MARYMOUNT MEDICAL CENTER, INC. v. COMMONWEALTH OF KENTUCKY, CABINET FOR HEALTH SERVICES
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RENDERED: October 2, 1998; 2:00 p.m.
NOT TO BE PUBLISHED
C ommonwealth O f K entucky
C ourt O f A ppeals
No.
1997-CA-001875-MR
MARYMOUNT MEDICAL CENTER, INC.
APPELLANT
APPEAL FROM FRANKLIN CIRCUIT COURT
HONORABLE WILLIAM L. GRAHAM, JUDGE
ACTION NO. 96-CI-01516
v.
COMMONWEALTH OF KENTUCKY,
CABINET FOR HEALTH SERVICES
APPELLEE
OPINION
REVERSING AND REMANDING
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BEFORE:
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GUIDUGLI, JOHNSON and SCHRODER, Judges.
JOHNSON, JUDGE:
Marymount Medical Center, Inc. (Marymount)
appeals from an order entered in Franklin Circuit Court on June
26, 1997, affirming the Administrative Law Judge's (ALJ) July 11,
1996 opinion which denied Marymount's request for an increase in
its reimbursement rate set by the Cabinet for Health Services
(the Cabinet) to compensate Marymount for the costs of inpatient,
acute care services rendered to Medicaid beneficiaries.
Marymount argues that it has been denied fundamental due process
and that the Franklin Circuit Court failed to use the appropriate
standard in reviewing the ALJ’s opinion.
We agree with the
second argument, and reverse and remand.
Marymount is a one-hundred bed, full service, general
acute care hospital located in London, Kentucky, which
participates in the Kentucky Medical Assistance Program (KMAP).
Approximately seventy-five percent of its patients are Medicare
or Medicaid patients and the hospital is heavily dependent on
reimbursement of Medicare and Medicaid expenses.
Medicaid is a largely state-administered program for
the federal and state financing of medical costs among specific
disadvantaged groups, notably, the impoverished.
The Medicaid
program is designed, implemented and administered by states using
federal funds and following federal guidelines.1
At its
inception, the Medicaid Act, Title XIX of the Social Security
Act, 42 U.S.C. § 1396 et seq., was not specific in its regulation
of allowable cost.
However, in 1972, Congress adopted a Medicare
program which required payment on a “reasonable cost” basis.
As
a practical matter, the "reasonable cost" reimbursement method
meant that the state paid for virtually all care provided
Medicaid recipients.
Mary Washington Hospital, Inc. v. Fisher,
635 F.Supp. 891, 893 (E.D. Va. 1985).
Congress ultimately found
the Medicare reasonable cost reimbursement principles to be
1
Medicaid differs from Medicare which is administered
exclusively by the federal government.
-2-
inherently inflationary and to contain no incentives for
efficient performance.
46 Fed.Reg. at 47966.
State participation in Medicaid is voluntary, but to
obtain federal financial assistance the state must comply with
federal Medicaid laws and regulations.
See Wilder v. Virginia
Hospital Association, 496 U.S. 498, 501, 110 S.Ct. 2510, 25132514, 110 L.Ed.2d 455, 462 (1990).
The state must devise a
scheme for reimbursing health care providers and have that plan
approved by the Secretary of Health and Human Services.
The
Cabinet is the state agency charged with administering the
Kentucky Medicaid program.
At the time of the action sub
judice,2 it was also required that the state plan comply with the
Boren Amendment which was enacted in 1980.3
(a)(13)(A).
42 U.S.C. § 1396a
The Boren Amendment strongly encouraged states to
2
The Balanced Budget Act of 1997 repealed several
provisions of the Boren Amendment. This appeal is unaffected by
the repeal. See Balanced Budget Act of 1997, Title IV, Subtitle
H, Chapter 2, Sec. 4711.
3
The Boren Amendment, in pertinent part, requires the
State to provide
for payment . . . of the hospital services
. . . provided under the plan through the use
of rates . . . which the State finds, and
makes assurances satisfactory to the
Secretary, are reasonable and adequate to
meet the costs which must be incurred by
efficiently and economically operated
facilities in order to provide care and
services in conformity with applicable State
and Federal laws, regulations, and quality
and safety standards. . . .
-3-
contain costs within fixed limits or suffer substantial financial
penalties in the form of reduced federal contribution.
Kentucky's program, approved by the federal government,
based reimbursement rates upon the operating costs, capital
costs, and professional costs of treating eligible Medicaid
patients during the previous year.
Operating costs are comprised
of both routine costs and ancillary costs.
Routine costs are the
total administrative costs divided by the total number of patient
days at the hospital, regardless of payor.
Ancillary costs, on
the other hand, are expenses which are directly attributable to a
specific patient and are based upon that patient's actual use of
a particular service (such as lab tests, x-rays, pharmaceuticals
and surgery).
Operating costs are calculated annually with
payment rates applied prospectively.
Kentucky uses two basic methods of limiting Medicare
expense reimbursement:
increase control (RIC).4
a median-based limit and a rate-ofTo determine the median-based limit,
hospitals are divided into "peer groups" based upon the number of
hospital beds available and a median per diem cost is computed.
Marymount is in the peer group for acute care hospitals with
fifty-one to one hundred beds, which has a hospital reimbursement
rate of 110% of the median per diem cost.
However, as a hospital
which services a disproportionately high number of Medicaid
patients, Marymount can receive up to 120% of the median cost.
4
The RIC was implemented in July 1993.
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To determine the RIC, the routine and ancillary costs from the
previous year are totaled and that figure is then increased by
one and one-half times the hospital’s specific inflation factor,
which is known as the “DRI.”5
In this case, the RIC rate is based on Marymount's 1994
inpatient rate, which, in turn, is based on Marymount's 1993
fiscal year's cost report.
Using data from fiscal year 1993, the
Cabinet set Marymount's reimbursement rate at $547 per diem for
1995 even though Marymount's actual Medicaid recognized operating
cost was $656 per diem.
The median cost limit for Marymount’s
peer group was $681 per diem.
However, Marymount was not
eligible for $656 per diem because when the RIC was applied to
the previous year’s cost, it was capped at $547 per diem.
There
can be no upward adjustment above the median-based limit and the
RIC unless specific exceptions apply.
Marymount initiated administrative proceedings claiming
the per diem reimbursement rate was "unreasonable and inadequate"
and requesting an increase based upon Section 113(b), (c), and
(f) of the Medicaid Reimbursement Manual for Hospital Inpatient
Services authorized under 907 KAR 1:013E.
Section 113 of the
manual provides as follows:
Participating hospitals are provided a
mechanism for a review of Program decisions
when any of the following circumstances
occur:
5
The DRI (Data Resources, Inc.) is a nationally recognized
calculation frequently used for Medicaid rate-setting purposes.
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(a) The addition of new and necessary
services requiring Certificate of Need
approval.
(b)
Major changes in case mix.
(c) Major changes in types or intensity of
services.
(d) Costs of improvements incurred because
of certification were established if those
costs were not considered in the rate
calculation.
(e) Extraordinary circumstances which may
include fires, floods, etc.
(f) Program decisions of a substantive
nature relating to the application of this
payment system.[6]
Marymount's major contention is that, based upon its
audited financial data, it experienced major changes in case mix
and/or major changes in types or intensities of service and
therefore qualified for an upward adjustment under Section 113
(b) and (c).
Marymount argues that implementation of the RIC in
1993 qualified it for an increase in its reimbursement rate under
Section 113 (f).
Marymount argues that because it has managed to
shorten the average length of stay, the average cost per day has
necessarily increased.7
Marymount argues that even though it
6
The Cabinet has no regulation or internal memorandum
defining the terms used in Section 113.
7
It is undisputed in this case that a hospital stay costs
more in the first few days. Thus, for example, if a patient can
be released in five days rather than seven days, the cost per day
on the five-day stay is higher than the cost per day on the
seven-day stay.
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operates efficiently, the $547 reimbursement rate penalized it by
not adequately reimbursing it for its reasonable costs.
A program review meeting was held on January 9, 1996,
between representatives of Marymount and the Cabinet.
Marymount
argued that fiscal year 1993 was not a proper base year in which
to impose the RIC because changes made in the 1993 fiscal year8
resulted in higher ancillary costs and a significant reduction in
average length of stay.
Marymount argued that these changes and
a decline in obstetrical services increased the facility's per
diem operating costs beyond the maximum recognized reimbursement
amount.
Marymount has historically contained operating costs
well below the median for its peer group.9
In the final report, the hearing officer and acting
director of reimbursement operations, Pam Aldridge (Aldridge),
stated that the decrease in hospital occupancy should have
8
In 1992, Marymount experienced its first unprofitable
year since 1982 due to the loss of $1 million in annual income
caused by the state's discontinuance of the indigent care
program. In an attempt to make up for that large revenue loss,
Marymount made changes: increasing employee contribution to
insurance premiums, raising deductibles on its malpractice
insurance, implementing a wage structure, entering into a
management contract, opening a twenty-four bed dual-licensed
unit, implementing a new utilization review program as well as
other changes in an attempt to reduce average length of stay.
9
An analysis by an accounting firm revealed that when
overall hospital operating costs were divided by adjusted patient
volume, the hospital experienced only modest increases in
operating expenses--less than four percent over a two-year
period. Marymount argues that this analysis indicated that the
large increase in Medicaid costs was attributable to something
other than failure to control costs.
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resulted in a commensurate decrease in ancillary and nursery
costs.
She stated that the hospital administrator failed to
monitor changes in utilization of the facility and those costs
did not decrease.
Aldridge concluded that the hospital was not
operated in an efficient and economical manner and recommended no
increase in Marymount's reimbursement rate.
Pursuant to 907 KAR 1:671, Section 14, Marymount
requested an administrative hearing arguing that it was an
efficiently and economically operated facility and an increase in
per diem reimbursement rate was warranted under sections (b),
(c), and (f) of Section 113.
At a hearing on April 19, 1996,
Marymount presented evidence from its president/chief executive
officer, chief financial officer and a certified public
accountant, Mark Carter (Carter).
The Cabinet presented only the
testimony of Aldridge.
Marymount contended that changes it had made in 1993
resulted in a reduced average length of stay and a commensurate
increase in ancillary costs.
Marymount presented audited
financial data supporting this argument.
Those changes included
the opening of a dual-licensed unit, the increased use of
observation beds, and the implementation of a case management
approach to cost control.
Marymount also noted that it had a
change in obstetrical services10 during the 1993-1994 year when
one primary care physician discontinued deliveries due to the
10
Approximately 78% of deliveries in the area served by
Marymount are Medicaid cases.
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cost of insurance premiums.
Marymount emphasized that although
total deliveries decreased in 1994, the number of Caesarean
deliveries increased when two other primary care physicians began
obstetrical care.11
Marymount attempted to prove that it was an economical
and efficient hospital by presenting the following statistics:
it is below both state and national averages for its costs per
discharge; it uses only 3.8 full-time equivalent employees for
each patient per 100 adjusted discharges versus the Kentucky
average of 5 full-time equivalent employees; it pays its
employees an average salary of $29,000 which is below the
Kentucky average of $31,000, its Medicare average length of stay
was the shortest in the region; its costs per discharge were the
lowest of the twenty hospitals in the Sisters of Charity of
Nazareth system; its costs per adjusted discharge were only one
half of the costs for comparable Kentucky facilities; and it was
the only hospital in the state with a variable staffing program.
Marymount noted that the decrease in average length of stay which
it achieved brought a substantial savings to the Kentucky
Medicaid Programs; and that even if it received the full upward
rate adjustment, it would nevertheless save Medicare over nine
percent.
11
Caesarean deliveries produce increased ancillary costs,
whereas routine deliveries are a lower intensity, i.e., lower
cost, service.
-9-
Before accountant Carter testified, Marymount sought a
stipulation concerning the reliability of its basic data.
The
Cabinet indicated that it had no objection to the data.12
Through Carter, Marymount entered Exhibit 1, fourteen tables
based upon audited financial data, which Carter explained in
great detail.
Carter testified that a shortened average length
of stay combined with an increasing case mix index will cause a
hospital's ancillary cost to rise13 and that Marymount had such a
12
Prior to accountant Carter's testimony, the following
colloquy took place:
Marymount's counsel: And maybe I could just
--Mr. Ramsey, we are not, as I understand it,
in disagreement as to their basic source
numbers that we are using here today.
The Cabinet's counsel: Fine. This is
information that came from us.
Marymount's counsel: So we won't put on
proof as [to] the source and accuracy of that
base information then.
ALJ:
That's fine.
13
The Cabinet argues that we must defer to statements of
agency policy. A major change in case mix index is a critical
issue in this case. Marymount argues that agency policy
fluctuates depending on the circumstances. Aldridge generally
defined case mix as noted above; however, Marymount contends that
in a recent Medicare rate appeal involving another hospital, a
Cabinet staff member testified that case mix actually referred to
"payor type" and that the agency had always interpreted the
phrase in that manner. Marymount included in its reply brief
before this Court as an exhibit the transcript of the testimony
given by the Cabinet employee at a recent rate appeal hearing.
Marymount argues the Cabinet's interpretation of "case mix"
changes to fit the circumstance. The Cabinet has requested that
this Court strike Marymount's exhibit because CR 76.12(4)(c)(vi)
prohibits using as an exhibit a document which was not part of
(continued...)
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situation.
Carter also presented a single page unaudited
document,
Exhibit 2, Attachment E, containing only numbers
rather than tables.
Carter testified that Attachment E "was
included just to show that some of the measures that the hospital
reports monthly to its corporate office and it is held
accountable to by the leadership in their corporate office."
Carter explained that the parent corporation used this data to
compare its hospitals to one another and to the state and
national averages.
He was not cross-examined about Attachment E.
On direct examination, Aldridge was asked about each
of the tables Carter presented.
When asked about Table #4, she
noted that the total hospital discharges in Attachment E did not
match those in Table #4.
However, she did state that she was not
sure about her testimony because she "didn't work through this
one."
When asked if there was anything else she wished to add
regarding Table #4, she reiterated her belief that "exhibit E
. . . kind of contradicted this [Table #4] a little bit . . . ."
Regarding Table #9, the case mix table, Aldridge stated that the
case mix index may be roughly described to mean "the ratio of the
number of patients requiring minor services to those requiring
more serious services."
Aldridge noted again that Attachment E
"really didn't reflect--what was on that particular page didn't
reflect such an extreme increase in acuity levels."
On cross-
examination when asked about Table #9, Aldridge stated:
13
(...continued)
the record below.
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I did look at this but there again like we
mentioned earlier, I mean I don't have
anything to base this on. I'm just looking
at this chart and the chart would indicate
that the case mix has changed but there
again, that is not--I had already looked at-prior to looking at that, I had looked at E
of exhibit #2 also which really reflected
something a little bit different in the
trends in that case mix. So there I had two
different documents that I was looking at and
they seemed to indicate different things.
When asked about Table #10, the Medicaid admissions chart,
Aldridge noted that Attachment E indicated a reduction in
admissions rather than an increase as presented in Table #10.
In conclusion, when Aldridge was asked her opinion on
whether Marymount had shown an increase in case mix or case
types, she replied that having reviewed all the materials, "it
does not indicate a change in services or intensity as we have
applied it in the past and based on our interpretation of what
the intent of the manual is."
She stated that the reason for
that decision is that "it looks like the majority of what we are
seeing here or pretty much all of what we are seeing is something
that is representative of what's going on in the industry from
provider to provider."
She explained that routine fluctuations
are going to occur when operating a business.
She testified that
"we were trying to find something that was unique to Marymount
that we wouldn't be seeing across the board or that we wouldn't
be seeing at all the rural hospitals or everywhere in the state.
And, no, I did not see anything that was truly unique to
Marymount."
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Marymount's president/chief executive officer and chief
financial officer testified that the hospital would lose
$400,00014 per year at the $547 per diem rate and that the low
rate of reimbursement set by the Cabinet will mean major changes
in the services provided to Medicare patients.
The officers
opined that one of the major changes would be a discontinuation
of obstetrical practice even though the nearest obstetric
hospital is over twenty miles away.
At the close of the hearing, the ALJ gave the parties
ten days to file simultaneous post-hearing briefs, which each
party did.
The Cabinet argued that Marymount's data was
unreliable and it detailed perceived discrepancies between the
tables used by the Cabinet and Attachment E.
Unaware that the
Cabinet was going to allege these discrepancies, Marymount simply
summarized the evidence and detailed its audited financial data
which it claimed supported its argument that it was an
economically and efficiently operated hospital and that it should
receive rates which are reasonable and adequate to meet its
costs.
The ALJ, in her July 11, 1996 opinion, noted that "KMAP
is required to pay for inpatient hospital services provided to
eligible Medicaid recipients through the use of rates that are
reasonable and adequate to meet the costs that are required to be
14
The hospital forecasted a loss of $600,000 the first
year at that rate.
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incurred by efficiently and economically operated hospitals."
The ALJ stated that "[t]he figures presented in this document
. . . are largely inconsistent with those presented by Marymount
in this appeal."
The ALJ specifically noted several perceived
discrepancies between the audited statistics and the unaudited
report.
In fact, four of fourteen "findings" made by the ALJ
addressed these discrepancies.
In her conclusions of law, the
ALJ stated in pertinent part as follows:
Section 113 provides the Cabinet and
hospitals with necessary flexibility in
applying the payment rate standards.
However, that section is not to be
interpreted liberally but rather is to be
applied only in limited circumstances to
resolve individual inequities unique to the
facility seeking relief. This is especially
true in light of the recent Memorial[15]
decision in which KMAP's reimbursement system
was held to be fair and reasonable. The
Court in Memorial court [sic] concluded that
KMAP reimburses Kentucky hospitals on average
between 93 percent and 96 percent of Medicare
eligible costs. "By any measure of Kentucky
hospitals, this reimbursement is within a
reasonable zone calculated to allow those
efficient hospitals the ability to recoup
their reasonable Medicaid related costs."
Memorial, 896 F.Supp. at 1439. That is
certainly not to say that the application of
the same reimbursement methodology is
mandated regardless of the circumstances.
Certainly, Section 113 allows crucial
flexibility in dealing with special
situations faced by providers. However, it
must be applied as an exception rather than a
rule. Applied too liberally, Section 113 has
the potential of inflicting a great deal of
damage to an established reimbursement
methodology system.
15
Memorial Hospital, Inc. v. Childers, 896 F.Supp. 1427
(W. D. Ky. 1995).
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Marymount has failed to prove with any
certainty that it experienced a major change
in case mix or a major change in the types or
intensities of services it offers. First,
the impact of Marymount's efforts to cut
costs and increase the efficiency of hospital
operations during the time in question is
unclear from the data presented at the
administrative hearing in this matter. The
evidence of a substantially decreased ALOS
[average length of stay] and a corresponding
increase in ancillary costs is riddled with
uncertainties and is tenuous at best. There
is conflicting evidence in Marymount's own
documentation concerning whether a reduced
ALOS for Medicaid patients was actually
achieved. Contradictory evidence also exists
as to Marymount's assertions that its CMI
[case mix index] increased. . . .
*
*
*
Even if the financial data prepared and
presented by Marymount was consistent and
fully supportive of its arguments, a reduced
ALOS and a routine fluctuation in obstetrical
services do not qualify as major changes in
case mix or types or intensities of services
for purposes of Section 113. Marymount is
not experiencing any type of individual
inequity here; there is no evidence to
suggest that Marymount's situation differs
from that of other rural hospitals. The
hospital's efforts to reduce the ALOS is an
industry-wide trend. . . . Marymount's
approach is a practical cost-cutting measure,
but it is not a unique one and it is
certainly not the type of individual inequity
contemplated by Memorial and by Section 113.
The changes in the hospital's obstetrical
practice are indicative of the normal ebb and
flow of any rural hospital operation and do
not represent a major change in case mix or
type or intensity of service. . . . The
discrepancies in Marymount's data aside, any
changes experienced by Marymount appear to be
temporary and not unusual. . . . Like the
increase in the number of births or number of
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caesarean sections, these changes are normal
and temporary fluctuations which are to be
expected.
*
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Marymount has not alleged that the program
decision to apply the RIC effective July 1,
1993[,] was erroneous or faulty in any way,
the hospital is just asking that the program
decision not apply to it. There is no
evidence to suggest that Marymount's
circumstances differ from those of any other
provider . . . or that the application of
Section 113(f) is warranted in this
particular case.
*
*
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KMAP applied the proper rate limitation
methodology to Marymount in establishing its
inpatient operating costs and reimbursement
amounts. KMAP's methodology is reasonable
and has been applied in conformity with
federal and state law. The exceptions to the
established KMAP reimbursement procedures set
forth in Section 113 of the Manual are
necessary to resolve individual inequities in
the reimbursement system. In this case,
Marymount has failed to prove that it was the
subject of any individual inequities or that
its circumstances entitled it to the
application of any of the exceptions
enumerated in Section 113.
On July 26, 1996, Marymount filed exceptions to the ALJ
opinion and maintained that the only issue of the proceeding was
whether Marymount's reimbursement rate was adequate and
reasonable.
Marymount stated that the Cabinet waited until after
the hearing to raise the issue of the inaccuracy of its basic
financial data and that the ALJ "jump[ed] to extreme and
completely insupportable conclusions based upon an incomplete and
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uninformed review of Attachment E."
Marymount attached an
affidavit from accountant Carter stating in part as follows:
Thus, while Attachment E is an important
management tool, it would have to be audited
or subject to independent review to determine
its accuracy before being used for anything
other than internal management purposes. I
have not audited Attachment E but it appears
to be largely consistent with the Tables in
Exhibit 1 with minor discrepancies such as
can be expected when different source
documents or accounting assumptions are used.
Marymount argued that the ALJ's use of Attachment E as
substantive financial data was a procedural due process violation
because Marymount had not been afforded any opportunity to refute
the Cabinet’s allegations of financial discrepancies made in the
post-hearing brief.
The ALJ denied Marymount's exceptions and
recommended that the requested rate increase be denied.
Pursuant to statute, Marymount filed exceptions with
the Secretary of the Cabinet.
Marymount attached materials which
it claimed the Cabinet had in its files at the time of the
hearing which demonstrated that Marymount's data was indeed
correct.
The Secretary adopted in toto the ALJ's recommendation
stating that "[u]pon review of this matter I find that Marymount
has failed to produce consistent and adequate evidence that it
experienced major changes in its case mix or types or intensity
of services as contemplated by Section 113 . . . ."
Marymount appealed the matter to the Franklin Circuit
Court and argued that the Cabinet’s decision to deny the rate
increase was "arbitrary, capricious, or characterized by abuse of
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discretion"; "without support of substantial evidence on the
whole record”; "in violation of constitutional or statutory
provisions including the federal Medicaid Act, . . . KRS 205.560,
and Kentucky Constitution Section 2"; and "deficient as otherwise
provided by law including Marymount's right to due process as
protected by Kentucky Constitution Section 2 and KRS Chapter
13B".
In its June 26, 1997 opinion, the circuit court stated in
pertinent part as follows:
The validity of the KMAP reimbursement
procedure was recently challenged in federal
court. In Memorial Hospital v. Childers, 896
F.Supp 1427 (W.D. Ky. 1995), the court
considered a suit by a group of providers who
claimed that the program violated the Boren
Amendment's mandate of efficient and
economically-run facilities. The Court
concluded that every facet of the KMAP,
including the RIC limit, was consistent with
the Boren Amendment. The court found the
RIC, at 1.5 times the nationally-established
inflation rate, was not unlawful per se or
unreasonable as applied. Evidence presented
to the federal court, and considered by the
hearing officer in this case, showed that in
some circumstances the inflation rate
actually overcompensated some facilities for
Medicaid costs, even when considering
increased technology and acuity rates. This
is not to say, however, that the RIC can
never be applied in an unreasonable manner.
A case-by-case analysis of specific
application should be taken to ensure the
circumstances have not changed.
In Petitioner's case, the hearing officer
addressed the RIC's impact specifically on
its facility, and concluded that it was
reasonable. Petitioner urged the Cabinet to
find an exception within subsections (b), (c)
and (f) of Reimbursement Manual Section 113.
The hearing officer concluded that Petitioner
had not proven "with any certainty that it
experienced a major change in case mix or a
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major change in the types or intensities of
services it offers." He found that the data
presented in support of its decreased length
of stay was "riddled with uncertainties and
is tenuous at best," including some
inconsistencies with Petitioner's own data as
to the overall results. In any event, the
hearing officer concluded, the changes made
within Petitioner's structure were not the
types considered to be "major changes" for
purposes of Section 113.
As for Section 113(f), Petitioner argued
that the RIC's base date of July 1, 1993[,]
adversely affects its operating cost base,
because during the 1993 year Petitioner
experienced a major change in its obstetrical
services, making it an "aberrant" year for
operating costs. The hearing officer
rejected this argument, noting that the
changes in types of services were the "normal
ebb and flow" of providing health care
services, which is to be experienced by every
provider at some point. This normal
occurrence, plus the fact that providers were
beginning to convert to dual-licensed
facilities, was not unique enough, according
to the hearing officer, to fall within the
exceptions in Section 113. The exceptions,
the hearing officer opined, are to be a rare
occurrence, and not the general rule.
Based on the evidence presented at hearing
[sic], we conclude that there is substantial
evidence to support the hearing officer's
conclusion that the KMAP, and the RIC
specifically, was not unreasonably applied.
Section 113 provides an adequate remedy for
facilities alleging extraordinary
circumstances seeking an exception to the
reimbursement plan. The circumstances
alleged by the Petitioner in this case were
not considered to be unique or extraordinary
enough to warrant the requested relief. An
agency's interpretation of its own
regulations should not be disturbed unless it
is found to be totally against the evidence
or contrary to existing law. See J.B.
Blanton Co. v. Lowe, Ky., 415 S.W.2d 376, 378
(1967). We agree that Section 113 was
designed to be a rarely-applied exception,
-19-
and not a process commonly-used to "end run"
the established reimbursement procedure.
Accordingly, the agency's decision shall not
be disturbed.
Marymount filed a motion to reconsider asking for
reconsideration and/or clarification of two issues as follows:
An administrative appeals process required by
federal law cannot be divorced, however, from
corresponding federal standards. While
Section 113 of the Hospital Inpatient
Reimbursement Manual may legitimately set
some limits on the scope of permissible
administrative appeals, that appeals process
must be implemented and interpreted in
accordance with its federally mandated
purpose--to insure rates in individual cases
are adequate and reasonable.4 . . .
4
Thus, for example, whether a rate
increase should be granted pursuant to
Section 113 due to "program decisions of
a substantive nature relating to the
applications of this payment system"
cannot be properly decided without
reference to whether the program
decision in question (in this case the
implementation of the RIC), as applied
to the hospital's individual
circumstances produced rates that are
inadequate under federal standards.
*
*
*
CHS indicated clearly before the hearing that
it agreed Marymount's data showing it had
reduced its ALOS was accurate; during the
hearing CHS did not contest those figures;
and after the hearing when CHS finally raised
questions about Marymount's data it had
access to its own audited cost report
demonstrating the veracity and reliability of
Marymount's data. The government should not
be permitted to contest the accuracy of data
while it holds confirming data in its own
files. Under these circumstances, CHS should
-20-
be equitably estopped from contesting the
accuracy of Marymount's data.[16]
*
*
*
At a minimum, Marymount was entitled to ask
Ms. Aldridge to explain why CHS's own audited
cost report should be disregarded and to have
her credibility assessed.
Marymount requested the circuit court, at a minimum, to "clarify
that it is [sic] holding that federal reimbursement standards
including the adequacy and reasonableness of Medicaid rates or
affects on the accessibility of Medicaid services to
beneficiaries are inapplicable and irrelevant and will not be
considered by this Court in reviewing Section 113 administrative
appeals."
The Cabinet responded to Marymount's arguments by
stating that the elements of equitable estoppel were not present
and even if the elements were present, the general rule is that
equitable estoppel does not apply to governmental agencies unless
special or exceptional circumstances are present.
The Cabinet
argued that it was improper to use an administrative appeals
process to analyze whether KMAP complies with the Boren Amendment
on a facility-by-facility basis.
The Cabinet stated that "the
Kentucky Medicaid Program's overall reimbursement methodology is
in compliance with federal standards (i.e. the Boren Amendment)
16
Marymount pointed out that the Cabinet had conceded that
it had not timely raised the question about the deficiencies in
the data until after the hearing. The Cabinet responded that its
action in attacking the data after the hearing "is of little
consequence provided Marymount had the opportunity to respond to
any questions raised."
-21-
and therefore does reimburse all Kentucky hospitals for inpatient
services with rates that are reasonable and adequate to meet the
costs that must be incurred by efficiently and economically
operated providers [emphasis original]."
The Cabinet emphasized
that KMAP's appeals procedure was upheld in Memorial, supra, as
"viable" and "not a sham."
By order entered July 23, 1997, the circuit court
stated that it held in its previous order that KMAP's "limitation
on per diem payment increases from one year to the next -- called
the rate of increase control (RIC) -- was not arbitrary."
The
circuit court did not comment on the ALJ's lack of a finding that
Marymount's resulting rate, in and of itself, was "reasonable and
adequate".
The circuit court concluded that it was without power
to rule on the Cabinet's failure to comply with federal law since
Marymount did not raise that issue before the ALJ.
This appeal
followed.
Our standard of review is expressed in American Beauty
Homes, Corporation v. Louisville and Jefferson County Planning
and Zoning Commission, Ky., 379 S.W.2d 450 (1964), as follows:
Basically, judicial review of
administrative action is concerned with the
question of arbitrariness. On this ground
the courts will assume jurisdiction even in
the absence of statutory authorization of an
appeal. There is an inherent right of appeal
from orders of administrative agencies where
constitutional rights are involved, and
section (2) of the Constitution prohibits the
exercise of arbitrary power.
Obviously within the scope of a proper
review the court may determine whether the
-22-
agency acted in exercise of its statutory
powers. Such action would be arbitrary
within the prohibition of section (2)[17] of
the Kentucky Constitution.
In the interest of fairness, a party to be
affected by an administrative order is
entitled to procedural due process.
Administrative proceedings affecting a
party's rights which did not afford an
opportunity to be heard could likewise be
classified as arbitrary.
Unless action taken by an administrative
agency is supported by substantial evidence
it is arbitrary.
The above three grounds of judicial
review, (1) action in excess of granted
powers, (2) lack of procedural due process,
and (3) lack of substantial evidentiary
support, effectually delineate its necessary
and permissible scope. . . . In the final
analysis all of these issues may be reduced
to the ultimate question of whether the
action taken by the administrative agency was
arbitrary. As a general rule the yardstick
of fairness is sufficiently broad to measure
the validity of administrative action.
Id. at 456 (emphasis original) (citations omitted) (footnotes
omitted).
See also Kaelin v. City of Louisville, Ky., 643 S.W.2d
590, 591 (1983), and Commonwealth, Transportation Cabinet
Department of Vehicle Regulation v. Cornell, Ky. App., 796 S.W.2d
591, 594 (1990).
We will first review Marymount’s claim that a
procedural due process violation occurred when evidence was used
against it without it being allowed to cross-examine the
17
Section 2 states in part as follows: "Absolute and
arbitrary power over the lives, liberty and property of freemen
exists nowhere in a republic, not even in the largest majority."
-23-
substance of the evidence.
For there to be procedural due
process rights, there must be a property interest.
In The Board
of Regents of State Colleges v. Roth, 408 U.S. 564, 576, 92 S.Ct.
2701, 33 L.Ed.2d 548, 560 (1972), the Court stated as follows:
The Fourteenth Amendment's procedural
protection of property is a safeguard of the
security of interests that a person has
already acquired in specific benefits. These
interests--property interests--may take many
forms.
* * * * *
Property interests, of course, are not
created by the Constitution. Rather, they
are created and their dimensions are defined
by existing rules or understandings that stem
from an independent source such as state law
--rules or understandings that secure certain
benefits and that support claims of
entitlement to those benefits.
One has a property interest in welfare benefits if she has
previously been determined to meet the statutory criteria.
Goldberg v. Kelly, 397 U.S. 254, 262-263, 90 S.Ct. 1011, 25
L.Ed.2d 287, 295-296 (1970).
Procedural due process requires
that a party has the right to notice, an unbiased decision-maker,
fair procedures, and an opportunity to be heard which includes
the right to call and fully cross-examine witnesses.
Id.
Also
see Mathews v. Eldridge, 424 U.S. 319, 96 S.Ct. 893, 47 L.Ed.2d
18 (1976).
In Kaelin, supra, a somewhat similar issue was
presented.
At an administrative hearing held for the purpose of
granting or denying a zoning permit, the appellant was
-24-
specifically denied the right to cross-examine witnesses.
The
Supreme Court reversed this Court stating as follows:
The purpose of a "trial-type hearing", as
was stated in McDonald, [Ky., 470 S.W.2d 173
(1971)], is to permit the development of all
relevant evidence that will assist the
administrative body in reaching its decision.
In such a hearing, as we view it, the parties
must have the opportunity to subject all
evidence to close scrutiny so as to determine
its trustworthiness. A trial-type hearing
implies the opportunity for full rebuttal,
and the opportunity to impeach witnesses.
Cross-examination is a time-tested and unique
method of assisting in the quest for truth.
Under the rules of the Commission, there is
no opportunity to demonstrate the
incompleteness, the untruth, the partiality
or any other weakness or defect in the
testimony of a witness. Without such
opportunity, the search for truth may very
well be impeded and restricted. In a hearing
to terminate welfare benefits, the United
States Supreme Court declared that the
recipient must have an effective opportunity
to defend by confronting any adverse
witnesses which includes the right to "crossexamine the witnesses relied on by the
defendant."(who sought to terminate
benefits). Goldberg v. Kelly, [supra18].
Id. at 591-592 (emphasis original).
We cannot accept Marymount’s argument that it was
prohibited from cross-examining the Cabinet about the alleged
discrepancies.
Although counsel had agreed that the basic data
18
907 KAR 1:671 Section 14 lists the procedural due
process requirements of a hospital reimbursement rate adjustment
hearing. It specifically states that "[t]he hearing officer
shall consider the facts as presented at the hearing (including
supplementary material if requested) and prepare a decision based
on the record consistent with statutes and regulations."
-25-
was not an issue, testimony was presented which raised that
issue.
As noted, supra, on several occasions, Aldridge raised
the issue that the data in Attachment E did not support
Marymount's tables.
At one point in his cross-examination of
Aldridge, Marymount's counsel questioned her about the alleged
discrepancy between Attachment #2 and Table #9.
Aldridge stated
that Attachment E "really reflected something a little bit
different" and that "I had two different documents that I was
looking at and they seemed to indicate different things".
Marymount was not denied the right to cross-examine the Cabinet
about the discrepancies; it could have cross-examined Aldridge
when she pointed out what she perceived as discrepancies.
The
fact that Marymount failed to cross-examine Aldridge after she
specifically stated on several occasions that the data did not
match was certainly not a denial of Marymount’s procedural due
process.
We will now review whether the Cabinet acted in excess
of its statutory power when it refused to apply the "reasonable
and adequate" standard to the $547 per diem rate it set for
Marymount.
If a state agency has adopted a standard under which
its entire program is operated, it must act within that standard
or the agency has exceeded its granted powers.
In Kentucky Power
Co. v Energy Regulatory Commission of Kentucky, Ky., 623 S.W.2d
904, 907 (1981), the Supreme Court stated that even though a
rate-setting agency must have broad latitude in conducting its
proceedings, it is "the right and duty of the court to protect
-26-
parties who are subject to the authority of such an agency from
arbitrary and capricious treatment.
“Administrative authorities
must strictly adhere to the standards, policies, and limitations
provided in the statutes vesting power in them.”
Henry v.
Parrish, 307 Ky. 559, 566, 211 S.W.2d 418 (1948).
907 KAR 1:013E, Section 1, states as follows:
The Department for Medicaid Services shall
pay for inpatient hospital services provided
to eligible recipients of Medical Assistance
through the use of rates that are reasonable
and adequate to meet the costs that are
required to be incurred by efficiently and
economically operated hospitals to provide
services in conformity with applicable state
and federal laws, regulations, and quality
and safety standards.
Marymount contends that throughout the administrative
proceedings it was clear that the federal standard of "reasonable
and adequate to meet the costs that are required to be incurred
by efficiently and economically operated hospitals" was
applicable.
Marymount claims that the Cabinet was fully aware of
the federal efficiency and economy standards and specifically
recognized their applicability throughout the administrative
process as follows:
in the initial program review report,
Aldridge recommended denying Marymount's increase because the
hospital was not operated in an efficient and economical manner;
and in the ALJ’s opinion, the ALJ stated that "KMAP is required
to pay for inpatient hospital services provided to eligible
Medicaid recipients through the use of rates that are reasonable
and adequate to meet the costs that are required to be incurred
-27-
by efficiently and economically operated hospitals."
Furthermore, the federal standard has been adopted as the state
standard in its own regulation, 907 KAR 1:013E, Section 1, supra.
The Cabinet argues that as long as the methodology was
determined to be "reasonable and adequate" within the standards
of the Boren Amendment there is no need for further inquiry.
However, Marymount is not arguing that the methodology used was
not "reasonable and adequate"; rather, Marymount is arguing that
the particular rate applied to it does not fit the "reasonable
and adequate" standard.
Marymount argues that by practically any
measure, it is an efficient and economically operated hospital,
and therefore, it is entitled to rates that are reasonable and
adequate to meet its costs.
In Memorial Hospital Inc., 896 F.Supp. 1427, supra, the
only published court opinion dealing with Kentucky's Medicare
reimbursement program, twenty-six hospitals19 sought to
invalidate Kentucky's Medicaid reimbursement method for several
reasons--one of which was the usage of the RIC.20
The hospitals
argued that the RIC was arbitrary in that it did not account for
changes in the acuity level or increased cost of technology.
The
19
Marymount's attorney in the action sub judice was one of
the attorneys for the appellant, Memorial Hospital, Inc.
20
Other reasons argued to invalidate the program included
the calculation and payment of per diem rates, usage of a peer
group methodology, usage of a median cost index, capital
expenditure occupancy limits and failure to "take into account"
hospitals which treat a disproportionate number of Medicaid
patients. We limit our discussion to the RIC argument.
-28-
hospitals argued that the RIC unfairly limited all per diem
reimbursements, even for hospitals with per diem costs below its
peer group median.
The federal court noted that "[t]hese
persuasive arguments require careful consideration" but the Court
then concluded that the evidence did not support Memorial's
arguments.
Id. at 1437.
However, the Court cautioned:
The RIC has existed for only two years.
The formula may be revised in future years.
Plaintiffs may have justifiable reason to
fear the RIC's future impact: it is not
inconceivable that at some future time the
RIC could cause unlawful consequences;
however, that time has not yet arrived. This
Court need not predict the future and will
not speculate when, if ever, a point of
unlawfulness may arrive. This Court does
conclude that the RIC is not unlawful per se
or unreasonable, as currently applied.
Id. at 1438.
The federal court concluded that the hospitals
offered evidence of varying strength that
parts of KMAP have some inherent unfairness.
But they failed to show that plan as a whole
is either unfair or contains incentives to
create savings which are unlawful.
*
*
*
Plaintiffs' principal argument has a
certain logic and appeal. Assuming for the
moment that the Kentucky reimbursement
formula defines an efficient and economical
hospital, then how can it be that any of
those hospitals so defined be denied their
full cost recovery under the Boren Amendment?
The answer is that neither the Boren
Amendment nor any proof available to this
Court define so precisely what are economical
and efficient hospital costs. Neither the
Boren Amendment's express language nor its
intent require such a precise definition.
The proof of reimbursements more than 93% of
Medicaid costs is safely within any required
zone of reasonableness. KMAP may not be
-29-
equally fair to all hospitals, however, it
does provide hospitals with substantial
reimbursement of all reasonable Medicaid
costs. To acknowledge that KMAP may produce
some unfair results and that it may require
belt tightening by some hospitals that claim
to be efficient, does not, by any means,
demonstrate that this Court must overturn it.
Id. at 1439-1440.
The Memorial Court used percentage of reimbursement of
the actual costs as a yardstick for determining a zone of
reasonableness of the rate-methodology.
Memorial was being
reimbursed for 93% of its actual costs and the Court concluded
that the 93% reimbursement was within the zone of reasonableness
for Kentucky hospitals.
The Memorial Court stated that "[b]y any
measure of Kentucky hospitals, this reimbursement is within a
reasonable zone calculated to allow those efficient hospitals the
ability to recoup their reasonable Medicaid related costs."
Id.
at 1439.
In the case sub judice, the Cabinet's reimbursement
rate for Marymount only paid roughly 83% of its costs.
The ALJ
determined that none of the sections in Section 113 applied to
Marymount even though she noted that the Memorial Court stated
that "the Kentucky Medical Program reimburses Kentucky hospitals
on average between 93 percent and 96 percent of its Medicare
eligible costs."
Id.
The ALJ did not make a determination that
the resulting rate for Marymount was reasonable.
She stated that
KMAP had applied the proper methodology and that the methodology
was reasonable and applied in conformity with federal and state
-30-
law.
However, we believe the proper question is whether an 83%
reimbursement rate to an individual hospital is within the zone
of reasonableness when that hospital's operating costs are less
than the median operating costs of hospitals within its peer
group.
Neither the ALJ nor the circuit court applied the
"reasonable and adequate" standard to Marymount's actual rate of
reimbursement.
The Cabinet did not act within the scope of its
authority when it did not apply the proper standard to
Marymount's rates and for this reason, we must remand this case
to the ALJ for further proceedings in accordance with this
Opinion.
ALL CONCUR.
BRIEFS AND ORAL ARGUMENT FOR
APPELLANT:
BRIEF AND ORAL ARGUMENT FOR
APPELLEE:
Hon. Stephen R. Price, Sr.
Louisville, KY
Hon. Zachary S. Ramsey
Frankfort, KY
-31-
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