in a prior cost reporting period.
9. The Office of Audit is not barred from retrospectively applying the policy in
Section 8.8 specifically related to long term borrowings to short term borrowings
before the borrowings are actually converted to long term borrowings.
***
11. The “prudent buyer” principle was another basis to disallow the interest
expense on the Ciena promissory notes.
12. The “related party” principle was another basis for disallowing the interest
expense on the Ciena promissory notes and it was proper for the Department to
disallow the same.
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After reviewing petitioners’ exceptions to the hearing referee’s findings, the
Department’s Director entered a final order adopting the referee’s conclusions. Petitioners
appealed the final order to the circuit court, which issued an order affirming the referee’s
findings and rulings with respect to Ciena, but reversing with respect to the NexCare homes.
After the circuit court denied the parties’ motions for reconsideration, the parties applied to this
Court for leave to appeal. This Court granted leave and consolidated the appeals.5
II. AGENCY REVIEW
“This Court reviews a lower court’ s review of an agency decision to determine whether
the lower court applied correct legal principles and whether it misapprehended or grossly
misapplied the substantial evidence test to the agency’s factual findings.” Department of Labor
& Economic Growth v Dykstra, 283 Mich App 212, 222; 771 NW2d 423 (2009) (quotation
marks and citation omitted). When reviewing an agency’s decision, the circuit court is “limited
to determining whether the decision was contrary to law, was supported by competent, material,
and substantial evidence on the whole record, was arbitrary or capricious, was clearly an abuse
of discretion, or was otherwise affected by a substantial and material error of law.” Id. at 223(quotation marks and citation omitted); see also MCL 24.306.
“When reviewing whether an agency’s decision was supported by competent, material,
and substantial evidence on the whole record, a court must review the entire record and not just
the portions supporting an agency’s findings.” Great Lakes Sales, Inc v State Tax Comm, 194
Mich App 271, 280; 486 NW2d 367 (1992). Substantial evidence is evidence “that a reasoning
mind would accept as sufficient to support a conclusion.” Monroe v State Employees’
Retirement Sys, 293 Mich App 594, 607; 809 NW2d 453 (2011) (quotation marks and citation
omitted). “Substantial evidence is ‘more than a mere scintilla’ but less than ‘a preponderance’ of
the evidence.” Huron Behavioral Health v Department of Behavioral Health, 293 Mich App
491, 497; 813 NW2d 763 (2011) (citation omitted). “If there is sufficient evidence, the circuit
court may not substitute its judgment for that of the agency, even if the court might have reached
a different result.” VanZandt v State Employees Ret Sys, 266 Mich App 579, 584; 701 NW2d
214 (2005). “Courts should accord due deference to administrative expertise and not invade
administrative fact finding by displacing an agency’s choice between two reasonably differing
views.” Monroe, 293 Mich App at 607 (quotation marks and citation omitted). This is
particularly true with regard to “witness credibility and evidentiary questions.” VanZandt, 266
Mich App at 588.
5
See Ciena Healthcare Mgt v Dep’t of Community Health, unpublished order of the Court of
Appeals, issued August 18, 2014 (Docket No. 321027); Ciena Healthcare Mgt v Dep’t of
Community Health, unpublished order of the Court of Appeals, issued August 18, 2014 (Docket
No. 321066).
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B. DOCKET NO. 321027
The Department conceded in the circuit court and in its brief on appeal that it should have
allowed the interest on the line of credit taken out by Durand Senior Care and Rehab because the
loan was less than one year old. It argues on appeal, however, that the circuit court erroneously
extended this concession to the other seven NexCare homes, and thus clearly erred by reversing
the final order with respect to all the NexCare facilities rather than with respect to the Durand
facility alone. We agree that the circuit court erred by reversing the final order with respect to all
of the NexCare facilities, but not for the reason advanced by the Department.
Contrary to the Department’s assertion, the circuit court did not reverse the final order
with regard to NexCare by erroneously extending its finding that the Durand facility should have
been allowed to claim the interest expense on its line of credit. Rather, the circuit court reversed
because it agreed with NexCare that the interest paid on the lines of credit should have been
allowed up to the time when the lines were refinanced. In drawing this conclusion, however, the
circuit court failed “to accord due deference to administrative expertise” and improperly invaded
“administrative fact finding by displacing [the] agency’s choice between two reasonably
differing views.” Monroe, 293 Mich App at 607.
The relevant question with regard to the NexCare homes was whether loans, which were
initially considered short term, could be treated as long-term debt before actually being formally
converted to a long-term debt instrument. The hearing referee found that the lines of credit taken
out by the NexCare homes had taken on the character of long-term debt before the time they
were refinanced into long-term debt. Accordingly, the referee determined that their retrospective
classification was proper, and that the auditor properly determined that the lines of credit were
not funds borrowed for a relatively short time to meet current normal operating expenses.
The circuit court, however, rejected that contention and reversed, not because the record
showed that NexCare’s loans had not taken on the character of long-term debt, but because it felt
that it was reasonable to treat the loans as short-term until formally converted. The circuit court
based its decision on the form of the loans, but the hearing referee looked not just at the timing,
but also at how the facilities used the loans. Because the referee’s view was reasonable and
supported by the record, the circuit court was obligated to defer to the hearing referee’s
administrative expertise. Id. at 607. Absent any indication that the record was insufficient to
support the referee’s findings, the court was prohibited from “substituting its judgment for that of
the agency, even if the court might have reached a different result.” VanZandt, 266 Mich App at
584. By substituting its own judgment for that of the agency, the circuit court committed clear
error. Id. at 596. For these reasons, we reverse the circuit court’s order with regard to the seven
non-Durand homes.
C. DOCKET NO. 321066
Although petitioners assign several errors to the circuit court in this docket, the
dispositive issue is whether § 8.8 of the Provider Manual is valid. Petitioners do not dispute that
when they enrolled in the Medicaid program administered they signed agreements stating that
they would read and comply with the Provider Manual and with the Department’s “policies and
procedures for the Medical Assistance Program contained in the manual, manual updates,
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provider bulletins, and other program notifications.” They also do not dispute that they agreed
to comply with the provisions of 42 USC 405 and MCL 400.1 et seq. Also undisputed is the fact
that Ciena’s promissory notes do not require repayment of the loan principal within a “prescribed
period,” or that Ciena has been making interest-only payments on most of the loans for at least
two years, and for even longer on some of the loans. Thus, if § 8.8 is valid, it would necessarily
follow that the interest on those promissory notes would not be eligible for reimbursement.
Accordingly, petitioners claim that § 8.8 of the Provider Manual is invalid because it changes the
state plan with regard to whether an expense is allowable and therefore cannot be enforced until
it is approved by the Centers for Medicare and Medicaid Services.
Michigan’s state plan incorporates 42 CFR 413.153 and Reimbursement Manual-15,
§ 202.1 as guidelines for identifying allowable costs. 42 CFR 413.153(a)(1) provides that
“[n]ecessary and proper interest on both current and capital indebtedness is an allowable cost.”
It defines interest as follows:
Interest is the cost incurred for the use of borrowed funds. Interest on current
indebtedness is the cost incurred for funds borrowed for a relatively short term.
This is usually for such purposes as working capital for normal operating
expenses. Interest on capital indebtedness is the cost incurred for funds borrowed
for capital purposes, such as acquisition of facilities and equipment, and capital
improvements. Generally, loans for capital purposes are long-term loans. [42
CFR 413.153(b)(1).]
Reimbursement Manual-15, § 202.1 provides the same definition of “interest,” further
characterizing “relatively short term” as “usually for 1 year or less.” It also specifies that to be
allowable, interest must be “[s]upported by evidence of an agreement that funds were borrowed
and that payment of interest and repayment of funds are required.”
The definition of working capital borrowings in § 8.8 as “funds borrowed for a relatively
short period of time to meet normal operating expenses,” is clearly consistent with the definition
in 42 CFR 413.153(b)(1) of current indebtedness as “funds borrowed for a relatively short
term . . . usually for such purposes as working capital for normal operating expenses.” The
requirement in § 8.8 that for interest to be allowable, the underlying loan must require repayment
of the balance within a prescribed period interprets, but does not change, the requirement in
Reimbursement Manual-15 § 202.1 that for interest to be allowable, the underlying loan must
require payments of interest and repayment of the principal. Because the state plan incorporates
42 CFR 413.153 and Reimbursement Manual-15 § 202.1, with which § 8.8 of the Provider
Manual is consistent, we conclude that § 8.8 does not change the state plan, and therefore does
not require federal approval before enforcement.
Alternatively, petitioners argue that, even if § 8.8 is valid, it is ambiguous and must be
construed against the Department. An ambiguity can be found only where the language of a
statute as used in its particular context has more than one common and accepted meaning.
Colucci v McMillin, 256 Mich App 88, 94; 662 NW2d 87 (2003). Because petitioners do not
base their claim of ambiguity on the actual text of § 8.8, we find their argument unpersuasive.
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Petitioners base their claim of ambiguity on two alleged admissions by the Department.
They contend first that a statement by an appeals officer in a written conference report for Belle
Fountain Nursing and Rehabilitation Center, asserting that what constitutes “regular” payments
is ambiguous, establishes the ambiguity of the entire section. Assuming arguendo that the term
“regular” is ambiguous, construing it against the Department would not help petitioners because
the meaning of “regular” is not at issue. The promissory notes for Ciena actually require regular
payments, but still run afoul of § 8.8 because they require interest-only payments. Accordingly,
construing § 8.8 against the Department with respect to “regular” would not produce a different
outcome for Ciena.
Petitioners next rely on a notice issued by the Department in conjunction with a 2012
proposed change in the wording of § 8.8 to specify that a relatively short time meant “12 months
or less.” As a rationale for the change in wording, the Department explained that the “[c]urrent
policy does not clearly define the appropriate time period for repayment of the principal balance
of a working capital loan.” Petitioners contend that this is evidence that § 8.8 is ambiguous with
regard to what constitutes a “relative short period.” However, notwithstanding the rationale for
revising the wording of § 8.8, the proposed change does no more than incorporate the
characterization of “relatively short term” as “usually for 1 year or less” found in Reimbursement
Manual-15 § 202.1, and in that part of the state plan that incorporates Reimbursement Manual-15
§ 202.1, with which petitioners have taken no issue.
In sum, § 8.8 of the Provider Manual does not change the state plan; it corresponds to 42
CFR 413.153 and interprets Reimbursement Manual-15 § 202.1, both of which are incorporated
into the state plan as guidelines for identifying allowable costs. Further, because petitioners have
not pointed to any language in § 8.8 that, when “used in its particular context has more than one
common and accepted meaning,” there is no ambiguity. Colucci, 256 Mich App at 94.
Consequently, § 8.8 of the Provider Manual is valid and enforceable, and the Department
properly applied it to disallow the interest expense on loans that in most cases were at least two
years old and required interest-only payments. For that reason, it is unnecessary for this Court to
address whether the related party and the prudential buyer principles provided alternative bases
for disallowing the interest expense.
Finally, petitioners claim that the circuit court deferred to the referee’s findings of fact
when it should have determined that those findings were based not on the whole record, but on
portions of testimony taken out of context, and that they ignored or were contrary to the parties’
stipulations. The portion of the record petitioners cite is the circuit court’s articulation of the
standard of review for administrative decisions found in Quality Clinical Laboratories, Inc v
Dep’t of Social Services, 141 Mich App 597, 599; 367 NW2d 390 (1985). Petitioners do not
identify which of the more than 50 stipulations the referee, agency or court ignored or
contradicted, and we will not search the record for citations to support their claim. Derderian v
Genesys Health Care Sys, 263 Mich App 364, 388; 689 NW2d 145 (2004). Because petitioners
have abandoned this claim of error by failing to properly support it, we decline to address it.
Wilson v Taylor, 457 Mich 232, 243; 577 NW2d 100 (1998).
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III. CONCLUSION
We reverse the circuit court’s order with regard to the eight NexCare facilities and
remand this case to the circuit court to issue an order reversing the Department’s final order with
regard to the Durand facility alone. In all other respects we affirm.
Affirmed in part, reversed in part, and remanded for further proceedings consistent with
this opinion. We do not retain jurisdiction.
/s/ Peter D. O'Connell
/s/ Donald S. Owens
/s/ Michael J. Kelly
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