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Commonwealth v. Saint Joseph Health System, Inc.

Court of Appeals of Kentucky

May 19, 2017

COMMONWEALTH OF KENTUCKY, CABINET FOR HEALTH AND FAMILY SERVICES APPELLANT
v.
SAINT JOSEPH HEALTH SYSTEM, INC. D/B/A SAINT JOSEPH MARTIN; SAINT JOSEPH HEALTH SYSTEM, INC. D/B/A SAINT JOSEPH BEREA; JAMES B. HAGGIN MEMORIAL HOSPITAL, INC.; CARROLL COUNTY MEMORIAL HOSPITAL; WOODFORD HOSPITAL, LLC D/B/A BLUEGRASS COMMUNITY HOSPITAL; COMMUNITY UNITED METHODIST HOSPITAL, INC. D/B/A METHODIST HOSPITAL UNION COUNTY; NICHOLAS COUNTY HOSPITAL CORPORATION; CASEY COUNTY, KENTUCKY D/B/A CASEY COUNTY HOSPITAL; RUSSELL COUNTY, KENTUCKY D/B/A RUSSELL COUNTY HOSPITAL; NEW HORIZONS HEALTH SYSTEMS, INC. D/B/A NEW HORIZONS MEDICAL CENTER; THE MEDICAL CENTER AT FRANKLIN, INC.; SAINT ELIZABETH MEDICAL CENTER, INC. D/B/A SAINT ELIZABETH GRANT; JANE TODD CRAWFORD MEMORIAL HOSPITAL, INC.; APPALACHIAN REGIONAL HEALTHCARE, INC. D/B/A MCDOWELL ARH; BRECKINGRIDGE MEMORIAL HOSPITAL, INC.; LIVINGSTON HOSPITAL & HEALTHCARE SERVICES, INC.; ARH MARY BRECKINGRIDGE HEALTH SERVICES, INC.; APPALACHIAN REGIONAL HEALTHCARE, INC. D/B/A MORGAN COUNTY ARH; BOWLING GREEN - WARREN COUNTY COMMUNITY HOSPITAL CORPORATION D/B/A THE MEDICAL CENTER AT SCOTTSVILLE APPELLEES

         APPEAL FROM FRANKLIN CIRCUIT COURT HONORABLE PHILLIP J. SHEPHERD, JUDGE ACTION NO. 14-CI-01456

          BRIEFS FOR APPELLANT: Catherine York Frankfort, Kentucky.

          BRIEF FOR APPELLEES: Stephen R. Price Louisville, Kentucky.

          BRIEF FOR APPELLEES: Matthew R. Klein Crestview, Kentucky.

          BRIEF FOR APPELLEES: William L. Yocum Kansas City, Missouri.

          BEFORE: KRAMER, CHIEF JUDGE; COMBS AND J. LAMBERT, JUDGES.

          OPINION

          COMBS, JUDGE.

         The Commonwealth of Kentucky, Cabinet for Health and Family Services ("CHFS") (and its included agency, the Department for Medicaid Services ("DMS")) appeals from an order of the Franklin Circuit Court entered August 7, 2015 addressing CHFS's practice of reimbursing Critical Access Hospitals (CAHs)[1] for outpatient laboratory services provided to Medicaid patients at the reduced level designated as the Medicare technical component rate, rather than the full Medicare reimbursement rate of 101% pursuant to KRS[2] 216.380(13). For the following reasons, we affirm.

         I. Factual and Procedural Background.

         CHFS, through DMS, is the state agency tasked with the administration and oversight of Kentucky's Medicaid program. All of the appellees are CAHs that provide Medicaid services.[3] Section 13 of KRS 216.380, which governs CAHs, states as follows:

The Cabinet for Health and Family Services and any insurer or managed care program for Medicaid recipients that contracts with the Department for Medicaid Services for the receipt of Federal Social Security Act Title XIX funds shall provide for reimbursement of services provided to Medicaid recipients in a critical access hospital at rates that are at least equal to those established by the Federal Health Care Financing Administration or Centers for Medicare and Medicaid Services for Medicare reimbursement to a critical access hospital. (Internal footnote omitted).

         In order to effectuate that payment scheme, CHFS has made interim estimated payments to CAHs based on the cost ratios of the previous years. As that year's cost reports became available for the rate year at issue, CHFS would determine the CAH's actual costs, multiply by 1.01, and settle with the CAH for the difference between the interim payments and 101% of the CAH's costs, either settling a deficit payment or recouping any overpayments. However, beginning in 2009, CHFS changed its reimbursement scheme and began making interim payments to CAHs at the rate set by the Medicare technical component rate for outpatient laboratory services at Acute Care Hospitals, which resulted in an underpayment to CAHs based on the 101% reimbursement. However, CHFS no longer made the adjusted payment once the actual cost report became available.

         In 2011, the federal Centers for Medicare and Medicaid Services ("CMS") approved Kentucky State Amendment Plan ("SPA")[4] 08-011, submitted in September 2008, and effective December 5, 2008, formally implementing new outpatient hospital reimbursement methodology which resulted in reimbursement at each fiscal year's end equaling 95% of a facility's total outpatient costs incurred. Section VIII(C)(1) of the SPA states: "[t]he department shall reimburse for outpatient hospital services in a critical access hospital as established in 42 CFR 413.70(b) through (d)." Section VIII(C)(3) continues: "[i]n accordance with 1903(i)(7), Outpatient laboratory services will be paid at the Medicare technical component rate."

         On May 23, 2013, the associate regional administrator of CMS sent a letter to CHFS to "provide technical assistance regarding the Upper Payment Limit (UPL) for clinical diagnostic laboratory test and services performed in the hospital outpatient setting." The letter stated that

[w]ith regard to the clinical diagnostic laboratory tests and services rendered by [CAHs], the payment limitation at section 1903(i)(7) applies and states may not pay more, on a per test basis, than the amount that would be paid under section 1833(h) of the Act. In the event the Medicaid payment for clinical diagnostic laboratory tests at CAHs, on a per-test basis, exceeds the limit implemented via section 1903(i)(7) of the Act, then no federal matching funding for that excess is allowable (and the state would have to return any federal share claimed in excess). If the Medicaid payment is less than that limit, then the state could pay CAHs more to the extent consistent with the approved State Medicaid plan, up to the Section 1903(i)(7) limit. In comparing these payments, it is our understanding that the Medicare payment for clinical diagnostic tests at CAHs is 101% of the CAH's costs for those tests, calculated using Medicare cost accounting principles.

         Each CAH disputed these lower payments by CHFS, and DMS affirmed the original settlement amount in each case. The Division of Administrative Hearings assigned each appeal to various Hearing Officers, but the parties agreed to consolidate the appeals with a single Hearing Officer. The parties agreed to submit briefs on the issue in place of a hearing, and all parties entered into stipulations. The Hearing Officer for this case issued a Recommended Order, finding that both federal law and state law support the 101% reimbursement, but "reluctantly" concluded otherwise, determining that CAHs be reimbursed at the Medicare technical component rate because the "highest deference is due to [CMS's] interpretation of the law which they enforce when the agency is empowered to promulgate regulations." The Recommended Order continued:

This is a reluctant conclusion because the May 23, 2013 letter acknowledges that CMS reimburses CAHs for 101% of their costs for the services in question[] while mandating that DMS not do the same. Unfortunately for Appellants the extent to which the CMS mandate is inconsistent with any governing statute it is only the applicable state statute. CMS' mandate is not manifestly contrary to the federal statutes (based on their interpretation) and if there are any inconsistencies between state and federal law, the state law is preempted.

         Ultimately, the Hearing Officer concluded that the "mandate from CMS that is confirmed in the May 23, 2013 letter and that led to SPA 08-011 and the creation of 907 KAR[[5] 10:015 Section 5 is CMS denying FFP for Section 4 of this regulation and disapproving the provision. Thus, it is null and void."

         Each party timely filed exceptions to the Hearing Officer's Recommended Order. The Secretary of CHFS entered a Final Order in September 2014 affirming CHFS's practice of reimbursing CAHs for outpatient laboratory services provided to Medicaid patients at the reduced level designated by the Medicare technical component rate rather than the 101% Medicare reimbursement for the same laboratory procedures. The Secretary held that with respect to the Federal statutes that

actually apply to Medicaid reimbursement for outpatient clinical laboratory tests . . . there is no conflict with any other provision of federal law. Having no conflict, it is not necessary to rely upon CMS's "interpretation" of the federal law to reach the conclusion that the Federal law requires that all outpatient clinical laboratory tests must be paid at the Medicare-established technical component rate as set out in 907 KAR 10:015 Section 5. . . . Having established that the Federal Medicaid law clearly limits the reimbursement for outpatient clinical laboratory tests, regardless of the category of hospital involved, the only issue remaining is whether the Cabinet's regulation is invalid because it conflicts with KRS 216.380(13). . . . I interpret KRS 216.380(13) as covering outpatient services and 907 KAR 10:015 Section 5, adopted pursuant to KRS 205.520(3), as covering outpatient laboratory services in order to give effect to both statutes and the reimbursement regulation.

         On appeal, the Franklin Circuit Court's Opinion and Order reversed the Final Order of the Secretary, finding that KRS 216.380(13) is clear and unambiguous that the CAHs are entitled to reimbursement for outpatient laboratory services provided to Medicaid recipients at 101% of their costs since the statute provides that CHFS shall pay CAHs rates for Medicaid services at least equal to the rates the CMS pays CAHs for Medicare services. The circuit court was not persuaded that the 2008 approval of the SPA constituted a CMS interpretation that was entitled to deference; rather, the court found that since CHFS does not dispute and has stipulated that CMS pays CAHs 101% of their costs for these outpatient laboratory services for Medicare recipients, CHFS must pay at least that amount for Medicaid recipients in order to be compliant with KRS 216.380(13), Section 1834(g) of the Social Security Act ("SSA"), and 42 U.S.C.[6] § 1395m(g)(1) and 42 C.F.R. [7] § 413.70(b)(7). CHFS now appeals that opinion and order.

         II. Standard of Review.

         KRS 13B.150 sets forth the standard of review for the appeal of an administrative agency decision, stating that the reviewing court is to "be confined to the record, " and that:

(2) The court shall not substitute its judgment for that of the agency as to the weight of the evidence on questions of fact. The court may affirm the final order or it may reverse the final order, in whole or in part, and remand the case for further proceedings if it finds the agency's final order is:
(a) In violation of constitutional or statutory provisions;
(b) In excess of the statutory authority of the agency;
(c) Without support of substantial evidence on the whole record;
(d) Arbitrary, capricious, or characterized by abuse of discretion;
(e) Based on an ex parte communication which substantially prejudiced the rights of any party and likely affected the ...

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