SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
1232
CA 13-02197
PRESENT: SCUDDER, P.J., PERADOTTO, LINDLEY, SCONIERS, AND VALENTINO,
IN THE MATTER OF ADIRONDACK HEALTH-UIHLEIN
LIVING CENTER, ET AL.,
PETITIONERS-PLAINTIFFS-RESPONDENTS,
V MEMORANDUM AND ORDER
NIRAV R. SHAH, M.D., COMMISSIONER OF HEALTH,
STATE OF NEW YORK, ROBERT L. MEGNA, AS DIRECTOR
OF BUDGET, AND ANDREW M. CUOMO, GOVERNOR, STATE
OF NEW YORK, RESPONDENTS-DEFENDANTS-APPELLANTS.
ERIC T. SCHNEIDERMAN, ATTORNEY GENERAL, ALBANY (VICTOR PALADINO OF
COUNSEL), FOR RESPONDENTS-DEFENDANTS-APPELLANTS.
HARTER SECREST & EMERY LLP, ROCHESTER (F. PAUL GREENE OF COUNSEL), FOR
PETITIONERS-PLAINTIFFS-RESPONDENTS.
Appeal, by permission of the Appellate Division of the Supreme
Court in the Fourth Judicial Department, from an order of the Supreme
Court, Monroe County (John J. Ark, J.), entered November 20, 2013 in a
CPLR article 78 proceeding and declaratory judgment action. The
order, insofar as appealed from, granted those parts of the amended
petition seeking to prohibit respondents-defendants from enforcing 10
NYCRR 86-2.40 (m) (10).
It is hereby ORDERED that the order insofar as appealed from is
unanimously reversed on the law without costs and those parts of the
amended petition seeking to prohibit respondents-defendants from
enforcing 10 NYCRR 86-2.40 (m) (10) are dismissed.
Memorandum: Petitioners commenced this CPLR article 78
proceeding seeking to compel respondents to reimburse them for
Medicaid payments owed to them pursuant to 10 NYCRR 86-2.40 (m) (10),
and challenging “the legality and constitutionality” of that
regulation “both facially and as applied” to them. Supreme Court
granted the petition and determined that respondents’ enforcement of
the regulation is “arbitrary and capricious and otherwise unlawful
under both state and federal law.” We granted respondents’
application for leave to appeal from the interlocutory order (see CPLR
5701 [b] [1]; [c]), and we now reverse the order insofar as appealed
from.
We note at the outset that a CPLR article 78 proceeding is not
the proper vehicle for that part of petitioners’ challenge to the
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facial unconstitutionality of the regulation, and we thus convert the
article 78 proceeding to a hybrid article 78 proceeding/declaratory
judgment action (see CPLR 103 [c]; 92-07 Rest. v New York State Liq.
Auth., 80 AD2d 603, 604; see generally Matter of Kovarsky v Housing &
Dev. Admin. of City of N.Y., 31 NY2d 184, 191).
Petitioners-plaintiffs (hereafter, petitioners) are 80
residential health care facilities, as defined in Public Health Law
§ 2801 (3), that participate in the Medicaid program (see 42 USC
§ 1396 et seq.). The Medicaid reimbursement rates for residential
health care facilities are “calculated, in part, on the individual
facility’s ‘case mix,’ which . . . correspond[s] roughly to the
severity of the patients’ illnesses and the intensity of the required
care” (Matter of Jewish Home & Infirmary of Rochester v Commissioner
of N.Y. State Dept. of Health, 84 NY2d 252, 257) and, “as a facility’s
case mix index increases, so does its reimbursement rate” (Matter of
Nazareth Home of the Franciscan Sisters v Novello, 7 NY3d 538, 544,
rearg denied 7 NY3d 922).
In January 2013, the New York State Department of Health (DOH)
adopted a regulation providing that, in the event that a facility
reported an increase in its case mix index (CMI) of greater than five
percent, “the impact of the payment of the Medicaid rate adjustment
attributable to such a change in the reported case mix may be limited
to reflect no more than a five percent change in such reported data,
pending a prepayment audit of such reported . . . data” (10 NYCRR 86-
2.40 [m] [10]; see NY Reg, Jan. 2, 2013, at 16). Respondents-
defendants (hereafter, respondents) concede that, after the regulation
was promulgated, DOH began withholding from petitioners all
reimbursements attributable to any increase in case mix. As limited
by their brief, respondents do not appeal from that part of the order
directing them to pay case mix adjustments up to the five percent
threshold.
We agree with respondents that DOH had statutory authority to
promulgate 10 NYCRR 86-2.40 (m) (10) under Public Health Law § 2808
(2-c) (d) and that the regulation was not “ ‘out of harmony’ with an
applicable statute” (Weiss v City of New York, 95 NY2d 1, 5, quoting
Finger Lakes Racing Assn. v New York State Racing & Wagering Bd., 45
NY2d 471, 480-481). Although section 2808 (2-c) (d) does not
explicitly authorize prepayment audits of residential health care
facilities, “an agency can adopt regulations that go beyond the text
of that legislation, provided that they are not inconsistent with the
statutory language or its underlying purposes” (Matter of General
Elec. Capital Corp. v New York State Div. of Tax Appeals, Tax Appeals
Trib., 2 NY3d 249, 254). Moreover, we reject petitioners’ contention
that DOH usurped the role of the legislature by adopting 10 NYCRR 86-
2.40 (m) (10). DOH has “inherent authority to protect the quality and
value of services rendered by [Medicaid] providers” (Matter of Medicon
Diagnostic Labs. v Perales, 74 NY2d 539, 545) and, therefore, we
conclude that DOH did not “stretch[ ] [the enabling statute] beyond
its constitutionally valid reach” by adopting a regulation that allows
a prepayment audit of Medicaid claims under certain circumstances
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(Boreali v Axelrod, 71 NY2d 1, 9; see generally Ellicott Group, LLC v
State of N.Y. Exec. Dept. Off. of Gen. Servs., 85 AD3d 48, 53-54).
We further agree with respondents that 10 NYCRR 86-2.40 (m) (10)
“has a rational basis and is not unreasonable, arbitrary or
capricious” (Matter of Consolation Nursing Home v Commissioner of N.Y.
State Dept. of Health, 85 NY2d 326, 331). Contrary to petitioners’
contention, DOH is not required to rely upon empirical studies when it
adopts a regulation. “Although documented studies often provide
support for an agency’s rule making, such studies are not the sine que
non of a rational determination” (id. at 332). Thus, “the
commissioner [of DOH] . . . is not confined to factual data alone but
also may apply broader judgmental considerations based upon the
expertise and experience of the agency he [or she] heads” (Matter of
Catholic Med. Ctr. of Brooklyn & Queens v Department of Health of
State of N.Y., 48 NY2d 967, 968-969). Here, DOH adopted 10 NYCRR 86-
2.40 (m) (10) to “[e]nsure the accuracy and integrity of Medicaid
rates that are adjusted for case mix data” (NY Reg, Jan. 2, 2013, at
16), and we conclude that adoption of the regulation was within DOH’s
authority in order to “ ‘assure[] that the funds which have been set
aside for (providing medical services to the needy) will not be
fraudulently diverted into the hands of an untrustworthy provider of
services’ ” (Medicon Diagnostic Labs., 74 NY2d at 545, quoting
Schaubman v Blum, 49 NY2d 375, 379).
Petitioners contend that respondents acted arbitrarily and
capriciously in adopting 10 NYCRR 86-2.40 (m) (10) because regulations
previously adopted by DOH served the same purpose. We reject that
contention. Although there are other regulations concerning audits of
claims for Medicaid reimbursement in other contexts (see 10 NYCRR 86-
2.40 [m] [8]; see also 10 NYCRR 86-2.7), we conclude that they do not
render the prepayment audit provision in the challenged regulation
arbitrary and capricious (see generally Matter of Jennings v New York
State Off. of Mental Health, 90 NY2d 227, 239). Contrary to
petitioners’ further contention, we conclude that the regulation
challenged herein “provides an adequate objective, intelligible
standard for administrative action” (Matter of Big Apple Food Vendors’
Assn. v Street Vendor Review Panel, 90 NY2d 402, 408).
We agree with respondents that petitioners do not have standing
to challenge 10 NYCRR 86-2.40 (m) (10) under federal law on the ground
that it is a material change to the New York State Medicaid Plan.
States participating in the Medicaid program must produce a Medicaid
Plan (see 42 USC § 1396a; Social Services Law § 363-a [1]), and must
“amend [the] plan and submit it for federal approval . . . to reflect
‘[m]aterial changes in State law, organization, or policy, or in the
State’s operation of the Medicaid program’ ” (New Jersey Primary Care
Assn., Inc. v New Jersey Dept. of Human Servs., 722 F3d 527, 538,
quoting 42 CFR 430.12 [c] [1] [ii]). Under federal law, however,
health care providers “lack a private right of action to enforce the
requirement of federal approval of state plan amendments” (New Jersey
Primary Care Assn., Inc., 722 F3d at 539; see generally Community
Health Care Assn. of N.Y. v Shah, 770 F3d 129, 148).
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Petitioners contend that Social Services Law § 363-a confers a
private right of action upon residential health care facilities under
state law. We reject that contention because “[r]ecognition of a
private cause of action in favor of [petitioners] based upon
[respondents’] alleged violation of the statute . . . would not be
consistent with the legislative scheme” (Yates v Genesee County
Hospice Found., 278 AD2d 928, 929, lv denied 96 NY2d 714; see
generally Sheehy v Big Flats Community Day, 73 NY2d 629, 633).
We agree with respondents that 10 NYCRR 86-2.40 (m) (10) does not
violate petitioners’ rights to substantive due process. Even
assuming, arguendo, that petitioners have “a cognizable property
interest” in receiving Medicaid reimbursements prior to an audit
(Bower Assoc. v Town of Pleasant Val., 2 NY3d 617, 627), we conclude
that petitioners failed to establish that “there is absolutely no
reasonable relationship to be perceived between the regulation and the
achievement of a legitimate governmental purpose” (Brightonian Nursing
Home v Daines, 21 NY3d 570, 576). Respondents have a legitimate
governmental purpose of assuring that Medicaid funds “ ‘will not be
fraudulently diverted into the hands of an untrustworthy provider of
services’ ” (Medicon Diagnostic Labs., 74 NY2d at 545, quoting
Schaubman, 49 NY2d at 379), and a regulation requiring a prepayment
audit of certain Medicaid claims is reasonably related to that purpose
(see generally Brightonian Nursing Home, 21 NY3d at 576).
Contrary to petitioners’ further contention, 10 NYCRR 86-
2.40 (m) (10) does not violate their right to procedural due process.
Again, even assuming, arguendo, that petitioners have a
constitutionally protected property interest in receiving Medicaid
reimbursements prior to an audit, we conclude that the regulation
“adequately safeguard[s] the private interests of petitioners, and
minimize[s] the risk of erroneous deprivation while serving the
substantial government interest in safeguarding the integrity of the
Medicaid program” (Medicon Diagnostic Labs., 74 NY2d at 547).
Petitioners contend that 10 NYCRR 86-2.40 (m) (10) violates their
right to equal protection on the ground that there is no rational
basis for distinguishing between facilities reporting an increase in
CMI of greater than five percent from facilities reporting an increase
that falls below that threshold. We reject that contention. As the
proponents of an equal protection claim, petitioners had the burden of
demonstrating that the implementation of a five percent threshold
“lacks a rational basis” (Bay Park Ctr. for Nursing & Rehabilitation,
LLC v Shah, 111 AD3d 1227, 1230; see generally Port Jefferson Health
Care Facility v Wing, 94 NY2d 284, 290). We conclude, however, that
petitioners failed to meet that burden (see Montgomery v Daniels, 38
NY2d 41, 64-65).
Finally, we conclude that respondents did not improperly apply 10
NYCRR 86-2.40 (m) (10) retroactively (see generally Forti v New York
State Ethics Commn., 75 NY2d 596, 608-609).
Entered: February 6, 2015 Frances E. Cafarell
Clerk of the Court