On appeal from the Department of Human Services, Division of Medical Assistance and Health Services.
Fritz, Gaynor and Baime. The opinion of the court was delivered by Gaynor, J.A.D.
This appeal concerns the challenge to a regulation adopted by the Department of Human Services, Division of Medical Assistance and Health Services (DMAHS), and the underlying bulletin, providing a revised policy for the calculation of reimbursable final per diem rates chargeable by long-term care facilities (LTCFs) under the Medicaid program.*fn1 The regulation, codified in N.J.A.C. 10:63-1.23, promulgated December 16, 1984, provided for the recovery by the Division from an LTCF when the final audited rate calculation is lower than the original prospective per diem rate previously established under the Cost Accounting and Rate Evaluation (CARE) system but did not allow for additional reimbursement to an LTCF when the final audited rate calculation is higher than the original per diem rate. Additionally, the regulation was made applicable to all current, pending or future audits for rate years beginning January 1, 1978.
In taking exception to the regulation, appellant,*fn2 King James Nursing Home of Franklin (King James), contends the regulation is ultra vires, violates federal and state Medicaid reimbursement schemes and, by its retroactive application, offends due process.
The Medicaid program, administered by DMAHS, is a jointly funded state-federal welfare program whose purpose is to
secure quality medical care for persons who could not otherwise afford the expense of such care. N.J.S.A. 30:4D-2; 42 U.S.C. § 1396. Qualified applicants for Medicaid must receive or be eligible to receive certain enumerated forms of categorical cash assistance. N.J.S.A. 30.4D-3(l). Medical assistance is made in the form of payments to participating health care providers on behalf of recipients rather than in the form of direct cash payments. N.J.S.A. 30:4D-3(g). The rates or schedules of fees to be paid to a health care provider under the Medicaid program are established by the Commissioner of Human Services. N.J.S.A. 30:4D-7.
In the area of long-term care, reimbursement to LTCFs for services rendered to Medicaid patients in New Jersey is governed by the CARE guidelines codified at N.J.A.C. 10:63-1 et seq. The CARE system establishes prospective per diem rates for services rendered by a LTCF based upon the actual costs reported by the facility after the close of its fiscal year. A rate is struck which is either a statistically "reasonable" rate based upon a method of peer comparison within discrete categories or the facility's actual costs, whichever is lower. The prospective rate*fn3 is effective for a one-year period beginning six months after the close of the base period during which the costs are incurred. N.J.A.C. 10:63-3.1. Administrative appeals from the rates established are routinely permitted for situations peculiar to a facility which may result in inequities. N.J.A.C. 10:63-3.20. The appeals are first considered by agency analysts and, if continued, by an administrative law judge. Ibid. Furthermore,
the per diem rates are not subject to routine retroactive adjustments except for matters as specified in the regulations and are also subject to on-site audit verification of costs and statistics reported by the LTCF.
As discussed in detail by the Supreme Court in Bergen Pines County Hosp. v. Department of Human Services, 96 N.J. 456, 461-465 (1984), the CARE system of long-term care reimbursement which became effective January 1, 1978 constituted New Jersey's response to the former federal mandate for reimbursement to participating facilities on a "reasonable cost related basis." 42 U.S.C. § 1396a(a)(13)(A) (1972). Since October 1, 1980, the federal statute has required that reimbursement be paid at rates which the State finds are reasonable and adequate by efficiently and economically operated facilities. 42 U.S.C. 1396a(a)(13) (1980). Under both of these criteria, the CARE system has been utilized by DMAHS to set the rates of reimbursement for LTCFs with federal approval. Bergen Pines, supra at 479-480.
Under the CARE system, the facilities are permitted to challenge the rate or demonstrate that an error in the rate is the result of a miscomputation by the agency. If the appeal is timely any resulting upward adjustment is effective retroactive to the first day of the reimbursement period. If the appeal is untimely but the challenge meritorious, any upward adjustment is effective on the first of the month following the date of the appeal. N.J.A.C. 10:63-3.20(a)iv.(1) and (2). In addition, at any time beginning with the filing of the cost reports by the facility (90 days after the close of the facility's fiscal year and 90 days prior to the prospective reimbursement period) through the reimbursement period (15 months in total), the facility may apply to the agency to adjust its base year costs.
In accordance with prior practice, the auditing procedure previously resulted in findings of overpayments to be recovered by DMAHS or underpayments due the facilities, with the corresponding right to an administrative appeal. In 1982, the
DMAHS officials charged with the responsibility of establishing the long-term care rates noted that the recognition of an increase in the rate after audit was inconsistent with the CARE system of prospective rates, with its extensive established appeal mechanism at the time of the initial cost filing and rate setting. It was concluded that such a procedure was unfair to those facilities which complied with the appeal process and further that payment of upward adjustments from the current year's appropriation created havoc because of the inability to budget those costs. Accordingly, DMAHS issued "Medicaid Long-Term Care Services Bulletin 82-6" (Bulletin 82-6) to all participating LTCFs explaining that the auditing was not designed to identify or reopen reporting errors made by the facilities but rather to determine whether the reported costs and statistics which were the basis for the prospective reimbursement rates were allowable in accordance with CARE guidelines and could be substantiated. Accordingly, it was proposed in the bulletin that
[r]eporting errors discovered during the audit process which would have resulted in a higher per diem rate and which were not appealed with the original rate calculation will not be recognized for adjustment purposes when final audited rates are determined. Settlement after audit will be for fraud and/or abuse collections or recoveries of payments and any applicable penalties when the final rate is lower than the original rate. This means that except for highly unusual circumstances, final rates ...