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Liberty House Nursing Home v. New Jersey Department of Health and Senior Services


March 5, 2012


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

Per curiam.


Argued November 2, 2011

Before Judges Lihotz and St. John.

Petitioner Liberty House Nursing Home (Liberty) appeals from a September 23, 2010 final decision of the Commissioner of the Department of Health and Senior Services (DHSS) regarding the proposed reclassification of salary expenditures impacting its Medicaid funding level. The Commissioner agreed with Liberty and rejected DHSS's attempted enforcement of a newly espoused interpretation of a regulation, which required reclassification of salaries solely on the basis of the employees' status as owners or related parties, rather than the duties performed.*fn1 However, the Commissioner remanded the matter to allow DHSS to review the reasonableness of the reported salaries in light of the actual jobs performed by owner and related party-employees.

Liberty appeals the Commissioner's remand, arguing in a single point:


Following our consideration of the arguments presented on appeal, in light of the record and applicable law, we affirm.

Liberty is an inner city nursing home facility, which relies upon the admission of Medicaid beneficiaries as its principal source of patients and revenue. Since 2000, Israel Braunstein, one of Liberty's owners, and his two sons, Michael and Edward, (collectively the Braunsteins) have been full-time employees, performing a variety of functions for Liberty, including: "accounting; payroll; software; tax; union reporting; worker's compensation claims; allowances; and/or budget analysis."

This appeal centers on DHSS's review of the salaries paid to the Braunsteins. To appreciate the context of the underlying dispute, we pause to explain applicable regulations governing the calculation of a facility's Medicaid cost reimbursement rate and the relationship of salary expenditures to the rate's calculation.

Pursuant to the Health Care Facilities Planning Act, N.J.S.A. 26:2H-1 to -26, DHSS is charged with "central responsibility for the development and administration of the State's policy with respect to health planning [and] hospital and related health care services[.]" N.J.S.A. 26:2H-1. Additionally, the Commissioner through DHSS administers all benefits New Jersey receives for medical assistance provided by the federal Social Security Act, 42 U.S.C.A. § 1396a(a)(30)(A);

42 U.S.C.A. § 1396(b)(2) (requiring Medicaid program participant states to develop methodologies for the calculation of rates used to reimburse the reasonable cost of providing services to Medicaid beneficiaries). The Commissioner is also guided by the provisions of the Medical Assistance and Health Services Act (the Act), N.J.S.A. 30:4D-1 to -64.

Under the Act's provisions and regulations promulgated thereunder,*fn2 participating nursing home facilities, like Liberty, must report to DHSS and identify service costs extended to Medicaid-eligible residents. See N.J.A.C. 8:85-3.2(a) (setting forth requirements for facility annual cost report submission). DHSS reviews the submissions, screening for the reasonableness of the expenses claimed for each category identified and assures reimbursement is made only for "reasonable" costs. N.J.A.C. 8:85-3.1. From this review, a per diem rate for reimbursement on behalf of Medicaid-eligible residents is set.

In order to ensure the "reimbursement [is] paid at rates which the State finds are reasonable and adequate by efficiently and economically operated facilities[,]" In re Medicaid Long Term Care Servs. Bulletin 85-4, 212 N.J. Super. 48, 52 (App. Div.) (discussing the standard for developing a reasonable rate based upon peer comparison or a facility's actual cost), certif. denied, 107 N.J. 31 (1986), rates are calculated using "standards and reasonableness" criteria, referred to as "screens." N.J.A.C. 8:85-3.3(a). See also 42 U.S.C.A. 1396a(a)(13). Screens are developed and applied to food costs, administration, housekeeping, and other general services. N.J.A.C. 8:85-3.7(e). Using the facility's prior fiscal year's reported costs, DHSS conducts a "desk review," matching each category of expenses reported by the facility to discern whether it falls within the applicable screen. If so, DHSS calculates the facility's prospective per diem reimbursement rate. N.J.A.C. 8:85-3.2(a).

Employee salaries are typically reported within the cost center applicable to the function performed by the employee. In this way, reimbursement of all expenses in the category, including employee salaries, may be included in calculating the reimbursement rate, with one significant exception. Reimbursement of salaries related to management expenses performed by owners and relatives is capped. See N.J.A.C. 8:85-3.1; see also N.J.A.C. 8.85-3.10. Also important is N.J.A.C. 8:85-3.6(b)(2)(iii),*fn3 which states "[c]ompensation and special fringe benefits of all owners, officers, related parties, and other employees acting in an administrative capacity must be reported as Management unless such parties specifically carry out the function of Administrator or Assistant Administrator" (emphasis added). Accordingly, when calculating a facility's Medicaid reimbursement rate, although salary and benefit expense for management functions are limited, salaries for non-management functions would be fully considered if the total category cost fell within the allowed screen for that cost center.

Since 1985, DHSS Bulletin 85-4 provided the agency's interpretation of N.J.A.C. 8:85-3.6(b)(2)(iii). Specifically, the agency advised related party compensation may be reported in other than the management cost center, so long as the compensation was for a function other than management, performed by an owner or related party. For example, if the owner was the facility's cook or gardener, the salary attributed to these functions would be placed in the cost centers for food or housekeeping respectively. In this way, the salary and benefit costs of owner or related party non-management functions would not be subject to the management cost cap. Following this policy, Liberty employed a full-time manager other than the Braunsteins, and they performed additional bookkeeping and accounting functions. Liberty categorized the Braunsteins' salaries as "administrative costs" rather than management costs, and claimed 100% allowance of the salary and benefit expenses when computing its Medicaid reimbursement rate.

In 2007, DHSS developed a new interpretation of N.J.A.C. 8:85-3.6(b)(2)(iii), which required all salaries and costs associated with owners and related parties to be reported under the management cost center, regardless of the duties performed. Using this recent interpretation, DHSS identified Israel's salary as incorrectly charged to administrative costs, rather than management costs, and reclassified the expense, presumably lowering Liberty's Medicaid per diem reimbursement rate.

In December 2007, Liberty filed a Level I appeal to challenge DHSS's application of this new interpretation of the regulation addressing owner and related party compensation. See N.J.A.C. 8:85-3.17. *fn4 DHSS denied Liberty's challenge seeking to calculate its Medicaid per diem reimbursement rate according to the prior interpretation of N.J.A.C. 8:85-3.6(b)(2)(iii). Liberty then submitted a Level II appeal to the Office of Administrative Law. During discovery, DHSS learned Edward and Michael were Israel's sons. Consequently, DHSS also reclassified their salaries and benefits to Liberty's management cost center as related parties, and Liberty amended its appeal.

DHSS and Liberty filed cross motions for summary decision, N.J.A.C. 1:1-12.5, regarding the legal issue of whether DHSS's reclassification of the Braunsteins' salaries and benefits, from administrative costs to management costs, was permissible. Liberty argued DHSS was required to follow notice and rulemaking procedures before applying the newly espoused interpretation of N.J.A.C. 8:85-3.6(b)(2)(iii). See N.J.S.A. 52:14B-1 to -25 (setting forth the Administrative Practice Act).

Following a hearing, an Administrative Law Judge (ALJ) issued an initial decision concluding DHSS could not deviate from its historical interpretation of its regulation or require reclassification of the salaries without proper notice and ability to comment by the regulated community as mandated by N.J.S.A. 52:14B-4. Both parties filed exceptions to the ALJ's determination. DHSS noted that if the ALJ's conclusion was upheld, the agency remained obligated to examine the reasonableness of the salary expenditures attributed to management cost centers.

The Commissioner issued a final agency decision, siding with Liberty and adopting the ALJ's determination, stating the change in interpretation [of N.J.A.C. 8:85-3.6(b)(2)(iii)] was material for the regulated community and significantly changed the status quo. As noted in the case law, such a change . . . requires [DHSS] at least to provide notice to the regulated community about the change in advance of its implementation even if the language of the regulation is not being altered. Therefore, . . . [DHSS] cannot require the reclassification of the salaries of the three Braunsteins to the [m]anagement cost center in the 2006 cost report solely on the basis of those individuals' status as owners and/or related parties.

Further, the Commissioner agreed with DHSS, concluding "a remand to [DHSS] for determination of [the] reasonableness of the Braunsteins' salaries and fringe benefits is necessary" because [t]here is no evidence that [DHSS] waived its right to review the reasonableness of these costs . . . [as] there was a need to determine the underlying law first because if [DHSS] was correct on that issue, there would be no need to delve into the facts related to the reasonableness of the Braunsteins' salaries and benefits because there would be no issue of material fact relevant to issuing the reimbursement rate[.]

Liberty appealed and seeks reversal of only that portion of the Commissioner's decision remanding for review of the reasonableness of the compensation paid to the Braunsteins.*fn5

Applicable to our examination is the well established principle that we will not overturn a final agency decision unless it is "arbitrary, capricious or unreasonable," or in violation of legislative policies expressed or implied in the act governing the agency. Campbell v. Dep't of Civil Serv., 39 N.J. 556, 562 (1963). See also Prado v. State, 186 N.J. 413, 427 (2006). We defer to actions that are consistent with an agency's legislative grant of power, liberally construing the Legislature's intention so that the agency may carry out its statutory responsibilities. Lewis v. Catastrophic Illness in Children Relief Fund, 336 N.J. Super. 361, 370 (App. Div.), certif. denied, 168 N.J. 290 (2001). Also, we afford deference to an agency based on its expertise in its area of responsibility, but note we are not bound by its interpretation of the enabling legislation. Mayflower Sec. Co. v. Bureau of Sec., 64 N.J. 85, 93 (1973).

In reviewing a challenge to administrative regulations, the same rules apply. Essex Cnty. Welfare Bd. v. Klein, 149 N.J. Super. 241, 247 (App. Div. 1977). In general, when an administrative agency's interpretation is challenged, "'a presumption of reasonableness'" attaches to the administrative agency's decision, and the party challenging it has the burden of showing that it was "'arbitrary, unreasonable or capricious.'" Barone v. Dep't of Human Servs., 210 N.J. Super. 276, 285 (App. Div. 1986), aff'd, 107 N.J. 355 (1987) (quoting Boyle v. Riti, 175 N.J. Super. 158, 166 (App. Div. 1980)).

Liberty argues DHSS is equitably or judicially estopped from further review of any issue resulting in an adjustment of its 2006 Medicaid per diem reimbursement rate because the agency neglected to present these claims in the prior adjudication reviewing the establishment of said rate. Liberty maintains since DHSS had the opportunity but failed to reserve a challenge to the reasonableness of the Braunsteins' salaries in the event of an adverse ruling on its regulatory interpretation, it now cannot do so because the determination is final. Further, Liberty suggests in the prior administrative proceeding, DHSS took the position it was not challenging the reasonableness of the Braunsteins' compensation. Therefore, the Commissioner's decision to grant DHSS "the right to start an entirely new administrative process regarding" the reasonableness of the Braunsteins' salaries "would be the epitome of unfairness[.]" We disagree with these arguments.

Equitable estoppel applies where "conduct, either express or implied, . . . reasonably misleads another to his prejudice so that a repudiation of such conduct would be unjust in the eyes of the law." Ridge Chevrolet-Oldsmobile, Inc. v. Scarano, 238 N.J. Super. 149, 154 (App. Div. 1990) (internal quotation marks and citations omitted). A party asserting equitable estoppel may rely on the "'conduct, inaction, representations of the actor, misrepresentation, silence or omission.'" Ibid. (quoting Fairken Assocs. v. Hutchin, 223 N.J. Super. 274, 280 (App. Div. 1987)). Equitable estoppel "requires a detrimental change in position based on reasonable reliance[,]" Hutchin, supra, 223 N.J. Super. at 280, and the party's "reliance must be reasonable and justifiable" with the burden of proof on the party asserting the estoppel. Foley Mach. Co. v. Amland Contras., Inc., 209 N.J. Super. 70, 75 (App. Div. 1986).

"Equitable estoppel is rarely invoked against a governmental entity," Middletown Twp. Policemen's Ben. Assoc. v. Twp. of Middletown, 162 N.J. 361, 367 (2000) (internal quotation marks and citations omitted), evoked only in instances necessary to prevent manifest injustice. Aqua Beach Condo. Ass'n v. Dep't of Cmty. Affairs, Bureau of Homeowner Prot., New Home Warranty Program, 186 N.J. 5, 20 (2006). In this regard, "the party claiming the estoppel must demonstrate detrimental reliance on the action or inaction of the official or entity." M.J. Ocean, Inc. v. Dir., Div. of Tax., 23 N.J. Tax 646, 655 (Tax Ct. 2008), certif. denied, 198 N.J. 473 (2009). Furthermore, "a showing of affirmative misconduct is necessary to invoke this doctrine against the government." U.S. v. Bd. of Educ. of City of Union City, 697 F. Supp. 167, 178 (D.N.J. 1988).

In a closely related vein, where a party has prevailed on a litigated point, principles of judicial estoppel demand that such party be bound by its earlier representations. See McCurrie v. Town of Kearny, 174 N.J. 523, 533-34 (2002) (concluding that "judicial estoppel precludes a party from taking a position contrary to the position he has already successfully espoused in the same or prior litigation" and "judicial estoppel is a doctrine designed to protect the integrity of the judicial process by not permitting a litigant to prevail on an issue and then to seek the reversal of that favorable ruling" (citation omitted)). [Guido v. Duane Morris, LLP, 202 N.J. 79, 94-95 (2010).]

Applying these principles to the matter under review, we reject Liberty's contention that it relied upon DHSS's position that there was no dispute of material facts, as evinced by the agency's initiation of summary decision. We reject as unfounded Liberty's assertion suggesting it crafted its arguments relying on the limited nature of the dispute believing DHSS's silence on the issue of the Braunsteins' salaries reflected a position the agency did not dispute their reasonableness.

The single issue present for resolution in the agency actions was whether DHSS was permitted to deviate from its historical application of its regulations regarding classification of owner and related party salaries absent compliance with applicable rulemaking requirements. We note Liberty's initiation of the Level I appeal narrowed the scope of review requested. N.J.A.C. 8:85-3.17 provides that in the two-step appeals process for nursing facilities, "[n]o issues other than the specific issues identified in the original Level I appeal shall be heard at the Level II hearing." DHSS neither concealed nor misrepresented any material facts throughout the process. See Carlsen v. Masters, Mates & Pilots Pension Plan Trust, 80 N.J. 334, 339 (1979) (holding equitable estoppel requires the concealment or misrepresentation of material facts). Contrary to Liberty's arguments, DHSS did not assent or otherwise act in a way to lead Liberty to believe it had accepted as reasonable the salaries listed as administrative costs, and the agency did nothing which could possibly rise to the level of affirmative misconduct. Union City, 697 F. Supp. at 178. We conclude the doctrine of estoppel is inapplicable to these facts.

More important is the significance of the reasonableness determination in calculating a Medicaid reimbursement rate. Medicaid provides "medical assistance to the poor at the expense of the public." Mistrick v. Div. of Med. Assist. & Health Servs., 154 N.J. 158, 165 (1998). The use of taxpayer monies to fund services afforded Medicaid beneficiaries results in a highly regulated area. States must adhere to "Title XIX of the Social Security Act, and the regulations adopted by the Secretary of Health and Human Services. 42 U.S.C.A. § 1396a." Ibid. Consequently, reimbursement to participating nursing home facilities is conditioned on compliance with both Federal as well as State standards. In this regard, DHSS, as the watchdog of the use of federal Medicaid funds, is tasked with a duty to the public to assure full compliance with regulatory requirements before monies are released. Screening for the reasonableness of costs expended is at the heart of DHSS's responsibilities. See Bulletin 85-4, supra, 212 N.J. Super. at 52; N.J.A.C. 8:85-3.1.

We conclude no manifest injustice results from the Commissioner's remand to enable DHSS to abide its obligation to safeguard the expenditure of taxpayer funds to meet the stated public interest purpose. The strength of Liberty's assertion, contending the remand altered its settled expectation, is severely weakened when balanced against the strong interest of the State in maintaining the financial integrity of the utilization of Medicaid funds.


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