HUDSON MANOR v. DIVISION OF AGING SERVICES
Annotate this CaseNOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
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SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-5654-16T2
HUDSON MANOR,
Petitioner-Appellant,
v.
DIVISION OF AGING
SERVICES,
Respondent-Respondent.
________________________
Submitted January 28, 2019 – Decided February 7, 2019
Before Judges Haas and Sumners.
On appeal from the New Jersey Department of Human
Services, Division of Aging Services.
Pashman Stein Walder Hayden, PC, attorneys for
appellant (Andrew Bayer, on the brief).
Gurbir S. Grewal, Attorney General, attorney for
respondent (Nicholas Logothetis, Deputy Attorney
General, on the brief).
PER CURIAM
The question presented in this appeal is whether appellant Hudson Manor
Health Care Center is entitled to continue to be overpaid by the State at the
Medicaid reimbursement rate for Class II government-owned or operated
nursing facilities even though appellant has always been a Class I privately-
owned and operated facility that was never legally eligible to receive the higher
Class II facility rate. Because we answer this question in the negative, we affirm
the July 18, 2017 final decision of the Director of the Division of Aging that
corrected the mistake that caused the overpayment.
By way of background, the Medicaid program is jointly funded by the
federal and state governments. As a program participant, New Jersey is required
to obtain federal approval for its "State Plan" which, among other things,
describes the methodologies it will use to reimburse nursing facilities 1 and other
institutions for the reasonable cost of providing care to Medicaid patients. 42
U.S.C. § 1396b; N.J.S.A. 30:4D-7. Federal approval of the State Plan enables
states to receive matching federal funds for medical services provided. 42
U.S.C. § 1396b.
1
"Nursing facilities" are institutions "certified by the New Jersey Department
of Health and Senior Services for participation in [the Medicaid program] and
primarily engaged in providing health-related care and services on a 24-hour
basis to Medicaid beneficiaries[.]" N.J.A.C. 8:85-1.2.
A-5654-16T2
2
The New Jersey Department of Human Services, Division of Medical
Assistance and Health Services, was originally responsible for managing the
State's Medicaid nursing facility reimbursement program. 42 N.J.R. 1793(A).
Pursuant to Executive Reorganization Plan No. 001-1996, this responsibility
was transferred to the Department of Health and Senior Services. Ibid.
Effective June 29, 2012, State oversight over the setting of Medicaid rates was
transferred to the Department of Human Services, Division of Aging (Division).
N.J.S.A. 30:1A-14. On the federal side, the Centers for Medicare & Medicaid
Services (CMS) within the United States Department of Health and Human
Services periodically audits New Jersey's Medicaid program to ensure that it is
complying with federal and State law.
In New Jersey, there are two reimbursement "rate classes" for nursing
facilities. N.J.A.C. 8:85-3.3(a). Privately-owned and operated facilities are paid
at the Class I rate. N.J.A.C. 8:85-3.3(a)(1). "Governmental Nursing Facilities,"
meaning facilities that are government-owned or operated,2 are paid the Class II
rate. The Class II rate is higher than the Class I rate. A privately-owned and
operated facility is not entitled to the higher, Class II rate.
2
The term "Governmental Nursing Facility" includes facilities owned and
operated by the State, a county, or a municipality. 42 C.F.R. § 447.272(a)(1).
A-5654-16T2
3
The State's nursing facility rate system and accompanying regulations
were most recently revised in April 2011, and placed limits on how much a
facility's reimbursement rate could fluctuate from year to year. N.J.A.C. 8:85-
3.16(a) and (b). For State Fiscal Year 2010-2011 (FY 2011), a nursing facility's
Medicaid reimbursement rate could not vary more than $5 from the rate it
received on June 30, 2010. N.J.A.C. 8:85-3.16(a). This limitation was also
included in the Appropriations Act for that year. L. 2010, c. 35, p. 90.
For FY 2011-2012 (FY 2012), the reimbursement rate could not vary more
than $10 from the rate the facility received on June 30, 2010. N.J.A.C. 8:85-
3.16(b). This limitation was also included in the Appropriations Act. L. 2011,
c. 85, p. 86. While the regulations did not place a limit on a facility's
reimbursement rate for FY 2012-2013 (FY 2013), the Appropriations Act for
that year stated that a facility's rate could not be less than what it had received
on June 30, 2012. L. 2012, c. 18, p. 103.
Turning to the present case, appellant is a private company that owns and
operates a nursing facility. It purchased the facility from the County of Hudson
in 2002. When the County owned and operated the facility, it was reimbursed
at the Class II rate. In the contract for sale, the County agreed it would use its
"best efforts to cooperate with [appellant] so that [it] continues to receive th e"
A-5654-16T2
4
Class II rate. However, the contract stated that "[t]his is in no way to be
construed to create any guarantee on behalf of the County . . . of same."
Even though appellant should have been paid at the lower, Class I rate
after the 2002 sale, the Department of Health continued to pay appellant at the
higher Class II rate. 3 Thus, for the next ten years, appellant received thousands
of dollars more in Medicaid reimbursement that it should have.
The Department set appellant's Medicaid reimbursement rate at $217.454
for FY 2011, and at $207.45 for FY 2012. Beginning July 1, 2012, appellant's
rate continued to be set at $207.45. 5
Shortly thereafter, CMS notified the Division that an audit had revealed
that appellant was being paid at the Class II rate even though there was no
evidence that it was a government-owned or operated nursing facility. Upon
receipt of this information, the Division contacted appellant and asked if it could
provide any evidence that it was owned and operated by a government entity.
3
As discussed below, the Administrative Law Judge (ALJ) found that the
overpayment was the result of a "mistake."
4
The Medicaid reimbursement rate is the amount paid per patient per day.
5
As noted above, the Division assumed responsibility for nursing facility rate
setting on July 1, 2012.
A-5654-16T2
5
Because it was privately owned and operated, appellant was unable to
demonstrate its entitlement to the higher Class II rate.
As a result, the Division corrected the reimbursement error by properly
classifying appellant as a Class I facility, and resetting its rate so that it was in
line with the rate paid to other similarly-situated private facilities. On December
6, 2012, the Division set appellant's new, correct rate at $194.38 effective June
30, 2012, with that new rate then continuing into FY 2012 beginning on July 1,
2012. Significantly, the Division did not seek reimbursement from appellant for
all of the Medicaid funds that had been overpaid to it over the ten-year period
between 2002 and 2012.
Appellant filed an administrative appeal challenging the new rate. Even
though it was a privately-owned and operated facility, appellant argued that it
should have continued to be paid the incorrect rate because the language in the
Appropriations Acts required it be reimbursed at the same rate it received in the
prior year, even though that rate had been incorrectly set. Appellant also
asserted that the Division was barred by the doctrine of equitable estoppel from
correcting the rate when the error was discovered by CMS.
After the Division denied appellant's Level I appeal, the matter was
transmitted to the Office of Administrative Law (OAL) for hearing as a
A-5654-16T2
6
contested case. N.J.A.C. 8:85-3.17(a)(1) and (2). Because there was no dispute
as to any of the material facts, appellant and the Division filed cross-motions for
summary decision.
On April 26, 2017, the ALJ rendered a comprehensive written Initial
Decision, rejecting appellant's arguments, and concluding that the Division had
properly recalculated appellant's Medicaid reimbursement rate. In so ruling, the
ALJ found that the Department of Health had never made a substantive decision
that appellant should be paid at the Class II rate in 2002 and, instead, the rate
had been paid by mistake. The ALJ explained:
At oral argument, [appellant] argued that the
agency did not make a mistake in its prior classification
as Class II. Instead, it "changed its interpretation," such
that [appellant] would not be considered to be a Class I
facility. However, interestingly, [appellant] does not
point to any language of statute or regulation that would
appear to have ever authorized the agency to classify a
privately owned facility as within Class II. And while
the Certifications [submitted by appellant with its
motion papers] make reference to a legal authorization,
[appellant] does not offer any actual legal opinion by
the Attorney General to this effect. As such, it appears
that the facility was accorded a status for ten years that
was not authorized by statute or regulation. Why
exactly it was that the rate setting agency allowed this
to occur is uncertain, although [appellant] argues it was
in order to facilitate the desire of Hudson County to
protect the "safety-net" in the context of the transfer to
private hands. Contrary to [appellant's] argument, I
FIND that the continuing classification as a "Class II"
A-5654-16T2
7
facility was not in accord with the governing statute or
regulation and was a "mistake." There was no
"reinterpretation" of any statute or regulation involved.
The ALJ next found that the Appropriations Acts did not bar the Division
from correcting this mistake in order to ensure that appellant received the proper
reimbursement rate. The ALJ stated that appellant's "reliance on the language
of the Appropriations Act seems a weak branch to support its position. Surely,
the intent of the language was not to freeze in place erroneous classifications
and reimbursement rates calculated based upon such mistakes or
misunderstandings."
In addition, the ALJ noted that the Division put appellant on notice on
July 18, 2012 that its rates for that year were in doubt because it was not
government-owned or operated and, in any event, appellant knew "from the very
time of its negotiation of the Purchase Agreement that it was seeking treatment
in a classification in which it did not fit and which the very Purchase Agreement
recognized was not guaranteed."
Under these circumstances, ALJ found no basis to conclude that the
Division should be equitably estopped from properly applying the governing law
to set appellant's reimbursement rates at the proper level. Therefore, the ALJ
A-5654-16T2
8
granted the Division's cross-motion for summary decision, and ruled that the
$194.38 reimbursement rate was entirely appropriate.
Appellant filed exceptions to the ALJ's decision. 6 In her July 18, 2017
decision, the Division Director upheld the ALJ's determination that appellant
should be paid at the proper Medicaid reimbursement rate as a Class I facility
effective July 1, 2012. Like the ALJ, the Director rejected appellant's argument
that the correction was barred by the Appropriations Acts. The Director stated:
[Appellant] relies upon the Appropriations Acts
to perpetuate reimbursement as a Class II facility,
which it is not. The purpose of the Appropriations Act
is to provide a fiscally responsible annual budget
process. Burgos v. State, 222 N.J. 174, 183 (2015).
The Appropriations Act is not intended to protect the
improper classification of a nursing facility.
Consequently, the Appropriations Act cannot be used
to protect the reimbursement of a rate that is improperly
based on an improper classification. . . . [The Division]
adjusted only the rate for Fiscal Year 2012, not the
actual reimbursement. For Fiscal Year 2013,
[appellant] was not entitled to Class II status or the
higher rate of reimbursement that resulted therefrom.
For these reasons, I agree with the ALJ that the
Appropriations Act would logically freeze only
legitimate rates.
6
The Division also filed exceptions, limited to the ALJ's ruling on an
evidentiary issue relating to the admissibility of a certification submitted by
appellant that was protected by the attorney-client privilege. However, the
resolution of that issue is not material to the resolution of this appeal.
A-5654-16T2
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The Director also determined that appellant's equitable estoppel argument
lacked merit. She found that appellant was on notice from the beginning of July
2012 that its rate for that year was under review because it was not a
government-owned or operated facility. In addition, appellant was aware when
it purchased the facility in 2002 that it was not entitled to the Class II rate and
that the County, which had no say in the setting of the rates in any event, made
no guarantee that appellant would be paid at that rate. This appeal followed.
On appeal, appellant raises the same contentions it unsuccessfully pressed
before the ALJ and the Director. It again asserts that the Director arbitrarily,
capriciously, and unreasonably corrected its rate in violation of the
Appropriations Act, and that it should have been equitably estopped from doing
so. We disagree.
Our review of an agency decision is limited. In re Stallworth, 208 N.J.
182, 194 (2011). "In order to reverse an agency's judgment, [we] must find the
agency's decision to be 'arbitrary, capricious, or unreasonable, or [ ] not
supported by substantial credible evidence in the record as a whole.'" Ibid.
(second alteration in original) (quoting Henry v. Rahway State Prison, 81 N.J.
571, 580 (1980)). In determining whether agency action is arbitrary, capricious,
or unreasonable, our role is restricted to three inquiries:
A-5654-16T2
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(1) whether the agency action violates the enabling act's
express or implied legislative policies; (2) whether
there is substantial evidence in the record to support the
findings upon which the agency based application of
the legislative policies; and (3) whether, in applying the
legislative policies to the facts, the agency clearly erred
by reaching a conclusion that could not reasonably have
been made upon a showing of the relevant factors.
[W.T. v. Div. Med. Assistance & Health Servs., 391
N.J. Super. 25, 35-36 (App. Div. 2007) (quoting Pub.
Serv. Elec. & Gas Co. v. N.J. Dep't of Envtl. Prot., 101
N.J. 95, 103 (1985)).]
Thus, the burden of showing the agency acted in an arbitrary, capricious,
or unreasonable manner rests on the party opposing the administrative action.
E.S. v. Div. of Med. Assistance & Health Servs., 412 N.J. Super. 340, 349 (App.
Div. 2010) (citing In re Arenas, 385 N.J. Super. 440, 443-44 (App. Div. 2006)).
It is not the function of the reviewing court to substitute its independent
judgment on the facts for that of an administrative agency. In re Grossman, 127 N.J. Super. 13, 23 (App. Div. 1974).
We must also "'defer to an agency's technical expertise, its superior
knowledge of its subject matter area, and its fact-finding role,'" and therefore
are "obliged to accept all factual findings that are supported by sufficient
credible evidence." Futterman v. Bd. of Review, Dept. of Labor, 421 N.J. Super.
281, 287 (App. Div. 2011) (quoting Messick v. Bd. of Review, 420 N.J. Super.
A-5654-16T2
11
321, 325 (App. Div. 2011)). Although we are not bound by an agency's
interpretation of law, we accord a degree of deference when the agency
interprets a statute or a regulation that falls "within its implementing and
enforcing responsibility[.]" Wnuck v. N.J. Div. of Motor Vehicles, 337 N.J.
Super. 52, 56 (App. Div. 2001). Our authority to intervene is limited to "those
rare circumstances in which an agency action is clearly inconsistent with the
agency's statutory mission or with other State policy." Futterman, 421 N.J.
Super. at 287.
Furthermore, "[i]t is settled that '[a]n administrative agency's
interpretation of statutes and regulations within its implementing and enforci ng
responsibility is ordinarily entitled to our deference.'" E.S., 412 N.J. Super. at
355 (second alteration in original) (quoting Wnuck, 337 N.J. Super. at 56).
"Nevertheless, 'we are not bound by the agency's legal opinions.'" A.B. v. Div.
of Med. Assistance & Health Servs., 407 N.J. Super. 330, 340 (App. Div. (2009)
(quoting Levine v. State Dep't of Transp., 338 N.J. Super. 28, 32 (App. Div.
2001))). "Statutory and regulatory construction is a purely legal issue subject
to our de novo review." Ibid. (citation omitted).
Applying these principles, we discern no basis for disturbing the Division
Director's reasonable determination that appellant's Medicaid reimbursement
A-5654-16T2
12
rate had to be corrected as soon as the mistake was discovered by CMS. We
therefore affirm substantially for the reasons set forth in the Director's
comprehensive written decision, and add the following comments.
We agree with the Director that the language in the Appropriations Acts
placing limits on the amount a nursing facility's rate could vary from year to
year only applied to rates that had been correctly established in accordance with
law. It is well settled that "statutes are to be read sensibly rather than literally
and the controlling legislative intent is to be presumed as 'consonant to reason
and good direction.'" DeLisa v. Cnty. of Bergen, 165 N.J. 140, 147 (2000)
(quoting Schierstead v. City of Brigantine, 29 N.J. 220, 230 (1959)). Thus,
[i]n reading and interpreting a statute, primary regard
must be given to the fundamental purpose for which the
legislation was enacted. Where a literal rendering will
lead to a result not in accord with the essential purpose
and design of the act, the spirit of the law will control
the letter. This doctrine permeates our case law.
[N.J. Builders, Owners & Managers Ass'n, 60 N.J. 330,
338 (1972).]
In short, "common sense should not be abandoned in interpreting a
statute[.]" A.B., 407 N.J. Super. at 341. "[W]here a literal interpretation would
create a manifestly absurd result, contrary to public policy, the spirit of the law
A-5654-16T2
13
should control." Ibid. (quoting Turner v. First Union Nat'l Bank, 162 N.J. 75,
84 (1999)).
Here, the overriding public purpose behind any Appropriations Act is to
ensure that the State's limited funds are spent in a fiscally responsible manner.
Burgos, 222 N.J. at 183. Yet, appellant would have us read the language in the
Acts to mandate the continued payment of an incorrect Medicaid reimbursement
rate that is higher than that permitted by law. To maintain appellant's Class II
rate when it has always been a privately-owned Class I facility would contravene
the regulatory scheme and be a fiscally irresponsible use of State and federal
Medicaid funds. Because appellant's interpretation would lead to the absurd
result of continuing reimbursement at an improper rate to which it was never
entitled, we reject its contention on this point.
Appellant's equitable estoppel argument is equally unavailing. "Equitable
estoppel is 'rarely invoked against a governmental entity[,]'" Middletown Twp.
Policemen's Benevolent Ass'n Local No. 124 v. Twp. of Middletown, 162 N.J.
361, 367 (2000) (quoting Wood v. Borough of Wildwood Crest, 319 N.J. Super.
650, 656 (App. Div. 1999)), particularly when estoppel would interfere with
"essential governmental functions[.]" Vogt v. Borough of Belmar, 14 N.J. 195,
205 (1954). The doctrine of equitable estoppel requires proof of
A-5654-16T2
14
a misrepresentation or concealment of material facts,
known to the party allegedly estopped and unknown to
the party claiming estoppel, done with the intention or
expectation that it will be acted upon by the other party
and on which the other party does in fact rely in such a
manner as to change his [or her] position for the
worse[.]
[Carlsen v. Masters, Mates & Pilots Pension Plan Tr.,
80 N.J. 334, 339 (1979).]
The reliance must be "reasonable and justifiable" and the burden of proof is on
the party asserting the estoppel. Foley Mach. Co. v. Amland Contractors, Inc.,
209 N.J. Super. 70, 75-76 (App. Div. 1986).
Appellant cannot meet these requirements. The State was not a party to
its contract with the County when it purchased its facility, and the State made
no misrepresentations to appellant concerning its Medicaid reimbursement rates.
Appellant obviously knew it was privately owned, and should have been paid at
the Class I rate like all other similar facilities. When the mistake was discovered
by the CMS, the Division properly corrected it to ensure that going forward,
appellant received only the payments permitted by law. 7
7
We again note that the Division has not sought to recover the payments that
appellant incorrectly received during the ten-year period between 2002 and
2012.
A-5654-16T2
15
Nothing in the circumstances of this case estopped the Division from
taking that required, regulatory action, and its decision was clearly not arbitrary,
capricious, or unreasonable. Therefore, we reject appellant's contention on this
point.
Affirmed.
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