in the design of the program as the source of the right to create this policy. DPW admits that the plaintiffs do lose money but emphasizes that the skilled nursing facilities provide extraordinary levels of care, a service for which the Medicaid program does desire to provide, and suggests that the facilities are losing money because of inefficient operations. South Hills, which even if classified as operating a hospital-based skilled nursing facility would lose money, is said by DPW to be an example of this inefficiency.
This Court is unpersuaded by these arguments.
It is not at all clear from the 73 Reg. or the 78 Reg. that any policy of cost reduction was ever the motivation behind the establishment of the hospital-based skilled nursing facility categories. The suggestion that "hospital-based" in the 73 Reg. implicitly contained a collocation requirement is absurd even if DPW's assertion that the meaning of the word, hospital, has undergone some recent evolution is correct. To now suggest that hospital-based could only, and clearly did, refer to the physical proximity of the skilled nursing facility to an acute care facility is to ask far too much of the English language. In designing and operating skilled nursing facilities, the plaintiffs reasonably and rationally interpreted hospital-based to mean hospital-affiliated and to refer to a skilled nursing facility that had the resources of an acute care facility at its immediate disposal. This relationship, envisioned by the plaintiffs, provides a new alternative on the continuum of the levels of health care services with attendant cost savings being generated by the provision of more appropriate care for a class of persons needing more care than non-hospital-based skilled nursing facilities could provide but less than that available at acute care institutions. This interpretation, shared by all the plaintiffs, individually, also appears from DPW documents, and through the testimony of Dr. Cutt, a former DPW employee, and others to have also been the prior interpretation of this regulation by DPW. These facts satisfy this Court that the 73 Reg. never has, and still does not, contain any implicit collocation requirement.
The 78 Reg. is also said to have embodied an implicit collocation requirement as part of the conversion requirement. The argument proceeds that to convert from acute care beds to skilled nursing beds, the acute care facility would of necessity be adjacent to the remainder of the acute care facility. The flaw in this proposed interpretation is readily visible with reference to the experiences of both South Hills and Forbes. South Hills and Forbes built entirely new acute care facilities and converted the former acute care plant to a skilled nursing facility. These two examples show the meaningful interpretation that the plaintiffs understood to be the subject of the 78 Reg. These interpretations also appear to have been the understanding of DPW, prior to the beginning of the instant litigation as DPW did not assert a collocation requirement until Forbes submitted its application. For these reasons, this Court finds that the 78 Reg. does not, and never did, contain an implicit collocation requirement.
Thus, at least until the publication of the 80 Reg. no collocation requirement can be said to have existed. For this reason, it would have been improper to deny reimbursement prior to the stated effective date of the 80 Reg.
The 80 Reg. explicitly does require that a skilled nursing facility be collocated with its affiliated acute care facility in order to be eligible for reimbursement as a hospital-based skilled nursing facility. However before the change proposed by the 80 Reg. could be effective approval would be needed from the Secretary of Health and Human Services (hereinafter HHS or HEW).
Recently the appropriate scope of HHS review was the subject of federal appellate review in Alabama Nursing Home Ass'n v. Harris, 617 F.2d 388 (5th Cir. 1980). There the Court elaborated upon the obligation of HHS.
Section 1396a(a)(13)(E) obligated HEW to approve and verify the cost-finding methods utilized in a state's reimbursement plan. However, Congress clearly intended that HEW's obligation to approve and verify extended beyond the cost-finding methods so as to accompany the state's proposed rate-setting methodology.