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STRATFORD NURSING & CONVALESCENT CTR. v. KILSTEIN

November 15, 1991

STRATFORD NURSING AND CONVALESCENT CENTER, INC. A NEW JERSEY CORPORATION, PLAINTIFF,
v.
SAUL KILSTEIN, IN HIS CAPACITY AS DIRECTOR OF DIVISION OF MEDICAL ASSISTANCE AND HEALTH SERVICES OF THE NEW JERSEY DEPARTMENT OF HUMAN SERVICES, THOMAS RUSSO, INDIVIDUALLY AND AS THE DIRECTOR OF THE DIVISION OF MEDICAL ASSISTANCE AND HEALTH SERVICES OF THE NEW JERSEY DEPARTMENT OF HUMAN SERVICES AND MELISSA HAGER, INDIVIDUALLY AND AS AGENT OF THE DIVISION OF MEDICAL ASSISTANCE AND HEALTH SERVICES OF NEW JERSEY DEPARTMENT OF HUMAN SERVICES, DEFENDANTS.



The opinion of the court was delivered by: Debevoise, District Judge.

OPINION

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 assignment.

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; 30:4D-7(b).

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).

While the CARE guidelines specify the standard rate-setting methodology for determining reimbursement rates for nursing homes, the guidelines also recognize, as federal law does, the need for some discretion in order to address exceptional situations in which "the strict application of the CARE regulations might result in some inequity." see Foreward, N.J.A.C. 10:63-3.1; 42 C.F.R. § 430.10 et seq. In some instances, the guidelines expressly incorporate a waiver mechanism that allows for relaxation of the regulatory screen. One example of such a waiver mechanism is N.J.A.C. 10:63-3.10(m)(2), the now-repealed provision upon which the dispute of the parties in this matter rests. That provision allowed facilities that were subject to "firm arms-length leases whose terms cannot be modified" to seek to have their property cost reimbursement calculated on the basis of their actual lease costs instead of their CFA equivalent. In the parlance that developed around this provision, a facility seeking to have its property costs calculated on an actual cost basis rather than by application of its CFA was said to be seeking a "lease pass-through." The "pass-through" regulation provided in full:

  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
  as:
  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
    financing.

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 rate.

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 ...


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