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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. State, Dept. of Health & Social Services v. North Star Hospital (7/20/2012) sp-6696
Notice: This opinion is subject to correction before publication in the PACIFIC REPORTER .
Readers are requested to bring errors to the attention of the Clerk of the Appellate Courts,
303 K Street, Anchorage, Alaska 99501, phone (907) 264-0608, fax (907) 264-0878, email
corrections@appellate.courts.state.ak.us.
THE SUPREME COURT OF THE STATE OF ALASKA
STATE OF ALASKA, )
DEPARTMENT OF HEALTH & ) Supreme Court No. S-14074
SOCIAL SERVICES, )
) Superior Court No. 3AN-09-07396 CI
Appellant, )
) O P I N I O N
v. )
) No. 6696 - July 20, 2012
NORTH STAR HOSPITAL, )
)
Appellee. )
)
Appeal from the Superior Court of the State of Alaska, Third
Judicial District, Anchorage, Michael L. Wolverton, Judge.
Appearances: Thomas A. Dosik, Assistant Attorney General,
Anchorage, and John J. Burns, Attorney General, Juneau, for
Appellant. Stephen D. Rose, Garvey Schubert Barer, Seattle,
Washington, for Appellee.
Before: Carpeneti, Chief Justice, Fabe, Winfree, and
Stowers, Justices. [Christen, Justice, not participating.]
FABE, Justice.
I. INTRODUCTION
The Office of Rate Review, a division of the State Department of Health
and Social Services (DHSS), set a Medicaid payment rate for North Star Hospital based
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on a 2005 home office cost report that did not reflect a substantial increase in costs
incurred by North Star in 2006. While making its determination, the Office of Rate
Review had access to an unaudited version of a 2006 home office cost report that
reflected these increased costs. The audited version of the 2006 home office cost report
was delayed through no fault of either party.
The Office of Rate Review refused to grant North Star's request for an
interim rate pending the audit of the 2006 report or to reconsider the rate once it received
the audited 2006 report. In response, North Star administratively challenged the Office
of Rate Review's rate determination. The DHSS Commissioner concluded that the
Office of Rate Review's refusal to consider data from the unaudited 2006 report was
proper and that the Office of Rate Review was not required to grant North Star a
temporary rate preceding completion of the audit of the 2006 report. The Commissioner
also concluded that DHSS did not have jurisdiction to determine whether 7 Alaska
Administrative Code (AAC) 150.170(b)(12), which establishes which home office costs
are to be considered, was in conflict with AS 47.07.070, which requires that the rate be
based upon reasonable costs. North Star appealed the decision to the superior court and
the superior court reversed, concluding that because the audited 2006 home office cost
statement was overdue at no fault of North Star, it was error for the Office of Rate
Review to refuse to grant North Star's request for a temporary rate in order to consider
the audited version of the 2006 report. We affirm the superior court's decision.
II. FACTS AND PROCEEDINGS
A. Facts
At least once every four years, the Office of Rate Review must determine
prospective Medicaid base payment rates in compliance with the methodology and
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criteria established in 7 AAC 150.160.1 On December 19, 2007, the Office of Rate
Review held an informal public hearing to aid in its determination of several hospitals'
base rates for fiscal years 2008-2011. Medicaid providers are entitled to reimbursement
based on this base rate, regardless of the actual cost incurred in subsequent years.
1 7 AAC 150.160(a) (2012) provides:
The department will use the following methodology and
criteria in reviewing and establishing prospective payment
rates for the Medicaid program:
(1) the department will consider the following with the
relative importance of each criterion being a matter of
department discretion:
(A) whether the costs are related to patient care and
are attributable to the Medicaid program;
(B) whether the payment rate is reasonably related to
costs;
(2) the department will set annual rates established for the
facility's fiscal year;
(3) base years may be changed to more current years and
may be subject to audit; the department may determine the
timing for a re-basing under this paragraph and whether and
when to conduct an audit;
(4) for all facilities, except facilities with rate agreements
established under 7 AAC 150.190, the department
(A) will perform a re-basing for the first fiscal year
beginning after notification to the facilities that a re-
basing will be done;
(B) will perform a re-basing no less than every four
years; and
(C) may perform a re-basing sooner than every four
years.
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Consequently, the base rates set by the Office of Rate Review affect up to four years of
Medicaid payments.
One component of the prospective base rate calculation is the home office
cost2 of the hospital provider. 7 AAC 150.170(b)(12) provides:
[A]llowable home office costs may not exceed the most
recent Medicare-audited Medicare home office cost statement
available in the department's files 60 days before the
beginning of a re-based prospective rate year; if the
Medicare-audited Medicare home office cost statement is not
from the same year as the facility's base year, the costs will
be inflated to the facility's base year using the methodology
described in 7 AAC 150.150.
At the time of the hearing, the fiscal year 2005 audited home office cost
report for North Star Hospital was on file 60 days before the beginning of the re-basing
year. But before the hearing, North Star submitted to the Office of Rate Review an
unaudited fiscal year 2006 home office cost report that reflected a substantial - almost
100% - increase in its home office costs. The audited version of the 2006 report was
unavailable because, despite North Star's timely submission of the 2006 report to the
federal auditor, the federal auditor was late in completing the audited version of that
home office cost report.
In a letter to the Office of Rate Review on December 17, 2007, North Star
objected to the payment rate based on the 2005 home office cost report. North Star
argued that the base rate did not comply with AS 47.07.070(b)(1), which requires that
when "determining the rates of payment for health facilities for a fiscal year, the
department shall . . . set rates for facilities that are based on . . . reasonable costs related
2 Home office costs are the costs attributable to the central headquarters of
Medicaid providers with multiple facilities.
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to patient care."3 North Star further argued that it "seems patently unfair to allow huge
swings in the calculations upon which rates are set to be determined by the speed with
which a fiscal intermediary completes its audit." North Star requested that either the
"known 2006 home office costs be allowed, or the rate setting . . . be delayed until the
2006 audited home office cost is available."
Under 7 AAC 150.030(b), the Office of Rate Review may establish
temporary prospective rates at its discretion.4 At the December 19 hearing, North Star
requested a temporary rate pending the final determination. The Office of Rate Review
denied North Star's request.
At the same December 19 hearing, the base rates for Providence Alaska
Medical Center and Providence Kodiak Island Medical Center were reviewed. Prior to
the meeting, the Office of Rate Review had given each of these two facilities desk
reviews which recommended a base rate.5 Because 7 AAC 150.200(b)(3) states that a
3 AS 47.07.070(b) states:
In determining the rates of payment for health facilities for a
fiscal year, the department shall, within the limit of
appropriations made by the legislature for the department's
programs under this chapter and under AS 47.25.120 -
47.25.300 for that fiscal year, including anticipated available
federal revenue for that fiscal year, set rates for facilities that
are based on (1) reasonable costs related to patient care; and
(2) audit and inspection results and reports, when the audit or
inspection is conducted under AS 47.07.074.
4 7 AAC 150.030(b) provides: "The department may establish temporary
prospective payment rates. The final rate approved by the department supersedes the
temporary rate, and payments will be adjusted in accordance with the final rate."
5 7 AAC 150.200 (i)(2) defines desk review as: "[T]he department's review
that is conducted without the auditor visiting the facility being desk-reviewed for the
(continued...)
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6
facility has at least 40 days to respond to the desk review and because Providence
Alaska Medical Center and Providence Kodiak Island Medical Center received their desk
reviews on dates leaving less than 40 days to respond to their reviews, both Providence
facilities requested temporary rates so they could adequately respond to their desk
reviews. These requests were granted. The final Medicaid rate for Providence Alaska
Medical Center was issued on March 17, 2008. The final Medicaid rate for Providence
Kodiak Island Medical Center was issued on March 28, 2008.
On December 28, 2007, North Star was informed that the Office of Rate
Review had set its base year rate, effective January 2008, at $562.12 "per patient day"
using the audited 2005 home office cost report already on file. On January 22, 2008,
North Star again requested that the Office of Rate Review use the unaudited 2006 home
office cost report instead of the 2005 home office cost report or that it delay its decision
until the audited 2006 home office cost report was returned by the fiscal intermediary.
On February 13, 2008, the Office of Rate Review refused both of North
Star's requests. On March 13, 2008, North Star received the federal audit of the 2006
home office cost report. North Star sent the audited report to the Office of Rate Review
that same day, and the audited numbers were virtually identical to the home office costs
5(...continued)
purpose of conducting tests or the initial phase of a field audit."
6 7 AAC 150.200(b)(3) provides:
[A] facility may file with the department a response to the
department's field audit or desk review report no more than
40 days after the date the department issues the report; the
department may make additional related adjustments if the
facility makes objections to the department's adjustments; the
department will provide to the facility a description of any
additional adjustments[.]
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found in the unaudited 2006 home office cost report. Reliance on the audited 2006 home
office cost report, rather than the 2005 home office cost report, would have resulted in
an increased payment to North Star of $30.19 per patient day.
B. Proceedings
North Star appealed the Office of Rate Review's decision to the
Commissioner of the Department of Health and Social Services pursuant to
AS 44.62.540.7 Larry Pederson was appointed as the hearing officer for DHSS. North
Star sought to revoke the imposed rate and require the Office of Rate Review to consider
the 2006 home office cost report. The Office of Rate Review urged that the
Commissioner rule as a matter of law that the rate was correct. On April 16, 2009, the
hearing officer issued a proposed decision that upheld the Office of Rate Review's
imposed Medicaid base rate at $562.12. On April 21, 2009, the Commissioner adopted
the proposed decision as DHSS's final administrative action on the matter.
North Star appealed this decision to the superior court under
AS 44.62.560.8 The superior court reversed the Commissioner's decision, concluding
that the Office of Rate Review erred by refusing to grant North Star's request for a
temporary rate until the audited 2006 home cost report was returned by the federal
auditor. The superior court observed that the Providence Medical Centers had been
7 AS 44.62.540(a) provides in relevant part: "The agency may order a
reconsideration of all or part of the case on its own motion or on petition of a party. To
be considered by the agency, a petition for reconsideration must be filed with the agency
within 15 days after delivery or mailing of the decision. The power to order a
reconsideration expires 30 days after the delivery or mailing of a decision to the
respondent."
8 AS 44.62.560(a) provides in relevant part: "Judicial review by the superior
court of a final administrative order may be had by filing a notice of appeal in accordance
with the applicable rules of court governing appeals in civil matters."
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granted temporary rates in order to have time to respond to overdue state agency reports.
Similarly, the superior court reasoned, North Star requested a temporary rate "while they
awaited an overdue report from a federal agency contractor."
The superior court further reasoned that DHSS "committed error by
refusing to set the Medicaid payment rates based on reasonable costs related to patient
care, thereby setting North Star's Medicaid payment rate too low." The superior court
noted that state and federal regulations also require the agency to follow Alaska's State
Medicaid Plan,9 which provides that "[f]acilities have the opportunity to provide
additional information on significant changes that would impact the rates."
The superior court further noted that "although [DHSS] argues that they
followed their regulation to the 'letter,' they did not do so in regard to [the Providence
9 See AS 47.07.040, which provides:
The department shall prepare a state plan in accordance with
the provisions of 42 U.S.C. 1396-1396p (Title XIX, Social
Security Act, Medical Assistance) and submit it for approval
to the United States Department of Health and Human
Services. The plan shall designate that the Department of
Health and Social Services is the single state agency to
administer this plan. The department shall act for the state in
any negotiations relative to the submission and approval of
the plan. The department may make those arrangements or
regulatory changes, not inconsistent with law, as may be
required under federal law to obtain and retain approval of
the United States Department of Health and Human Services
to secure for the state the optimum federal payment under the
provisions of 42 U.S.C. 1396-1396p (Title XIX, Social
Security Act, Medical Assistance).
See also 42 C.F.R. § 447.253(i) (2012): "The Medicaid agency must pay for inpatient
hospital and long term care services using rates determined in accordance with methods
and standards specified in an approved State plan."
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Medical Centers]" when they allowed the centers to submit additional information long
after DHSS's internal deadlines had passed. The superior court concluded that since
"being overdue [was] no fault of North Star," the audited 2006 report should have been
considered and that "[b]y allowing such supplemental information to be submitted, the
department would have been able to determine the most up-to-date assessment of the
reasonable costs related to patient care." The superior court remanded to the Office of
Rate Review with instructions to use North Star's audited 2006 home office cost report
to set North Star's base rate.
DHSS appeals.
III. STANDARD OF REVIEW
When the superior court acts as an intermediate court of appeal, "we
independently review the merits of the underlying administrative decision."10 When
reviewing an agency decision, we have "recognized four principal standards of
review."11 The first is the " 'substantial evidence' test" used for questions of fact.12 The
second is the " 'reasonable basis' test" used for questions of law involving agency
expertise.13 Third is the " 'substitution of judgment' test" used for questions of law
10 Usibelli Coal Mine, Inc. v. State, Dep't of Natural Res., 921 P.2d 1134,
1141 (Alaska 1996).
11 Handley v. State, Dep't of Revenue , 838 P.2d 1231, 1233 (Alaska 1992)
(quoting Jager v. State , 537 P.2d 1100, 1107 n.23 (Alaska 1975)).
12 Id.
13 Id.
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where no expertise is involved.14 Finally, the " 'reasonable and not arbitrary' test" is
used for review of administrative regulations.15
IV. DISCUSSION
In State of Alaska, Department of Health & Social Services v. Valley
Hospital Association, Inc. , we addressed a similar question: whether DHSS's rate-
setting for Medicaid reimbursement was arbitrary and capricious because it did not
reflect the most recent cost data.16 There, DHSS had established the Medicaid
reimbursement rate based on data that was not current, applying a newly adopted rule
that "in practical effect precluded DHSS's consideration of up-to-date cost data, which
would otherwise entitle Valley to a higher reimbursement rate."17 Valley Hospital had
filed an earlier Medicaid cost report, submitted as an interim cost report, which lacked
certain current data due to its medical management computer software's lack of
capacity.18 Historically the inaccuracy of the interim cost report had not affected the
annual rate determination because Valley Hospital would later provide to DHSS a more
accurate printout of its actual Medicaid-eligible billings.19 Because DHSS changed its
regulation, so that its rate determination "would endure for four, rather than one, years,"
it determined that the interim report with less current data was the only data it would
14 Id.
15 Id.
16 116 P.3d 580, 584-85 (Alaska 2005).
17 Id. at 581.
18 Id. at 582.
19 Id.
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consider, even though more accurate data was available.20 DHSS faulted Valley Hospital
for filing an inaccurate Medicaid cost report, although DHSS made "no claim that the
rate it set [was] in fact accurate, or superior in integrity to a rate established by accurate
data."21
We held that DHSS acted arbitrarily and capriciously in setting the
Medicaid reimbursement rate for Valley Hospital because "most importantly, at the time
it calculated Valley's reimbursement rate, DHSS's Medicaid staff appeared to have
known that there was a significant discrepancy between Valley's [submitted] log data
and the [more accurate billings] report, and that using the log data would result in a lower
reimbursement rate."22 We took note of "some authority suggesting that adherence to
a valid regulation can be illegal when there are unusual circumstances that make such
adherence highly unreasonable."23 We also recognized authority, relied on by the
superior court in that case, "that an agency [may act] arbitrarily and capriciously in
refusing to correct an error in a facility's reimbursement data, even though the correction
was apparently prohibited by the applicable regulations."24 Because we were persuaded
that Valley Hospital had "suffered a substantial injustice, offset by no compelling
20 Id. at 582.
21 Id. at 583.
22
Id. at 587.
23 Id. at 586.
24 Id. (citing Beverly Enters. v. Miss. Div. of Medicaid , 808 So. 2d 939, 942-
43 (Miss. 2002)).
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justification," we held that DHSS acted improperly in calculating the hospital's Medicaid
reimbursement rate.25
DHSS argues that in the present case there are "good reasons to prefer
audited data" and to "use a statement available before the new rate year begins." DHSS
explains that an audited report is superior to an unaudited report, that DHSS cannot be
responsible for auditing reports, and that DHSS staff needs at least 60 days to calculate
rates. All of these assertions may be true. But regulations expressly permit the Office
of Rate Review to grant a temporary rate, and DHSS concedes that any subsequent
discrepancy between the temporary rate and the final rate will be adjusted, allowing for
reimbursement of the overpayment or underpayment.26 Thus, the Office of Rate Review
could have granted a temporary rate and then adjusted the final rate based upon the
audited 2006 home office cost report when it was returned by the fiscal intermediary in
March.
Moreover, using the audited 2006 home office cost report would allow
DHSS to comply with AS 47.07.070(b)'s requirement that the department "set rates for
facilities that are based on (1) reasonable costs related to patient care; and (2) audit and
25 Id. at 587.
26 DHSS qualifies its concession by asserting that rerunning billings under a
newly established permanent rate is "a resource-intensive process that creates
administrative and fiscal burdens." It also argues that "[i]f the provider has not properly
budgeted [for the possibility of underpayment], it may cause serious problems to the
provider" and "where the state underpays under a temporary rate, the department may
have to seek additional funding from the legislature to make up a shortfall." But these
reasons are insufficient to justify setting a rate, based on outdated data, which does not
accurately reflect the reasonable costs related to patient care. Moreover, at the same time
the Office of Rate Review denied North Star's request for a temporary rate, it granted
temporary rates to Providence Alaska Medical Center and Providence Kodiak Island
Medical Center, indicating that the administrative burdens are not insurmountable.
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inspection results and reports, when the audit or inspection is conducted under
AS 47.07.074." DHSS argues that it should not be required to conduct its own internal
audit of the unaudited 2006 home office cost report, but that is not what North Star is
suggesting. At the time the Office of Rate Review set North Star's rate, North Star had
submitted its 2006 report to the federal auditor, fully expecting it to be returned in time
for the rate review. The federal auditor delayed North Star's receipt of the audited
report. Approving a temporary rate would have allowed time for receipt of the audited
2006 report and allowed the final rate to be set to reflect the hospital's "reasonable
costs," as required by AS 47.07.070(b).
DHSS further notes that compliance with 7 AAC 150.170(b)(12)'s
requirement that it use the data available 60 days before the rate year begins provides
DHSS staff the time needed to calculate the rates for facilities. This, DHSS contends,
allows the "prospective rate system" to work. In City of Cordova v. Medicaid Rate
Commission, Department of Health & Social Services, we recognized that a prospective
rate setting system was designed to save costs.27 Facilities are paid at predetermined
rates established every four years, predicated upon a base year that "provides an
incentive for facilities to minimize their costs because a facility providing a service at a
cost less than the pre-determined rate is permitted to keep the difference . . . , while a
facility providing the service at a cost greater than the pre-determined amount suffers a
loss in the amount of the difference."28 DHSS argues that a strict interpretation of the
rule will preserve the integrity of the prospective system and ensure that rates are kept
low because if "a facility were able to constantly adjust its rates based on any costs that
27 789 P.2d 346, 348 (Alaska 1990).
28 Id.
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it might incur during the course of a rate year, there would be little incentive for that
facility to operate in an efficient manner."
We understand that 7 AAC 150.170(b)(12)'s 60-day requirement is part of
this prospective rate regime. But allowing the four-year prospective rate to be set based
on the hospital's more recent 2006 cost data does not, as DHSS claims, undermine the
purpose of the prospective rate system. DHSS has the discretion to grant temporary rates
under 7 AAC 150.030(b), and in fact it granted temporary rates to both of the Providence
Medical Centers, adjusting their final rates based on updated data in March 2008, the
same month that the federal auditor completed North Star's audited 2006 home office
cost report. And facilities still have an incentive to operate efficiently while under a
temporary rate structure because it is uncontested that any discrepancy between the
temporary rate and the permanent rate will be reimbursed to the damaged party.
Additionally, there is no reason to believe that applying the temporary rate
in this case would create an exception that would devour the 60-day rule. Here, North
Star had done everything necessary to provide the Office of Rate Review with the most
up-to-date report, with the expectation that the federal auditor would complete the report
in a timely fashion. North Star's conduct cannot be faulted because the failure to
produce the audited 2006 home cost report on time was not something that North Star
could control.
Finally, North Star is correct in its argument that AS 47.07.070 requires that
the rate be based upon "reasonable costs related to patient care" and that the Alaska State
Medicaid Plan allows for an adjustment of rates when "significant changes . . . would
impact the rates." The 2005 home office cost statement states North Star's costs were
$613,056. The more recent 2006 home office cost statement states North Star's home
office costs were a significantly higher $1,214,888. DHSS acknowledges that reliance
on the 2006 audited report is "advantageous" to North Star because it would result in a
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higher reimbursement to North Star, which North Star estimates totals "hundreds of
thousands of dollars." Such a discrepancy is by no means insignificant. We conclude
there is no compelling reason to prefer the audited 2005 cost report to the audited 2006
report.
In summary, the present case and Valley Hospital are similar in a most
important respect: At the time DHSS calculated both hospitals' reimbursement rates,
DHSS's Medicaid staff appeared to have known that there was a significant discrepancy
between the most current data available and the outdated data it relied on, and that using
outdated data "would result in a lower reimbursement rate."29 In this case, it was
unreasonable for the Office of Rate Review to rely upon the 2005 home office cost report
when North Star had submitted the more recent 2006 home office cost report, the audit
of which had been delayed through no fault of North Star, and when an interim rate
could have been set pending receipt of the audited 2006 report. Thus, DHSS abused its
discretion when failing to consider the audited 2006 home office cost report.
V. CONCLUSION
For these reasons, we AFFIRM the superior court's decision reversing
DHSS's decision.
29 Valley Hosp., 116 P.3d at 587.
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