COURT OF APPEALS OF VIRGINIA
Present: Judges Coleman, Elder and Fitzpatrick
Argued at Richmond, Virginia
BEVERLY HEALTH AND REHABILITATION
SERVICES, INC.
OPINION BY
v. Record No. 1757-96-2 JUDGE LARRY G. ELDER
APRIL 22, 1997
ROBERT C. METCALF, DIRECTOR, VIRGINIA
DEPARTMENT OF MEDICAL ASSISTANCE SERVICES
FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND
Theodore J. Markow, Judge
Peter M. Mellette (Jeannie A. Adams; Crews &
Hancock, on briefs), for appellant.
E. Paige Selden, Assistant Attorney General
(James S. Gilmore, III, Attorney General;
William H. Hurd, Deputy Attorney General;
Siran S. Faulders, Senior Assistant Attorney
General, on brief), for appellee.
Beverly Health and Rehabilitation Services, Inc. (appellant)
appeals the decision of the Circuit Court of the City of Richmond
(circuit court) affirming the decision of the Director of the
Virginia Department of Medical Assistance Services (DMAS) denying
appellant's request for reimbursement from the Medicaid program
of certain depreciation and interest expenses. Appellant
contends that DMAS erroneously reversed a hearing officer's
recommendation and that DMAS' interpretation of applicable
regulations was arbitrary and capricious. For the reasons that
follow, we affirm in part, reverse in part, and remand.
I.
BACKGROUND
Appellant is a Delaware corporation that operates nursing
facilities, retirement living centers, home health agencies and
pharmacies throughout the United States. Appellant is also a
provider under the Medicaid program who operates several nursing
facilities in Virginia. DMAS is the state agency authorized to
administer Virginia's Medicaid program.
In the years relevant to this appeal, appellant claimed
reimbursement from DMAS for two types of expenses. The first
claim was for interest expense and depreciation related to four
facilities (REIT facilities) leased to appellant by Nationwide
Health Properties, Inc. (Nationwide). The other claim was for
interest expense arising from a revolving line of credit
(revolving debt) that was initially obtained by appellant at its
corporate level. A portion of the interest expense from the
revolving debt was allocated to each of appellant's facilities in
Virginia, and appellant sought reimbursement from DMAS for these
interest expenses.
Following an audit of appellant's cost reports for the years
relevant to this appeal, DMAS adjusted appellant's reports to
exclude these interest expenses and depreciation as allowable
costs under the Medicaid program. The Director of DMAS' Division
of Cost Settlement and Audit held an informal fact finding
conference and upheld these adjustments. Appellant appealed, and
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a hearing officer appointed by DMAS recommended reversing the
adjustments and allowing the reimbursement of the depreciation
and interest expense sought by appellant. Appellant filed
exceptions, and the Director of DMAS (DMAS director) rejected the
hearing officer's recommendation. He held that DMAS was correct
when it adjusted appellant's cost reports to deny reimbursement
to appellant for the depreciation and interest expenses
associated with the REIT facilities and the interest expense
arising from the revolving debt. Appellant appealed, and the
Circuit Court of the City of Richmond affirmed the decision of
the DMAS director.
II.
THE DMAS DIRECTOR'S REVIEW
OF THE HEARING OFFICER'S WRITTEN RECOMMENDATION
Appellant initially contends that the DMAS director's
decision should be reversed on procedural grounds. It argues
that the DMAS director lacked the power to reject the hearing
officer's recommendation because DMAS did not file timely
exceptions. In the alternative, appellant argues that the DMAS
director did not accord sufficient deference to the hearing
officer's factual findings.
The record establishes that the hearing officer recommended
allowing the costs associated with both the REIT facilities and
the revolving debt and based his recommendation upon the exhibits
and testimony of the parties. The hearing officer did not make
any credibility determinations based on recorded observations of
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the witnesses' demeanor. The DMAS director rejected the hearing
officer's recommendation based on several legal grounds,
including the hearing officer's refusal to qualify a DMAS witness
as an expert, the hearing officer's admission that he did not
review the entire record, his reliance upon informal case
decisions as precedent, and his erroneous application of the
Medicare principles of reimbursement. The DMAS director also
stated that appellant had excepted to the hearing officer's
recommendation while DMAS had failed to file timely exceptions.
Administrative proceedings before DMAS are governed by the
Administrative Process Act (APA), DMAS regulations known as the
"state plan for medical assistance" 1 and applicable federal law.
See Code § 32.1-325.1. Federal regulations require DMAS to:
provide an appeals or exception procedure
that allows individual providers an
opportunity to submit additional evidence and
receive prompt administrative review, with
respect to such issues as the agency
determines appropriate, of payment rates.
42 C.F.R. § 447.253(e). The NHPS satisfies this federal
requirement by providing for two levels of administrative review:
an informal proceeding and a formal hearing. See 12 V.A.C.
§ 30-90-130(III). After DMAS makes an informal decision, the
provider may request a formal hearing. Upon such a request, the
1
The portion of the state plan relevant to the issues in
this case is called the Nursing Home Payment System (NHPS).
Several versions of the NHPS have existed over the years and the
current version is codified at 12 V.A.C. § 30-90-10 et seq.
(1996).
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DMAS director appoints a hearing officer who is authorized to
conduct the formal hearing and to "make a written
recommendation." Id. § 30-90-130(III)(C).
Under the APA, the hearing officer's decision is subject to
agency review in two instances: first, if a party files
"exceptions thereto," Code § 9-6.14:12(D), or second, if:
the agency shall by its procedural
regulations provide for the making of
findings and an initial decision by [a
hearing officer] subject to review and
reconsideration by the agency . . . on its
own motion.
Id. § 9-6.14:12(C). The NHPS authorizes the DMAS director to
broadly review a hearing officer's recommendation. In fact, the
NHPS characterizes the DMAS director's final decision as distinct
from the recommendation of the hearing officer. 12 V.A.C.
§ 30-90-130(III)(E) states that "[t]he director shall notify the
provider of his final decision within 30 business days of the
date of the appointed hearing officer's written recommendation
. . . . " (Emphasis added). Thus, under the NHPS, the
recommendation of a hearing officer is just that -- a
recommendation, and the DMAS director may reexamine all of the
hearing officer's conclusions. Regarding a hearing officer's
factual findings, the DMAS director is required by the APA to
defer to findings in the hearing officer's recommendation that
are "explicitly based on the demeanor of witnesses." Code
§ 9-6.14:12(C).
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We hold that the DMAS director did not exceed his authority
when he reviewed and rejected the hearing officer's
recommendation. Even though DMAS failed to file timely
exceptions, the DMAS director was empowered to review all of the
hearing officer's conclusions based on both the exceptions filed
by appellant and on his own motion. In addition, contrary to
appellant's assertion, the DMAS director is authorized to reject
the factual findings of the hearing officer that are not based on
the hearing officer's express observations of the demeanor of the
witnesses. In this case, the hearing officer did not state in
his recommendation that any of his factual findings were based
upon his observation of the witnesses' demeanor. Thus, the DMAS
director did not exceed his power to review the hearing officer's
recommendation. 2
III.
INTEREST EXPENSE AND DEPRECIATION RELATED TO REIT FACILITIES
Appellant contends that the DMAS director arbitrarily and
capriciously interpreted Medicaid regulations to reach his
conclusion that the interest expense and depreciation related to
2
Appellant also contends that the DMAS director violated
the APA when he failed to rule upon appellant's exceptions to the
hearing officer's written recommendation. However, the substance
and nature of appellant's exceptions were not included in either
the joint appendix or the record received from the circuit court.
Therefore, we are unable to consider this argument on appeal.
See Jenkins v. Winchester Dep't of Social Servs., 12 Va. App.
1178, 1185, 409 S.E.2d 16, 20 (1991) (stating that "[t]he burden
is upon the appellant to provide [this Court] with a record which
substantiates the claim of error").
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the REIT facilities are not allowable costs.
In reviewing decisions by DMAS, an appellate court accords
great deference to both the agency's factual findings and
interpretation of the laws applicable to "the reimbursement due
qualified providers for their reasonable costs incurred while
delivering health care services." Fralin v. Kozlowski, 18 Va.
App. 697, 700-01, 447 S.E.2d 238, 240-41 (1994). This Court will
overturn DMAS' "interpretations of the statutes and regulations
governing Medicaid and Medicare principles of reimbursement . . .
only . . . when found to be arbitrary and capricious." Id. at
701, 447 S.E.2d at 241.
A.
Prior to 1985, appellant leased the REIT facilities from
Kellett Corporation (Kellett). Kellett was not a participant in
the Medicaid program and was not "related" to appellant. In
early September, 1985, Kellett sold the REIT facilities, along
with nineteen other nursing facilities, to appellant. Each REIT
facility had an outstanding mortgage debt attached to it. As
part of the consideration for its purchase, appellant assumed the
mortgages for three of the REIT facilities and paid off the
outstanding debt on the fourth.
On October 25, 1985, Nationwide was incorporated as a real
3
estate investment trust (REIT). At all times relevant to this
3
Nationwide was initially called Beverly Investment
Properties, Inc.
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appeal, appellant owned five percent of Nationwide's issued and
outstanding stock, and the two are "related" for Medicaid
reimbursement purposes. By December 30, 1985, appellant either
paid off or defeased the remaining three mortgages it had assumed
as part of its purchase of the REIT facilities. On December 31,
1985, appellant sold the REIT facilities to Nationwide pursuant
to a "sale/leaseback" transaction. Appellant leased the REIT
facilities from Nationwide during the subsequent fiscal years
relevant to this appeal.
Appellant sought reimbursement from DMAS for the expenses
associated with the REIT facilities. Specifically, appellant
sought reimbursement for depreciation of the facilities on a
"stepped-up" basis equal to the purchase price it paid Kellett
for the REIT facilities. It also sought reimbursement for the
"interest expense" related to the lease payments it made to
Nationwide.
DMAS refused to allow the reimbursement sought by appellant.
Regarding depreciation, DMAS allowed reimbursement to appellant
based on Kellett's basis in the REIT facilities and not
appellant's "stepped-up basis." In upholding this adjustment,
the DMAS director stated that § (A)(5)(b)(9) of the
then-applicable version of the NHPS prohibited appellant from
collecting reimbursement for depreciation on a "stepped-up"
basis. See NHPS § (A)(5)(b)(9) (1982 & Supp. 1984). Section
(A)(5)(b)(9) states:
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Effective October 1, 1984, the valuation of
an asset of a hospital or long term care
facility which has undergone a change of
ownership on or after July 18, 1984, shall be
the lesser of the allowable cost to the owner
of record, or the acquisition cost to the new
owner.
In the case of an asset not in existence as
of July 18, 1984 the valuation of an asset of
a hospital or long-term care facility shall
be the lesser of the first owner of record,
or acquisition cost to the new owner.
In establishing an appropriate allowance for
depreciation . . . the asset basis to be used
for such computations shall be limited to the
valuation above.
(Emphasis added). The DMAS director reasoned that the REIT
facilities were in existence as of July 18, 1984 and, citing
Black's Law Dictionary, held that the plain, meaning of "owner of
record" is "the owner of title at the time of notice." The DMAS
director concluded that appellant's basis in the REIT facilities
for depreciation purposes was limited to Kellett's basis because
Kellett was the owner of record on July 18, 1984 and its basis in
the REIT facilities was less than the acquisition cost to
appellant. Furthermore, the DMAS director held that the
sale/leaseback transaction between appellant and Nationwide did
not change the allowable reimbursement for depreciation. The
DMAS director reasoned that appellant would continue to be
reimbursed for the allowable depreciation that existed prior to
the sale/leaseback because this transaction was between related
parties.
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Regarding the lease-related interest expense, DMAS
disallowed reimbursement to appellant for any interest expense
incurred after the sale of the REIT facilities to Nationwide. In
upholding this adjustment, the DMAS director cited § (c) of
Appendix II in the NHPS, which stated:
Interest - Interest expense will be limited
to actual expense incurred by the owner of
the facility in servicing long-term debt
. . . .
NHPS app. II, § (c) (1982). He reasoned that the only long term
debt serviced by appellant in its acquisition of the REIT
facilities from Kellett was the three mortgages it assumed and
paid off or defeased prior to the sale of these facilities to
Nationwide. Because this long term debt ceased to exist,
appellant no longer incurred any "actual interest expense"
related to long term debt that was allowable under the NHPS.
B.
The DMAS 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 NHPS, DMAS may only reimburse
providers for "those allowable, reasonable cost items which are
acceptable under Medicare principles of reimbursement, except as
modified herein . . . ." NHPS, Introduction (1982). Thus, under
the NHPS, when DMAS considers the reimbursement of an expense
claimed by a provider in a cost report, it must first apply DMAS
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regulations that pertain to the particular expense. If the NHPS
is silent on a particular expense or issue, then DMAS is required
to apply Medicare principles of reimbursement, including those
stated in the Provider Reimbursement Manual. See State Plan
Under Title XIX of the Social Security Act, Attachment
4.19-D(d)(2) (stating that "[t]he determination of allowable
costs will be in accordance with Medicare principles as
established in the Provider Reimbursement Manual . . . except
where otherwise noted in this Plan"). 4
We hold that the DMAS director's denial of appellant's
request to allow depreciation of the REIT facilities on a
"stepped up" basis was based on an arbitrary and capricious
interpretation of the relevant Medicaid regulations.
Specifically, the DMAS director declined to apply federal
regulations defining which facilities were "not in existence" as
of July 18, 1984 for the purposes of determining the allowable
depreciation cost. The DMAS director correctly stated that
§ (A)(5)(b)(9) of the 1982 NHPS applied to the transactions
involving the REIT facilities. However, § (A)(5)(b)(9) is silent
on the issue of which facilities "existed" as of July 18, 1984
4
We have described the Provider Reimbursement Manual (PRM)
as "a guide for intermediaries in applying the Medicare statute
and reimbursement regulations [that] does not have the binding
effect of law or regulation." Fralin, 18 Va. App. at 699 n.2,
447 S.E.2d at 240 n.2. This statement does not describe the
legal effect of the PRM in all cases. In this case, DMAS is
bound by the state plan to apply any relevant provisions of the
PRM when the NHPS is silent on a particular reimbursement issue.
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for purposes of establishing the proper basis of depreciation.
Medicare principles of reimbursement, as stated in Federal
regulations, speak to this issue. 42 C.F.R.
§ 413.134(b)(1)(ii)(B) states that "an asset not in existence as
of July 18, 1984 includes any asset that physically existed, but
was not owned by a hospital or [skilled nursing facility]
participating in the Medicare program as of July 18, 1984."
(Emphasis added).
If the DMAS director had properly applied Medicare
principles of reimbursement as required by the NHPS, he could not
have concluded that appellant's basis of depreciation in the REIT
facilities was limited to Kellett's basis before the facilities
were sold. Although Kellett owned the REIT facilities prior to
July 18, 1984, it did not participate in the Medicare or Medicaid
program. Thus, for the purposes of calculating depreciation
under § (A)(5)(b)(9) of the 1982 NHPS, the REIT facilities were
not in existence as of July 18, 1984. See 42 C.F.R.
§ 413.134(b)(1)(ii)(B). Instead of analyzing the REIT facilities
under the first paragraph of § (A)(5)(b)(9), the DMAS director
should have applied the second paragraph of § (A)(5)(b)(9), which
states:
In the case of an asset not in existence as
of July 18, 1984 the valuation of an asset of
a hospital or long-term care facility shall
be the lesser of the first owner of record,
or acquisition cost to the new owner.
The REIT facilities did not "exist" until they were acquired by
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appellant. Thus, appellant was the first owner of record and its
basis in the REIT facilities for depreciation purposes should
have been its acquisition cost. Because the DMAS director
declined to apply relevant Medicare principles of reimbursement,
he acted arbitrarily and capriciously when he concluded that
appellant was not entitled to reimbursement for depreciation of
the REIT facilities on a "stepped-up" basis.
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C.
We also hold that the DMAS director incorrectly applied
Medicaid and Medicare regulations to the interest expense arising
from appellant's lease payments on the REIT facilities but that
the DMAS director reached the right result for the wrong reason.
"We do not hesitate, in a proper case, where the correct
conclusion has been reached but the wrong reason given, to
sustain the result and assign the right ground." Robbins v.
Grimes, 211 Va. 97, 100, 175 S.E.2d 246, 248 (1970).
Although the DMAS director correctly applied § (A)(5)(b)(9)
of the 1982 NHPS to the depreciation of the REIT facilities, the
DMAS director erroneously failed to determine that this section
applies to any interest expense arising from the sale/leaseback
transaction as well. Section (A)(5)(b)(9) states that:
Reimbursement for rental charges in sales and
leaseback agreements shall be restricted to
the . . . interest . . . as computed above
(cost of ownership).
As previously discussed, the REIT facilities did not exist as of
July 18, 1984, and the second paragraph of § (A)(5)(b)(9) applies
to the calculation of the costs of ownership of these facilities.
This paragraph states:
In the case of an asset not in existence as
of July 18, 1984 the valuation of an asset of
a hospital or long-term care facility shall
be the lesser of the first owner of record,
or the acquisition cost to the new owner.
Interest expense regarding leased facilities is defined elsewhere
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in the NHPS as "actual expense incurred by the owner of the
facility in servicing long-term debt . . . ." NHPS app. II,
§ (c) (1982).
Under these provisions of the NHPS, the DMAS director
correctly disallowed appellant any reimbursement for interest
expense arising from its lease payments on the REIT facilities to
Nationwide. Appellant was the "first owner of record" of the
REIT facilities. The record establishes that, prior to the
sale/leaseback transaction with Nationwide, appellant either paid
off or defeased all of the long term debt it assumed pursuant to
its purchase of the REIT facilities from Kellett. Thus, at the
time of the sale/leaseback transaction, appellant no longer
incurred any interest expense arising from its acquisition of the
REIT facilities. Although the record does not establish the
exact amount of interest expense incurred by Nationwide to
acquire the REIT facilities, we can assume that this amount was
greater than the interest expense incurred by appellant at the
time of the sale/leaseback transaction -- zero. Because the
interest expense of "the first owner of record" (appellant) was
less than the interest expense incurred by the subsequent
purchaser/lessor (Nationwide), the DMAS director did not act
arbitrarily and capriciously when he disallowed appellant
reimbursement of any interest expense arising from this
transaction.
Appellant contends that the NHPS was silent on the issue of
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sale/leaseback transactions and that the DMAS director
arbitrarily ignored applicable Medicare principles of
reimbursement. However, as previously discussed, the NHPS
contains a provision that applies to sale/leaseback transactions.
Thus, the DMAS director was not required to apply any other
Medicare principles of reimbursement. In addition, the only
Medicare principle of reimbursement cited by appellant, PRM
§ 110, does not apply to the transaction between appellant and
Nationwide. Section 110 states that it applies only to
sale/leaseback transactions between a provider and a "nonrelated
purchaser." The record establishes that appellant and Nationwide
were related parties at the time of their transaction. We cannot
say that the DMAS director acted arbitrarily or capriciously when
he declined to apply PRM § 110.
IV.
INTEREST EXPENSE ARISING FROM THE REVOLVING DEBT
Appellant contends that the DMAS director arbitrarily and
capriciously interpreted Medicaid regulations when he denied
reimbursement to appellant for the interest expenses arising from
the portions of the revolving debt allocated to its facilities in
Virginia. We disagree.
A.
The record indicates that on February 18, 1987, appellant
executed a complex, revolving line of credit agreement that had a
$400,000,000 limit. In 1989, appellant borrowed funds from the
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revolving line of credit due to cash flow problems that appellant
was experiencing at many of its facilities across the country.
When it decided to incur this revolving debt, appellant based its
decision on its "total corporate need" and not on the needs of
its individual facilities.
Appellant used its regular accounting practices and
procedures to allocate portions of the interest expense arising
from the revolving debt to each of its Virginia facilities.
Appellant's system of accounting consolidates through monthly
intercompany transfers both its cash accounts and debt accounts
from all of its facilities at the corporate level. After this
consolidation, appellant allocates portions of its cash and debt
accounts to its individual facilities either directly or through
a "home office cost report." Costs, assets, and liabilities
which can be directly identified with a particular facility are
allocated directly, while those that cannot are allocated through
the home office cost report.
In accordance with these accounting procedures, appellant
allocated portions of the interest expense from its revolving
debt to each of its Virginia facilities on a monthly basis in the
years relevant to this appeal. The amount allocated to each
facility was approximate and based on the sum of each facility's
estimated annual supply inventory and the actual amount of fixed
assets purchased by that facility from January, 1988 through the
current month. This sum was multiplied by one percent to obtain
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the amount of interest expense allocated to each facility.
Appellant allocated portions of the revolving debt to its
Virginia facilities without assessing each facility's need for
working capital. Moreover, due to its corporate accounting
procedures, appellant admitted that it was unable to determine
whether or not its Virginia facilities had excess working capital
at the time it allocated the revolving debt.
Appellant sought reimbursement from DMAS for the interest
expense arising from the revolving debt that it allocated to each
of its Virginia facilities. DMAS adjusted appellant's cost
reports to disallow this interest expense. In upholding this
adjustment, the DMAS director cited PRM § 202.1, which states
that interest expense is reimbursable if it is necessary for the
operation or maintenance of a provider's facilities. He then
relied upon PRM § 202.2 and 42 C.F.R. § 413.153 for the
proposition that interest expense is necessary if incurred to
satisfy a "financial need and for a purpose reasonably related to
patient care." Citing PRM § 202.2, the DMAS director also stated
that interest expense is not necessary if the debt from which it
arises created excess working capital for the provider.
The DMAS director then stated that neither the NHPS nor
federal regulations dictate the procedure for calculating a
provider's excess working capital for the purpose of determining
the provider's need to borrow funds. He then held that:
cash flow is an adequate measure of excess
working capital. A nursing facility with
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sufficient cash flow does not need to borrow
funds to pay for its working capital needs.
Regarding the method for calculating cash flow, the DMAS director
held that the calculation should not rely on generally accepted
accounting procedures (GAAP) and should instead "compare [the
provider's] total revenues with its Medicaid allowable expenses."
DMAS had introduced into evidence a report of the cash flow in
appellant's Virginia facilities based on this method. The report
showed that appellant's Virginia facilities had an aggregate
positive cash flow of several million dollars during the years
relevant to this appeal. Relying on this report, the DMAS
director held that appellant's Virginia facilities had excess
working capital at the time appellant allocated the revolving
debt to them, which rendered the revolving debt unnecessary.
Because the revolving debt was unnecessary, the DMAS director
held that any interest expense arising from it was not an
allowable cost.
B.
We hold that the DMAS director's interpretation of Medicaid
and Medicare regulations pertaining to the reimbursement of
interest expense arising from the revolving debt was not
arbitrary and capricious. The 1986 NHPS, which applies to the
interest expense on the revolving debt, provides little guidance
on reimbursement for loans that provide working capital to a
facility. Appendix I of the NHPS contains a list of "allowable
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expenses" that includes interest expense other than that incurred
to purchase a building or equipment. See NHPS app. I,
§ 2.1(D)(19) (1986). The NHPS also states that in order for this
interest expense to be "allowable," it must be, among other
things, necessary. NHPS app. I, § 1.1(A) (1986). However, the
NHPS does not indicate which interest is "necessary" and which is
not. Because the NHPS is silent, the DMAS director was required
to apply Medicare principles of reimbursement.
Medicare principles of reimbursement support the DMAS
director's conclusion that interest expense is unnecessary, and
therefore not allowable, if it is incurred by a provider to
finance a debt that creates "excess" working capital at the
facility claiming it as an expense. First, the federal
regulation cited by the DMAS director permits reimbursement to a
provider for "necessary and proper interest on both current and
capital indebtedness." 42 C.F.R. § 413.153(a)(1). This federal
regulation also states that interest expense is "necessary" only
if it is "[i]ncurred on a loan made to satisfy a financial need
of the provider. Loans that result in excess funds . . . would
not be considered necessary." Id. at § 413.153(b)(2). PRM
§ 202.2, also cited by the DMAS director, states that "when
borrowed funds create excess working capital, interest expense on
such borrowed funds is not an allowable cost."
The only aspect of the DMAS director's interpretation that
is not supported by the relevant authorities on Medicaid
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reimbursement is the method he adopted for measuring excess
working capital at a provider's facility. Both state and federal
regulations and the PRM provide no guidance on this issue. The
DMAS director held that whether or not a provider's facility has
excess working capital should be determined by calculating its
cash flow during the relevant cost reporting period.
Furthermore, the DMAS director held that the measurement of cash
flow should not follow GAAP but should instead be calculated by
subtracting a provider's allowable expenses under the Medicaid
program from its total revenues. The DMAS director reasoned that
this method prevents a provider from shifting interest expenses
incurred in the care of non-Medicaid patients to the Medicaid
program. He explained that this method of calculating cash flow
is superior to the GAAP method because it establishes whether the
borrowing by the provider was necessary to enable the provider to
care for its patients who are Medicaid beneficiaries.
We conclude that the DMAS director's method for calculating
excess working capital was not arbitrary and capricious because
it is consistent with general Medicare principles of
reimbursement. Medicare principles state that one of the
purposes of methods to determine reimbursable costs is to
segregate costs incurred to treat program beneficiaries from
costs incurred to treat patients not covered by the program. See
42 C.F.R. § 413.9(b)(1).
The determination of reasonable cost of
services must be based on the cost related to
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the care of Medicare beneficiaries.
Reasonable cost includes all necessary and
proper expenses incurred in furnishing
services . . . . However, if the provider's
operating costs include amounts not related
to patient care . . . such amounts will not
be allowable . . . .
Id. at § 413.9(c)(3). The DMAS director's method for calculating
excess working capital furthers this purpose of the Medicare
principles of reimbursement and is thus not arbitrary and
capricious. In light of DMAS' recognized expertise in
determining the reimbursement due to providers under the Medicaid
program, we will not substitute our own judgment for that of
DMAS. See Fralin, 18 Va. App. at 701, 447 S.E.2d at 240-41. In
addition, the DMAS director's holding that the revolving debt
allocated by appellant to its Virginia facilities was not
"necessary" because these facilities had excess working capital
is supported by credible evidence in the record.
For the foregoing reasons, we affirm in part and reverse in
part the circuit court's affirmance of the DMAS director's
decision. We remand this case to the circuit court for further
proceedings consistent with this opinion.
Affirmed in part, reversed in part,
and remanded.
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