COURT OF APPEALS OF VIRGINIA
Present: Chief Judge Fitzpatrick, Judges Coleman and Bumgardner
Argued at Salem, Virginia
DENNIS G. SMITH, DIRECTOR,
VIRGINIA DEPARTMENT OF MEDICAL
ASSISTANCE SERVICES
OPINION BY
v. Record No. 2926-98-3 JUDGE SAM W. COLEMAN III
JANUARY 11, 2000
LIBERTY NURSING HOME, INC.,
BEVERLY ENTERPRISES, INC. and
WILLIAM J. LEMON
FROM THE CIRCUIT COURT OF THE CITY OF ROANOKE
Robert P. Doherty, Jr., Judge
Paige Selden Fitzgerald, Assistant Attorney
General (Mark L. Earley, Attorney General;
Siran S. Faulders, Senior Assistant Attorney
General, on briefs), for appellant.
Robert T. Adams (Thomas J. Stallings;
McGuire, Woods, Battle & Boothe, LLP, on
brief), for appellees.
This appeal involves a dispute between the Director of the
Department of Medical Assistance Services (DMAS) and the
appellees, who at various times operated Rose Hill Nursing Home in
Warren County. The dispute concerns Medicaid payments that DMAS
made in 1979 and 1986, respectively, to the appellees for nursing
home care and related expenses which the appellees provided for
Medicaid recipients at Rose Hill Nursing Home. After the payments
had been made by DMAS and pursuant to Code § 32.1-325.1, the
Director made "initial determinations" between October 3, 1990 and
July 15, 1992, that DMAS had overpaid the appellees $968,875 for
excessive depreciation and lease cost reimbursements for the Rose
Hill Nursing Home. The Director claimed that the appellees were
not entitled to reimbursement for the claimed depreciation on the
facility by virtue of Medicaid's "related-party" rule and that
appellees' claims for lease costs reimbursement were excessive
because under DMAS's "cost of ownership" accounting principles,
the appellees' lease costs should have been reduced after the
appellees refinanced the mortgage loan.
The appellees disputed that DMAS was entitled to
reimbursement and requested a formal administrative hearing
pursuant to Code § 9-6.14:12 of the Administrative Process Act.
An administrative hearing, an appeal to the circuit court, and
this appeal followed.
PROCEDURAL BACKGROUND
At the formal administrative hearing, the hearing officer
held: (1) that the Director, because he initiated the claims for
reimbursement from the appellees, had the burden of proving that
the appellees were not entitled to the Medicaid funds under the
applicable Medicaid regulations; (2) that the appellees' expert
witnesses were more credible than DMAS's expert witness based upon
the witnesses' demeanor and their respective explanations of how
to apply DMAS's Medicaid regulations; (3) that the major portion
of DMAS's reimbursement claims were barred by Code
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§ 32.1-325.1:1(B), enacted in 1990, which provides that the
Director's "initial determination [of overpayment] shall be made
within the earlier of (i) four years, or (ii) fifteen months after
filing of the final cost report by the provider subsequent to sale
of the facility or termination of the provider"; 1 and (4) that
DMAS was not entitled to reimbursement of the claimed
overpayments, based upon the hearing examiner's interpretation and
application of the Medicaid regulations as explained by the
appellees' expert witnesses.
The Director rejected the hearing officer's decision and
recommendations and rendered a final case decision on August 8,
1997. He ruled that the hearing officer: (1) had erroneously
placed the burden of proof on the Director, rather than the
appellees; (2) had erroneously found the appellees' expert
witnesses more credible; (3) had erroneously ruled that Code
§ 32.1-325.1:1(B) was a statute of limitation barring all claims
that were more than four years old; and (4) had erroneously held
that Code § 32.1-325.1:1(B) enacted in 1990 was to be applied
retrospectively. Thus, the Director ruled that according to the
Medicaid regulations as he interpreted and applied them, DMAS had
overpaid the appellees by $968,875. The appellees appealed the
1
The Director's initial determinations of claimed
overpayments were $111,713 for depreciation in 1980 and part of
1981 and $857,162 for interest costs during 1983 through 1990 as
a result of refinancing.
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Director's decision to the circuit court pursuant to Code
§ 9-6.14:15-19.
The circuit court ruled that: (1) the appellees, rather than
the Director, had the burden of proof in challenging the agency's
decision; (2) the Director erred in rejecting the hearing
officer's factual findings that the appellees' expert witnesses
were more credible based upon their demeanor and explanations as
to how the regulations had previously been interpreted and
applied; and (3) Code § 32.1-325.1:1(B) is a statute of repose
that applies retrospectively to bar the majority of DMAS's
reimbursement claims. Accordingly, the circuit court remanded for
the Director to reconsider those claims not barred by Code
§ 32.1-325.1:1(B) and to consider them based upon the hearing
examiner's credibility determinations as to the appellees' expert
witnesses' evidence, but with the appellees having the burden of
proof.
We review the issues on appeal from the circuit court. 2
CODE § 32.1-325.1:1(B)
STATUTORY TIME LIMITATIONS
In 1986, the legislature enacted Code § 32.1-325.1 in order
to create a mechanism for DMAS to recover overpayments that had
2
Because we decide this case based upon the applicability
of Code § 32.1-325.1:1(B) and the Director's application of the
Medicaid regulations, we need not and do not reach the issues of
which party had the burden of proof in challenging the agency's
decision or the extent to which the hearing officer's factual
findings were based on credibility and binding on the Director.
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been made to Medicaid providers. That statute mandates that the
Director make an initial determination of overpayment and
undertake full recovery. See Code § 32.1-325.1. In 1990, the
legislature revisited the statutory mechanism for recapturing
overpayments and enacted Code § 32.1-325.1:1. The relevant
portion of subsection B of the 1990 enactment provides: "Such
initial determination [of overpayment] shall be made within the
earlier of (i) four years, or (ii) fifteen months after filing
of the final cost report by the provider subsequent to sale of
the facility or termination of the provider." Code
§ 32.1-325.1:1(B).
The statute does not expressly provide a consequence for
the Director's failure to determine the overpayment within the
specified time. The Director contends that the language of Code
§ 32.1-325.1:1 is merely directory and that no adverse
consequences flow from his inability, unwillingness, or delay in
determining or collecting overpayments within the time periods
provided by statute. The appellees argue that the statute is
mandatory and limits the Director from pursuing any claim for
overpayment made more than four years prior to the date of the
Director's initial determination that an overpayment had been
made.
The issue as to whether a statute is one of repose that
bars a cause of action or one of limitation that bars a remedy,
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or is merely directory, is a legal question of statutory
construction that "'falls outside the area generally entrusted
to . . . [an] agency, and is one in which courts have a special
competence.'" Johnston-Willis, Ltd. v. Kenley, 6 Va. App. 231,
243-44, 369 S.E.2d 1, 8 (1988) (quoting Hi-Craft Clothing Co. v.
N.L.R.B., 660 F.2d 910, 914-15 (3d. Cir. 1981)). Thus, whether
Code § 32.1-325.1:1(B) is directory or is a statute of repose or
limitation is a legal issue for the courts to decide without
being required to give deference to an agency's construction of
the statute. Thus, we decide whether Code § 32.1-325.1:1 is
directory or mandatory and whether it is a statute limiting the
agency's remedy or cause of action.
Both statutes of limitation and statutes of repose preclude
litigation of stale claims. See Commonwealth v. Owens-Corning
Fiberglass Corp., 238 Va. 595, 598-99, 385 S.E.2d 865, 867
(1989). However, a statute of limitation does not apply to the
Commonwealth unless the statute expressly so provides. See id.
at 603-04, 385 S.E.2d at 870 (Poff, S.J., dissenting); see also
Code § 8.01-231. Here, the statute, whether it be one of repose
or limitation, by its terms expressly applies to the
Commonwealth and its agency, DMAS. Therefore, because the
statute applies to the Commonwealth, it is irrelevant, for our
purposes, whether the statute, if mandatory, is one of
limitation or repose. Accordingly, the dispositive issues are
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whether the statute is mandatory or only directory, and, if
mandatory, whether the statute applies retrospectively to claims
existing prior to its enactment in 1990.
"'A mandatory provision in a statute is one the omission to
follow which renders the proceeding to which it relates illegal
and void, while a directory provision is one the observance of
which is not necessary to the validity of the proceeding.'"
Ladd v. Lamb, 195 Va. 1031, 1035, 81 S.E.2d 756, 759 (1954)
(quoting 82 C.J.S. Statutes, § 374, at 868 (1953)).
"Generally the rule is where a statute
specifies a time within which a public
officer is to perform an act regarding the
rights and duties of others, it will be
considered as merely directory, unless the
nature of the act to be performed or the
language shows that the designation of time
was intended as a limitation of power."
Huffman v. Kite, 198 Va. 196, 200, 93 S.E.2d 328, 331 (1956)
(quoting Nelms v. Vaughan, 84 Va. 696, 699-700, 5 S.E. 704, 706
(1888)). From our reading of the statute, the legislature
intended Code § 32.1-325.1:1(B) to be a "limitation of power" that
restricts DMAS from seeking return of overpayments after the
expiration of a certain time period. We construe the time limits
in Code § 32.1-325.1:1(B) as being more than merely directory; we
hold that the legislature intended to create a mandatory
limitation.
In reaching that holding, we believe the statutory framework
and chronology of the legislation are indicative of the General
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Assembly's intent. Furthermore, we assume the legislature enacted
the language at issue in Code § 32.1-325.1:1(B) to achieve a
purpose. See Williams v. Commonwealth, 190 Va. 280, 293, 56
S.E.2d 537, 543 (1949) ("We must assume that the legislature did
not intend to do a vain and useless thing."); Barnett v. D.L.
Bromwell, Inc., 6 Va. App. 30, 34, 366 S.E.2d 271, 273 (1988)
(en banc). Having mandated in 1986 by enacting Code § 32.1-325.1
that the Director "shall" recover overpayments, the legislature in
1990 revisited the statutory collection scheme by enacting Code
§ 32.1-325.1:1(B), which provides that the Director "shall" make
an initial determination within "the earlier of (i) four years, or
(ii) fifteen months after the filing of the final cost report
. . . subsequent to sale of the facility or termination of the
provider." Although the legislature could have stated the
limitation more clearly or expressly, we conclude "from the nature
[and purpose] of the act the designation of time must be
considered a limitation on the power of the officer." Huffman,
198 Va. at 200, 93 S.E.2d at 331 (quoting 50 Am. Jur. Statutes
§ 23, at 46 (1944)).
The General Assembly was obviously concerned that the
Director not unduly delay determining and collecting overpayments
made to Medicaid providers. We find that the provision in the
statute which provides the Director shall act to recover funds
within fifteen months after a provider has filed a final cost
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report subsequent to the sale of a facility or termination of the
provider makes apparent the legislative intent that the time be a
limitation rather than an ideal or goal for which the Director
should strive. The manifest purpose for enacting this provision
was to ensure that the Director "shall" not permit a claim for
overpayment to languish and to prevent the Director from
attempting a recovery from a Medicaid provider long after a
provider may have ceased doing business with DMAS. We find it
illogical to construe the language providing expressly for
different time limitations in the two situations as directory.
Furthermore, from the chronology of enactment of the statutes, we
conclude that the legislature intended to place limits on DMAS's
authority to recover overpayments. We see no reason, in this
context, to give "shall" a permissive or directory meaning. See
e.g., Last v. Virginia State Bd. of Medicine, 14 Va. App. 906,
912, 421 S.E.2d 201, 206 (1992) (finding that the word "shall" is
generally used in the mandatory sense and that if the language of
the statute is simple and unambiguous, the word will not be given
a permissive interpretation). Accordingly, we hold that the
provisions of Code § 32.1-325.1:1 are mandatory and limit the
Director's authority to seek recovery of overpayments made to
Medicaid providers.
Having determined that the time limits in Code
§ 32.1-325.1:1(B) are mandatory, we next determine whether the
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statute, passed in 1990, can retrospectively limit the Director's
right to collect overpayments more than four years old. In other
words, we must decide whether overpayments made in 1986 and
before, which the Director had the right and obligation to collect
prior to the enactment of Code § 32.1-325.1:1, are barred, or
whether the statute only applies prospectively to overpayments
made in 1990 and thereafter.
Although we presume statutes apply prospectively, the intent
of the legislature controls the application of the statute. See
Booth v. Booth, 7 Va. App. 22, 26, 371 S.E.2d 569, 571 (1988);
Eaton v. Davis, 176 Va. 330, 336, 10 S.E.2d 893, 896 (1940). The
legislature may enact statutes with retroactive application
provided they do not conflict with constitutionally-protected
rights or vested interests. See Booth, 7 Va. App. at 26, 371
S.E.2d at 571. Absent an express articulation of intent, we
determine the intent from the "statutory scheme and purpose, and
principles of statutory construction." Id. at 26, 371 S.E.2d at
571-72.
Here, as we have determined, the legislature enacted Code
§ 32.1-325.1:1(B), to limit the authority of DMAS to seek recovery
of overpayments pursuant to Code § 32.1-325.1. In addition, in
Code § 32.1-325.1:1(D), the legislature specifically provided that
DMAS was precluded from seeking recovery of overpayments from
successors in interest to health care providers, where the
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contracts for transfer of the health care facility were entered
into before February 1, 1990. By expressly barring retroactive
application of the statute to DMAS's recovery efforts against a
certain class of Medicaid providers, we find that the legislature,
by implication, intended other provisions of the statute to apply
retroactively to DMAS's recovery efforts against other providers.
The law disfavors retroactive application of statutes,
recognizing that it is unjust to interfere with rights and
liabilities that are vested or have accrued before a statute's
passage. See Island Creek Coal Co. v. Breeding, 6 Va. App. 1, 10,
365 S.E.2d 782, 787 (1988) (citations omitted). Where individuals
lawfully contract for property rights, or are granted rights by
the government, courts are loath to retroactively abridge those
rights. However, by enacting Code § 32.1-325.1:1(B), the
legislature determined it unjust to subject Medicaid providers to
the threat of DMAS overpayment recovery, regardless of how stale
the claim may be. Thus, where the statute operates retroactively
to foreclose DMAS from recovery, the general presumption against
retroactive application of a statute will not override the
legislature's decision to limit the time for which DMAS may
recover overpayment. Accordingly, we hold that the statutory
limitation was intended to apply retroactively and that DMAS is
limited to recovering overpayments made to the appellees during
the four-year period preceding the initial determinations by the
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Director dated July 19, 1990, June 17, 1991, and April 20, 1992,
respectively.
APPLICATION OF MEDICAID REGULATIONS
We next consider the propriety of the trial court's
conclusions concerning the merits of the Director's remaining
claims that are not barred. In reviewing an agency's decision,
this Court employs four different standards depending on the issue
raised.
Where the issue is whether there is
substantial evidence to support findings of
fact, great deference is to be accorded the
agency decision. Where the issue falls
outside the specialized competence of the
agency, such as constitutional and statutory
interpretation issues, little deference is
required to be accorded the agency decision.
Where, however, the issue concerns an agency
decision based on the proper application of
its expert discretion, the reviewing court
will not substitute its own independent
judgment for that of the agency but rather
will reverse the agency decision only if that
decision was arbitrary and capricious.
Finally, in reviewing an agency decision, the
courts are required to consider the
experience and specialized competence of the
agency and the purposes of the basic law
under which the agency acted.
Fralin v. Kozlowski, 18 Va. App. 697, 700-01, 447 S.E.2d 238,
240-41 (1994) (emphasis added) (quoting Johnston-Willis, 6 Va.
App. at 246, 369 S.E.2d at 9). Thus, the degree of deference
afforded an agency decision depends upon not only the nature of
the issue, legal or factual, but also upon whether the issue falls
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within the area of experience and specialized competence of the
agency.
Here, we are reviewing the interpretation and application of
an agency's rules and regulations governing Medicaid principles of
reimbursement. Thus, because this case involves the specialized
competence of an agency in construing and applying its
regulations, we are bound by the agency's decision unless the
decision is arbitrary and capricious. See id. at 701, 447 S.E.2d
at 240. The Director, rejecting the hearing officer's
recommendations, ruled that according to Medicaid regulations,
DMAS had overpaid the appellees by $968,875. At the date of its
incorporation in 1977, Rose Hill Nursing Home, Incorporated, (Rose
Hill) was owned by Dr. D. Blanton Allen, Frederick L. Spencer, and
the three minor children of William Lemon. Also in 1977, Rose
Hill entered into a management contract with Liberty Management
Corporation (Liberty), which was owned solely by Lemon. Rose Hill
agreed to lease the facility to Liberty in 1979 when the
management agreement was voided as a result of related-party
concerns expressed by DMAS. Thus, Liberty owned a leasehold
interest in and operated the nursing home. The term of the lease
was for seven years with an option to extend for an additional
three years on the same terms and conditions that were contained
in the original lease. Even though the mortgage on the property
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had a variable interest rate, the lease provided a $418,006 fixed
annual rent for the facility.
In 1979, Allen entered into an option agreement with SWS
Associates (SWS), a partnership consisting of Lemon's three minor
children. The option granted SWS the exclusive right to purchase
Allen's interest in the assets of Rose Hill. The option could be
exercised only between November 1, 1996, and October 31, 1997.
The option agreement also provided that Rose Hill would be
liquidated and its assets distributed to it stockholders. In
January 1980, Rose Hill was liquidated and the corporation was
dissolved in June of that year by operation of law.
In December 1980, Liberty was sold to Beverly Enterprises
(Beverly). Accordingly, Beverly acquired the lease of Rose Hill
when it purchased Liberty and was subject to the existing lease
terms. In November 1981, Lemon purchased Allen's interest in the
Rose Hill property. In 1986, Lemon paid off the existing
$1,800,000 loan on the facility and purportedly refinanced the
debt at a lower rate of interest. He did not produce
documentation substantiating the refinancing. In 1992, Beverly
purchased the property of Rose Hill from Lemon.
Recaptured Depreciation
The Director ruled that the appellees were not entitled to
reimbursement for the claimed depreciation on the Rose Hill
facility by virtue of Medicaid's "related-party" rule. The basis
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for DMAS's claim was that Lemon, who was one of the operating
principals, was related to some of the owners of the facility, his
three minor children. The period for which DMAS asserted claims
for depreciation reimbursement from the appellees was 1980 and
part of 1981. Because the alleged overpayments for 1980 and 1981
had been made more than four years before the Director's initial
determination, DMAS is barred by our previous holding from seeking
reimbursement from the appellees.
Underlying Cost of Ownership
The Director also ruled that DMAS was entitled to
reimbursement of overpayments to the appellees for the costs of
their lease of Rose Hill Nursing Home. The Director concluded
that the interest expense is limited to the actual expense
incurred by the owner of the facility in servicing the long-term
debt. Consequently, after Lemon paid the loan on the facility in
1986, DMAS was entitled to adjust the cost of ownership expense by
removing the interest expense component in the absence of
supporting documentation that Rose Hill refinanced the debt.
The Director is "authorized to administer [the] state plan
and to . . . expend federal funds therefor in accordance with
applicable federal and state laws and regulations . . . ." Code
§ 32.1-325(B). Under the Nursing Home Payment System (NHPS), DMAS
may only reimburse providers for "those allowable, reasonable cost
items which are acceptable under Medicare principles of
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reimbursement, except as modified herein . . . ." See NHPS,
Introduction (1982). Therefore, when "DMAS considers the
reimbursement of an expense claimed by a provider in a cost
report, it must first apply DMAS regulations that pertain to the
particular expense." Beverly Health & Rehabilitation Servs. Inc.
v. Metcalf, 24 Va. App. 584, 594, 484 S.E.2d 156, 161 (1997).
The applicable regulation provides that "the DMAS allowable
cost of ownership shall be determined by the historical cost of
the facility to the owner of record at the date the lease becomes
effective." 12 V.A.C. § 30-90-280.C (1990) (emphasis added). The
regulation was promulgated in 1990 to clarify the agency's
existing policies concerning reimbursement of the underlying costs
of ownership. Under § C.8 of the 1979 NHPS, the "rent or lease
expenses are limited to the underlying historical depreciation,
interest, and property tax cost" as was determined "at the date
the lease becomes effective."
We find that the Director's denial of interest costs for the
lease after Lemon refinanced the debt in 1986 was not in
accordance with the provision of 12 V.A.C. § 30-90-280.C,
providing that the "allowable cost of ownership shall be
determined by the historical cost . . . at the date the lease
becomes effective." Therefore, the Director's failure to base the
cost of ownership on the historical cost "at the date the lease
[became] effective" was an arbitrary and capricious interpretation
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and application of the regulation. The clear language of the
regulation provides that the lease cost is determined at the time
the lease becomes effective. Even though Lemon refinanced the
loan in 1986, Beverly was still obligated under the terms of the
original lease to pay the fixed amount of the lease as previously
agreed. Accordingly, because the Director disregarded the plain
language of the regulation, he arbitrarily and capriciously
interpreted the regulation when he concluded that DMAS was
entitled to the reimbursement for the excess interest expense.
See Fralin, 18 Va. App. at 701, 447 S.E.2d at 240. We find that
DMAS is not entitled to reimbursement from appellees for the
interest expense in the cost of the lease.
CONCLUSION
In summary, we find that the time limits in Code
§ 32.1-325.1:1(B) are mandatory and apply retroactively to limit
the Director's right to collect overpayments more than four years
old. Therefore, DMAS's claims for reimbursement of recaptured
depreciation for the lease during 1980 and 1981 are barred.
Finally, we hold that the Director arbitrarily and capriciously
applied 12 V.A.C. § 30-90-280.C to conclude that DMAS was entitled
to reimbursement of the interest expense after Lemon refinanced
the debt in 1986, and that under the regulation, the appellees
were entitled to be reimbursed for the historical cost of the
lease. Accordingly, for the reasons stated, we affirm the trial
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court's ruling that the Director is barred from pursuing the
claims for reimbursement for depreciation, and we reverse the
trial court's remand of the lease costs claims and direct the
trial court to enter final judgment for the appellees based on the
provisions of 12 V.A.C. § 30-92-280.C (1990). We remand the
matter to the trial court for entry of final judgment in
accordance with the foregoing opinion.
Affirmed in part,
reversed in part, and
remanded with directions.
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