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Southgate Health Care Center v. New Jersey Dep't of Health and Senior Services

January 21, 2009


On appeal from Department of Health and Senior Services.

Per curiam.


Argued September 23, 2008

Before Judges Skillman, Graves and Grall.

Southgate Health Care Center is a nursing facility that is reimbursed, at a per diem rate, for services provided to residents who are beneficiaries of Medicaid. Depreciation is a component of that per diem rate. Southgate appeals from a final decision and order of the Commissioner of Health and Senior Services that compels Southgate to justify a $188,833.53 increase in depreciation in accordance with a federal Medicare regulation. We denied a motion to intervene filed by the Health Care Association of New Jersey but granted the Association leave to file an amicus brief.

Relying on the Administrative Procedure Act (APA), N.J.S.A. 52:14B-1 to -15, and Metromedia, Inc. v. Dir., Div. of Taxation, 97 N.J. 313 (1984), Southgate contends that the Commissioner may not resolve its administrative appeal by applying a federal Medicare regulation that has not been adopted pursuant to N.J.S.A. 52:14B-4.*fn1 For the reasons stated below, we modify and affirm the Commissioner's order.


"The Medicaid program, established by Title XIX of the Social Security Act, is a joint federal-state program designed to provide medical care for indigent, disabled and elderly persons. 42 U.S.C.A. § 1396." United Hosps. Med. Ctr. v. State, 349 N.J. Super. 1, 4 (App. Div. 2002); see 42 C.F.R. § 430.0. Within parameters set by Title XIX and federal Medicaid regulations, each state develops its own plan for Medicaid services, including "payment levels for services." 42 U.S.C.A. §§ 1396a(a)-(b), 1396b(a); see 42 C.F.R. §§ 400.200, 430.0, .10, .12, .15, .35. Under New Jersey law, all Medicaid payments must be "reasonable." N.J.S.A. 30:4D-7(b). Federal law requires payment at a rate "consistent with efficiency, economy, and quality of care" and "sufficient to enlist enough providers."

42 U.S.C.A. § 1396a(a)(30)(A). Responsibility for fixing payment rates for nursing facilities and authority to adopt regulations for reimbursement consistent with federal and state law is delegated to the Commissioner. N.J.S.A. 30:4D-7a, b; see N.J.S.A. 30:4D-4; Executive Reorganization Plan No. 001-1996 at ¶ 14 (published at 28 N.J.R. 2655(a), 2658 (June 3, 1996) (transferring the statutory responsibility)).

Southgate commenced operations in 1986, and Medicaid beneficiaries receive approximately sixty percent of the daily care Southgate provides.*fn2 The per diem Medicaid reimbursement rate for Southgate, and the rate for every other nursing facility participating in the Medicaid program, is set annually for the upcoming year. N.J.A.C. 8:85-3.1, -3.2(a).*fn3

Southgate and other nursing facilities submit annual "cost reports" that provide the data used to establish prospective per diem rates. N.J.A.C. 8:85-3.2. The Department developed the "reimbursement formulae" to meet federal and state standards for reimbursement and "end opportunities for excessive property cost reimbursement." N.J.A.C. 8:85-3.1(f)1-3. Depreciation of a facility's building is one component of the rate formula, which includes capital costs. N.J.A.C. 8:85-3.3(b), -3.10.

Capital costs are screened for reasonableness. Two capital cost figures are calculated, "actual cost" and an "aggregate 'capital facilities allowance' (CFA)." N.J.A.C. 8:85-3.10(c)(1)-(2). The CFA is "the maximum reasonable reimbursement."*fn4 Ibid. The actual cost is the nursing facility's "total actual . . . expenses for depreciation, interest and rental." Ibid. The lower of these two figures is used to calculate the facility's per diem reimbursement rate.

In every annual report for years 1987 through 2001, Southgate listed a depreciation expense of $75,233.68 for its building.*fn5 For those years, Southgate calculated depreciation for its building as a single unit with an estimated useful life of forty years.

Southgate took a different approach when it filed its report on costs in 2002. For that year, Southgate revised the estimated useful life of its building by segregating the structural components and estimating the useful life of each component separately. As a consequence, Southgate's depreciation expense rose from $75,233.68 to $264,067.21, an increase of $188,833.53. The increase put Southgate's actual cost ...

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