The opinion of the court was delivered by: Debevoise, District Judge.
This matter comes before the court on Defendants' motion for
summary judgment pursuant to Fed.R.Civ.P. 59 on all counts of
Plaintiff's complaint. In addition, Plaintiff cross-moves for
summary judgment on all counts of its Complaint. For the reasons
set forth below, Defendants' motion will be granted and the
complaint will be dismissed.
STATEMENT OF FACTS AND PROCEDURAL HISTORY
Plaintiff, Stratford Nursing and Convalescent Center is a
licensed nursing home that has participated in the New Jersey
Medicaid program since the inception of that program in 1970.
Defendant, Thomas Russo is the former Director of the Division of
Medical Assistance and Health Services ("DMAHS"), which is the
agency of the State that administers its Medicaid program.
Defendant Russo served as Director of DMAHS from 1978 to 1989,
when he resigned and was succeeded by Defendant, Saul Kilstein.
Defendant Melissa Hager is a Deputy Attorney General ("DAG")
employed by the New Jersey Division of Law. She joined the
Division of Law in December 1983 and was thereafter assigned to
represent DMAHS. She provided legal representation for DMAHS
until September 1988, when she was transferred to a new
New Jersey's Medicaid Rate-Setting Procedures
Medicaid is a federally-created, state-implemented program
designed to ensure that people who cannot afford necessary
medical care are able to obtain it, see 42 U.S.C. § 1396 et
seq. The program is jointly funded by the state and federal
governments, and has been described as an exercise in
"cooperative federalism." Harris v. McRae, 448 U.S. 297, 308,
100 S.Ct. 2671, 2683, 65 L.Ed.2d 784 (1980). States have broad
discretion under federal statutes to adopt their own standards
for determining the extent of medical assistance to be provided,
but to qualify for federal funds, participating states must
submit a state plan to the federal Department of Health and Human
Services for approval. 42 U.S.C. § 1396a(a); 42 C.F.R. § 430.10.
Among other things, the state plan must "provide for the
establishment or designation of a single state agency to
administer or supervise the administration of the plan."
42 U.S.C. § 1396a(a)(5). DMAHS is the designated "single state
agency" vested with authority to "determine the amounts to be
paid medical providers" under Medicaid. N.J.S.A. 30:4D-5;
Under DMAHS's regulations, long-term care facilities like
Stratford that provide care to Medicaid-eligible patients are
reimbursed on the basis of rates established annually for each
participating facility. N.J.A.C. 10:63-3.1(A). DMAHS does not
itself perform the initial calculation of a facility's
reimbursement rate, but rather has contracted with the Health
Facilities Rate-Setting ("HFRS") Unit of the New Jersey
Department of Health (the agency of the state that is generally
responsible for hospital rate-making under New Jersey's health
care statutes, see N.J.S.A. 26:2H-1 et seq.) to perform that
initial calculation. For each participating facility, HFRS
calculates an annual rate from financial information filed by the
facility,*fn1 and then forwards its calculation to DMAHS for
review and approval.
If the facility is not satisfied with the Level I decision, it
may, within 20 days of receiving that decision, request a more
formal hearing, known as a "Level II" appeal. N.J.A.C.
10:63-3.20(A)(2). Level II appeals are referred by DMAHS to the
New Jersey Office of Administrative Law for formal hearing before
an Administrative Law Judge ("ALJ") under New Jersey's
Administrative Procedure Act. N.J.S.A. 52:14B-1 et seq. After
a full adversarial trial, the ALJ issues an Initial Decision
recommending a disposition of the dispute to DMAHS. The Initial
Decision is then reviewed by the Director of DMAHS, who has 45
days to accept or reject the ALJ's recommendations, and to issue
a Final Agency Decision. N.J.S.A. 52:14B-10(c). If a facility
is still not satisfied with its reimbursement rate, it may appeal
that decision to the Superior Court of New Jersey, Appellate
Division. N.J.Ct.R. 2:2-3(a)(2). Review of any Appellate Division
decision would be in the Supreme Court of New Jersey. N.J.Ct.R.
2:2-1(a)(2); N.J.Ct.R. 2:12-1.
Rate-Setting Methodology and Property Cost Reimbursement
Effective December 29, 1977, DMAHS promulgated regulations,
known as "Cost Accounting and Rate Evaluation" ("CARE")
guidelines, describing "the methodology to be used by the State
of New Jersey to establish prospective per diem rates for the
providing of routine care to patients under the State's Medicaid
program." Foreword, N.J.A.C. 10:63-3.1. In general terms, the
CARE regulations provide for reimbursement of facilities based on
a "screened rate" system, under which rates are calculated by
applying regulatory "screens," or reasonableness limits, to the
actual costs reported by the facility for each of the twelve
"cost centers" (e.g., food, patient care, property). As to each
cost center, a facility will generally be reimbursed for actual
costs up to the screened limit, which, for most cost centers, is
determined by a statewide averaging process.
In the area of property costs, however, the regulatory "screen"
used to limit a facility's reimbursement rate is somewhat
different. Rather than a statewide-average type of screen, DMAHS
uses a facility-specific screen known as a Capital Facilities
Allowance ("CFA") to set the limit to property costs.*fn2 Before
January 1986, the property cost component of a facility's rate
was calculated by using either its actual property costs or its
"screened," CFA-derived limit, whichever was lower. Effective
January 21, 1986, DMAHS amended its CARE guidelines to make the
CFA method of calculating a facility's property cost
reimbursement the sole method of reimbursement. see 17 N.J.Reg.
2331 (Oct. 7, 1985).
The departments [i.e., DMAHS and HFRS] will review,
on an individual basis, situations where the strict
application of the provisions of this section would
be inappropriate under particular circumstances, such
1. Situations where an existing debt must be
refinanced in connection with obtaining funds to
expand existing LTCF's;
2. The existence of a firm arms-length lease whose
terms cannot be modified;
3. The inability of LTCF's to obtain 25-year
As noted above, the lease pass-through provision was deleted
from the CARE regulations in January of 1986. 18 N.J.Reg. 189(a)
(Jan. 21, 1986).
In addition to the lease pass through relief, the DMAHS has
traditionally afforded and continues to provide facilities relief
from strict application of the CARE guidelines via "hardship
relief." Hardship relief is a form of relief granted on a
case-by-case basis to economically distressed facilities with
extremely high percentages of Medicaid patients in their resident
population (i.e. percentages in excess of 80%). Defendants' Brief
at 9. Where DMAHS has granted a facility hardship status,
additional reimbursement may be provided in the form of a waiver
of the screen for a particular cost center, or by means of an
increase in the facility's overall rate. Id.
Plaintiff, in 1972-73 was granted hardship status by DMAHS. In
Plaintiff's case the relief took the form of a two and one-half
percent increase in its total per diem rates. Id.
History of the Dispute Between the Parties
Plaintiff does not own the land upon which its facility is
located or the buildings that house it, but rather operates under
a long-term lease. As initially executed in January of 1969, the
lease had a termination date of December 31, 1990. See
Defendants' Brief, App., Vol. I, Exh. 5. Defendants contend that
the Plaintiff's lease has been modified at lease twice since its
initial execution. First, on December 31, 1969, Defendants assert
that it was modified to grant Plaintiff's lessor a 33% phased
rent increase. Id., Exh. 6. Finally, on March 30, 1982,
Defendants assert that the lease was further modified to extend
its term through December 2010, again at an increased rental
For the rate years, 1978, 1979 and 1980, Plaintiff sought a
lease pass-through from DMAHS under N.J.A.C. 10:63-3.10(m)(2).
For each of those rate years, DMAHS denied Stratford's requests.
Id., Exh. 8. Defendants maintain that Plaintiff's request was
denied because DMAHS interpreted and implemented N.J.A.C.
10:63-3.10(m)(2) (the lease pass-through provision) so that a
pass-through would only be granted where the facility's property
cost reimbursement under the CARE regulations was lower than the
property cost reimbursement they received under the rate-setting
system that preceded CARE. DMAHS, in other words, viewed the
pass-through provision of N.J.A.C. 10:63-3.10(m)(2) as a
relief-valve for its CARE guidelines. If the ...