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In the Consolidated Matters of Mercerville Center, Madison Center and Jersey Shore v. Department of Health and Senior Services


November 4, 2011


On appeal from the New Jersey Department of Health and Senior Services.

Per curiam.


Argued: October 19, 2011 -

Before Judges Axelrad and Sapp-Peterson.

In this appeal, Mercerville Center, Madison Center, and Jersey Shore nursing facilities that receive Medicaid funding (collectively appellants), challenge the authority of the Department of Health and Senior Services (DHSS) to conduct clinical acuity audits of appellants' 2006 cost reports. We sua sponte dismiss this appeal for failure of appellants to exhaust their administrative remedies, and remand the matter to DHSS.

On April 28, 2010, DHSS' auditors sent notices to 125 nursing facilities, including appellants, advising that DHSS would be conducting clinical acuity audits of the facilities' 2006 cost reports. About thirty facilities, including appellants, contacted DHSS challenging the audits on the ground they were time barred, alleging the cost reports were filed prior to March 31, 2007 and the audits commenced after March 31, 2010, the statutory deadline under N.J.A.C. 8:85-4.1. Devon L. Graf, Director of DHSS' Nursing Facility Rate Setting and Reimbursement (NFRSR) Program replied that the due date for submitting the 2006 cost reports was automatically extended from March 31, 2007 to April 30, 2007, and thus the audits were timely commenced within three years.

On May 17, 2010, appellants' attorney sent a letter on behalf of each appellant to Graf, characterized as a formal appeal contesting the clinical acuity audits and a request for a Level II hearing with the Office of Administrative Law (OAL). He claimed Graf's May 4, 2010 email constituted a Level I decision. Graf responded by letter of May 20, 2010, advising a Level II hearing was premature as a Level I hearing had not yet been conducted. Appellants' attorney then sent a letter to Graf on June 18, 2010, characterized as a formal appeal of the clinical acuity audit and a request for a Level I hearing with his office. The letter advised that appellants were also petitioning DHSS' Commissioner for a Level II hearing before the OAL based on their belief Graf's prior responses constituted a Level I decision regarding the audits.

On June 18, 2010, appellants' attorney also sent a letter to DHSS Commissioner Poonam Alaigh stating their position that:

(l) Graf's interpretation of the regulations, that the extension was "automatic" and did not have to be requested by the nursing facilities, was incorrect and thus the Commissioner should find the audits were untimely, and (2) even if the extension was automatic, the Commissioner should find the time period for commencing the audits "on site" had passed and she should thus stay the audits. Appellants requested the Commissioner "immediately enter a decision providing that these appeals filed on May 17, 2010 be certified for a Level II hearing by [DHSS] before the [OAL] concerning the matter of a Clinical Acuity Audit by [the auditor] on behalf of [DHSS]." He further requested the Commissioner "stay [DHSS'] determination, or its failure to initiate the audits within the proper timeframe[,]" concluding:

In light of the importance of this issue to the facilities, if we do not hear from you in response to this request for a stay by the close of business on Friday, June 25, 2010, we will deem you have to have denied our request for a stay and will seek judicial intervention in order to pursue that relief. In the meantime, thank you for your prompt attention to our request.

The Commissioner did not respond nor issue a final order or decision. On July 14, 2010, appellants filed an appeal from a "State Agency decision entered on June 25, 2010." The case information statement reflected that the appeal was commenced because no response was received from the DHSS Commissioner within the allotted time provided in appellants' June 18, 2010 letter. The enumerated issues to be raised on appeal were an interpretation of the regulatory three-year period for audits, whether the agency was permitted to grant blanket extensions to regulations, and an assessment of the facts. Appellants' brief similarly argued the audits were untimely and unlawful, and DHSS' justification of suspected fraudulent activity on the part of appellants was improper.

On August 23, 2010, Ruth Charbonneau, Director of DHSS' Office of Legal and Regulatory Affairs, notified appellants' attorney in writing that the agency initiated the audits within three years of the extended due date, and regardless of the due date, DHSS had "good cause" for waiving the limitation. She additionally advised that pursuant to N.J.A.C. 8:85-4.1(c), a nursing facility may request a hearing before the OAL regarding this waiver by DHSS within 20 days of receipt of the letter. Appellants made no request for a hearing before the OAL. Instead, they proceeded with the current appeal.

Under New Jersey Court Rules, appeals may be taken to the Appellate Division "to review final decisions or actions of any state administrative agency or officer[.]" R. 2:2-3(a)(2). Appellate review is not permitted "so long as there is available a right of review before any administrative agency or officer, unless the interest of justice requires otherwise[.]" R. 2:2-3(a)(2). Appellate courts do not render advisory opinions or function in the abstract. N.J. Civil Serv. Ass'n v. State, 88 N.J. 605, 612 (1982). Therefore, ordinarily, an appellant needs to exhaust his or her administrative remedies before seeking appellate review, unless it is in the interest of justice to allow the appeal to proceed. Borough of Matawan v. Monmouth Cnty. Bd. of Taxation, 51 N.J. 291, 296 (1968).

The principal aim in avoiding premature review of administrative determinations is to keep the court from "becoming entangled in abstract disagreements over administrative policies, and also to refrain from judicial interference until an administrative decision has been formed and its effects felt in a concrete way by the challenging parties." N.J. Civil Serv. Ass'n, supra, 88 N.J. at 612.

The rare cases where appellants do not need to exhaust administrative remedies are "when the administrative remedies would be futile, when irreparable harm would result, when jurisdiction of the agency is doubtful, or when an overriding public interest calls for a prompt judicial decision." Id. at 613. Generally, the requirement to exhaust administrative remedies will only be excused in cases with no factual disputes. Ibid. In deciding if the interest of justice favors waiving the exhaustion requirement, our Supreme Court has established guidelines to consider, including "the relative delay and expense, the necessity for taking evidence and making factual determinations thereon, the nature of the agency and the extent of judgment, discretion and expertise involved[.]" Ibid. (quoting Roadway Express, Inc. v. Kingsley, 37 N.J. 136, 141 (1962)).

In limited circumstances, a court will waive the exhaustion of administrative remedies requirement in the absence of final agency action. See N.J. Civil Serv. Ass'n, supra, 88 N.J. at 612. In those cases, "[t]he term 'action,' found in [Rules 2:2-3(a) and 2:2-4], includes inaction." Hosp. Ctr. at Orange v. Guhl, 331 N.J. Super. 322, 329 (App. Div. 2000) (alteration in original) (quoting Mathews v. Finley, 46 N.J. Super. 175, 177 (App. Div.), certif. denied, Mathews v. Neeld, 25 N.J. 283 (1957)).

For example, in New Jersey Civil Service Ass'n, supra, the Attorney General issued an opinion that hearing officers were not entitled to appointment as Administrative Law Judges (ALJ).

88 N.J. at 612. Although the Attorney General's opinion was not a final agency decision subject to review, the Court held that because the Director of OAL followed the Attorney General's advice and did not hire any hearing officers as ALJs, the implicit refusal of the Director to appoint the hearing officers was "tantamount to final agency action[,]" and appellants could appeal from the refusal. Ibid. The Court noted that excusing the failure to waive administrative remedies in this circumstance did not conflict with the Court's reluctance to issue abstract opinions because no facts were in dispute, no administrative expertise was required, and it saved time and money to hear the case. Id. at 612-13.

Additionally, in Guhl, supra, we waived the exhaustion of administrative remedies requirement when the appellants waited three years for an administrative agency to act. 331 N.J. Super. at 322. In that case, the appellants, twelve non-profit acute care hospitals, filed a prerogative writs action against the Department of Human Services (DHS) alleging they had filed administrative appeals with the agency challenging the Medicaid reimbursement rates established for the past three years, but DHS "continually and consistently" failed to issue any decision respecting those appeals. Id. at 326-27. We found DHS had an obligation to decide Medicaid rate appeals within a reasonable period of time and had failed to satisfy that obligation in processing the appeals that precipitated the action. Id. at 328, 333-35.

As we noted, the procedural course for an appeal by "a party claiming to be adversely affected by the inaction of a state administrative agency is to file a notice of appeal and motion for summary disposition accompanied by a supporting brief, certification and other relevant factual materials." Id. at 330. See also R. 2:8-3(b). If we determine it is appropriate to waive the exhaustion of administrative remedies requirement, and if there are no factual allegations in dispute, we may decide the claim, but if any factual disputes exist, the matter will be remanded to the appropriate agency, ALJ, or Law Division. Guhl, supra, 331 N.J. Super. at 330.

In the present case, there was no final decision or action of DHSS, and appellants did not exhaust their administrative remedies. Appellants are merely appealing from the inaction of the Commissioner by not responding to a June 18, 2010 letter requesting a stay of the acuity audits by June 25, 2010. This case is dissimilar to New Jersey Civil Service Ass'n and Guhl, where the requirement of administrative action was excused under the circumstances. Unlike New Jersey Civil Service Ass'n, where an agency's inaction in refusing to hire hearing officers as ALJs was tantamount to a final agency decision, here the refusal of DHSS to stay the audits was not, in any respects, a final agency decision. Appellants gave the DHSS Commissioner an arbitrary deadline of one week to respond to a letter and stay the audits. The refusal of the DHSS Commissioner to meet a made-up deadline is not a final agency action and cannot be construed, even broadly, as tantamount to a final agency action entitled to appellate review.

Additionally, unlike Guhl, where the appellants had attempted for three years to obtain an agency decision, here appellants demanded an answer in one week. DHSS had an obligation to process and decide clinical acuity audit appeals within a reasonable period of time and respond to a legitimate request for a stay of further agency action. Appellants, however, never gave the agency a reasonable opportunity to act. Appellants sent their first "formal appeal" to NFRSR Director Graf on May l7, 2010, contesting the clinical acuity audits and requesting a Level II hearing before the OAL. Graf promptly replied that a Level II hearing was premature and, by letter of June l8, 2010, appellants' attorney then requested a Level I departmental hearing. Appellants' attorney simultaneously requested the Commissioner certify the appeals for a Level II hearing before the OAL and requested a stay, setting an arbitrary one-week deadline. Appellants have not cited any statutory deadline mandating action by DHSS within seven days or any other fixed time period. Cf. N.J.S.A. 40:55D-61 and -76c (providing under the Municipal Land Use Act that failure of the planning board and zoning board of adjustment to grant or deny subdivision, site plan, or conditional use approval within 120 days after submission of the completed application shall constitute approval of the application). One week is clearly not an extensive delay to excuse appellants' failure to exhaust administrative remedies. Nor is the two months from appellants' first letter requesting a hearing to its appeal to this court a sufficient period of agency inaction to warrant judicial intervention at this stage of the case.

Appellants had an administrative procedure they chose not to follow. N.J.A.C. 8:85-4.1(c) provides that a nursing facility "may request a hearing on any waiver by [DHSS] to the extent authorized by applicable statutes, rules and regulations." N.J.A.C. 8:85-3.17 further describes the appeals process, and provides that a nursing facility may request a Level I appeal heard by a DHSS representative, followed by a Level II appeal before an ALJ, when the facility believes the application of the rules "results in an inequity." An appellant has twenty days from the mailing of the ruling in the Level I appeal to request an OAL hearing. See N.J.A.C. 8:85-3.17.1(a)(2)(ii).

Appellants simultaneously requested departmental and OAL hearings and filed an appeal to us before either could even be scheduled. Moreover, even after the appeal was filed, appellants were notified by DHSS' Office of Legal and Regulatory Affairs that they could proceed under the regulations by seeking a hearing before the OAL within twenty days regarding their concerns about the timeliness of the audits. Appellants failed to do so and instead proceeded with this appeal, asking us to make factual findings and interpret, in the first instance, the agency's own regulations.*fn1

Appellants are permitted to skip administrative remedies and proceed to the appellate court only in limited circumstances and when it is in the interest of justice. We are not persuaded by appellants' plea at oral argument that at this point in time it will save time and money for us to dispose of their appeal on the merits. Where appellants have demonstrated none of the factors established by the Supreme Court to deviate from our Court Rules, addressing the merits on appeal would encourage litigants such as appellants to circumvent the administrative procedures and appellate review process by establishing arbitrary deadlines for action by an agency.

Moreover, DHSS has experience with audits and understands the policies and procedures surrounding the audit process. Accordingly, DHSS should have the first opportunity to interpret the sections of the Administrative Code dealing with the audit cycle. Appellants will not suffer irreparable harm if the audits are continued because, if in the end, after exhausting administrative remedies, a court decides that the audits should not have been performed, then the cost reports can be "excluded from the audit" pursuant to N.J.A.C. 8:85-4.1(a). Accordingly, we dismiss the appeal for appellant's failure to exhaust administrative remedies. We remand the matter to DHSS to afford appellants the opportunity to request a Level II hearing before the OAL. As the record does not reflect the status of the audits pending appeal, we take no position as to whether such request, if made, will be considered timely or appropriate under the circumstances.

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