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Xanadu Adult Medical Day Care Center v. Department of Human Services


May 13, 2011


On appeal from the Department of Human Services, Division of Medical Assistance and Health Services.

Per curiam.


Submitted March 29, 2011

Before Judges Koblitz and Hayden.

Appellant Xanadu Adult Medical Day Care Center appeals from the final decision of the Division of Medical Assistance and Health Services (DMAHS), dated July 8, 2010, denying appellant's application to become a New Jersey Medical Care Provider. For the reasons that follow, we affirm.

In May 2009, DMAHS issued Xanadu a license to operate an adult medical day care center in Passaic County pursuant to N.J.A.C. 8:43F-1.1. In June 2009, Xanadu submitted an application to become a Medicaid provider.

John Laureda, Xanadu's administrator, prepared and submitted the Medicaid provider application, certifying that the information was true. Question 24 of the application asked:

Have any of the entities named in response to questions 1 or 16 or their officers or partners, or any of the individuals named in response to Question 11 ever been indicted, charged, convicted of, or pled guilty or no contest to any federal or state crime in this state or any other jurisdiction?

Laureda's response to question 24 was "no." By signing the application he acknowledged that his responses were "true, accurate, and complete." This certification was false as Laureda, named in the response to question 11, had been charged with criminal offenses. In 1989, Laureda was charged with conspiracy pursuant to N.J.S.A. 2C:5-2, leading to participation in the Pre-Trial Intervention Program. In 2003, he was charged with terroristic threats pursuant to N.J.S.A. 2C:12-3A, which was later downgraded to municipal court. N.J.S.A. 2C:43-12. He also pled guilty in 2004 to third-degree theft by failure to make required disposition of property received pursuant to N.J.S.A. 2C:20-9, for which he received jail time and probation. Laureda had made DMAHS aware of this as recently as March 2009, when he applied to, and was approved by, the Medicaid program to be the administrator of Xanadu.

The Medicaid provider application procedure mandates review by the Medicaid Fraud Division (MFD) of the Office of the State Comptroller. Upon review, the MFD discovered that, despite the certification on the application to the contrary, Laureda had a criminal record. DMAHS denied Xanadu's Medicaid application as a result of the false information.

Xanadu appealed the denial. The hearing at the Office of Administrative Law occurred on March 22, 2010. The Administrative Law Judge (ALJ) held that the applicant was responsible for verifying and investigating the information provided before certifying to its accuracy. Hence, she held that a false application was good cause for denying the application, even if the misrepresentation was unintentional. The ALJ noted that DMAHS had consistently denied applications containing false information. In response to Xanadu's argument that DMAHS must demonstrate some connection between an unintentional mistake and a potentially adverse effect for Medicaid, the ALJ stated,

The rationale of the regulation is to ensure a level of comfort with providers that will be responsible for public funds, compliance with complex federal and state regulations, and the delivery of medical services to New Jersey's poorest population. A false statement on an application diminishes that level of comfort for any number of reasons, including the provider's ability to correctly complete the various forms in order to ensure Medicaid compliance. [Internal quotation marks omitted.]

DMAHS adopted the ALJ's decision in its entirety in the final agency decision of the Director, dated July 8, 2010. The Director rejected Xanadu's arguments that Laureda misunderstood the question. The Director found that Xanadu submitted false or incorrect information in its application, which was "regulatory good cause for denial of the application." The Director elaborated:

The regulation does not require that the provider intended to deceive, manipulate, or defraud Medicaid, in order for an application to be denied. Rather, the mere submission of false information is grounds for denial. Indeed, a provider must be held to a high standard in order to preserve the integrity of the Medicaid program . . . . I am not persuaded that a provider who files an application with false information should receive the same benefits as a provider who has filed an accurate application.

The federal Medicaid Act, under Title XIX of the Social Security Act, 42 U.S.C.A. §§ 1396-1396v, mandates a joint federal-state program to provide financial assistance to individuals whose income and resources are insufficient to meet the costs of necessary medical services. 42 U.S.C.A. § 1396a. Once a state joins the program it must comply with the Medicaid statute and federal regulations in order to receive Medicaid funds. See Harris v. McRae, 448 U.S. 297, 308, 100 S. Ct. 2671, 2683-84, 65 L. Ed. 2d 784, 799 (1980). Participating states must submit a state plan to the Secretary of the Department of Health and Human Services for approval in order to receive federal financial participation. 42 U.S.C.A. § 1396a.

The Social Security Act confers broad discretion on the participating states to adopt standards determining the extent of medical assistance, requiring only that the standards be "'reasonable' and 'consistent with the objectives of the Act.'" Monmouth Med. Ctr. v. State, 158 N.J. Super. 241, 248 (App. Div. 1978) (citing 42 U.S.C.A. § 1396a(a)(17)), aff'd, 80 N.J. 299 (1979). New Jersey's participation in the federal Medicaid program was authorized by the enactment of the New Jersey Medical Assistance and Health Services Act, N.J.S.A. 30:4D-1 to -19.5.

DMAHS is the agency within the state Department of Human Services that administers the Medicaid program. N.J.S.A. 30:4D-7. DMAHS issues Medicaid regulations including the procedure for approving providers. N.J.S.A. 30:4D-12c; see generally N.J.S.A. 30:4D-7. The state must obtain federal approval of its methods for Medicaid provider qualification, reimbursement and prosecution. 42 C.F.R. § 455.1 to -.3. Once approved, the state must follow the plan, or it may loose federal funding. 42 U.S.C.A. § 1396c.

DMAHS is responsible for protecting the interest of the New Jersey Medicaid Program and its beneficiaries. N.J.A.C. 10:49-11.1(b). The agency has a strict policy that the submission of a false application for provider status constitutes good cause for suspension, disbarrment or disqualification from participation in the Medicaid program. N.J.A.C. 10:49-11.1(d)22. There is no requirement that the false statement on the application be made knowingly or intentionally. Ibid. The agency has consistently interpreted this regulation strictly in order to uphold the integrity of the Medicaid program.

A medical day care center is eligible to apply to participate as a Medicaid provider. N.J.A.C. 10:49-3.1(b)(17). To become an authorized Medicaid adult day health care program, a facility must be properly licensed by DMAHS and then submit a Medicaid provider application. N.J.A.C. 8:43F-1.1; N.J.A.C. 8:86-1.3. Once an application is completed, DMAHS will make a decision to accept or deny the application for "good cause." N.J.A.C. 10:49-3.2(d); N.J.A.C. 10:49-11.1(d). If denied, an applicant cannot reapply for one year. N.J.A.C. 10:49-3.2(d)3. The applicant can, however, appeal the decision. N.J.A.C. 10:49-3.2(d)2.

Our role in reviewing an agency decision is limited. In re Stallworth, ___ N.J. ___, ___ (2011) (slip op. at 13); In re Taylor, 158 N.J. 644, 656 (1999) (citing Clowes v. Terminix Int'l, Inc., 109 N.J. 575, 587 (1988)). We will intervene only "in those rare circumstances in which an agency action is clearly inconsistent with its statutory mission or other state policy." In re Musick, 143 N.J. 206, 216 (1996). We must defer to an agency decision unless it is arbitrary, capricious or unreasonable, or not supported by substantial credible evidence in the record as a whole, or is in violation of express or implicit legislative policy. In re Distrib. of Liquid Assets Upon Dissolution of Reg'l High Sch. Dist. No. 1, 168 N.J. 1, 10-11 (2001); Taylor, supra, 158 N.J. at 656-57. Based upon these standards, we see no reason to disturb DMAHS's decision here.

An agency's interpretation of its own regulations "is entitled to great weight . . . since [it] is in the best position to understand what was meant by the regulation when it was promulgated." In re Hosps.' Petitions, 383 N.J. Super. 219, 239 (App. Div.) (internal citation omitted), certif. denied, 187 N.J. 132 (2006). Here the agency charged with protecting the integrity of the Medicaid program and its beneficiaries has determined to enforce this regulation strictly in order to ensure that all information supplied by its providers be true and accurate. DMAHS's position is that its duty to prevent fraud and abuse in the Medicaid programs necessitates approving only those applicants who take seriously their certification of honesty and accuracy, beginning with the initial application.

Xanadu argues that the application should not be denied because the false statement was unintentional, made solely due to a misunderstanding of the question. It also argues that the agency had recently approved Laureda to be Xanadu's administrator with full knowledge of his criminal past. According to Xanadu, the fact that there had already been full disclosure of Laureda's past demonstrated that he had merely made an unfortunate mistake in completing the application.

We find these arguments unpersuasive in light of the agency's determination of the necessity of strict enforcement of its regulations designed to protect the Medicaid program. DMAHS's position that it must be confident in the truthfulness and accuracy of providers' certified statements from the very first application appears to us to be quite reasonable. Moreover, it is the party challenging the agency's action that bears the burden of demonstrating that the decision is arbitrary, capricious, or unreasonable. In re Arenas, 385 N.J. Super. 440, 443-44 (App. Div.), certif. denied, 188 N.J. 219 (2006). Xanadu has not satisfied that burden.



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