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decided: July 10, 1987.


Appeal from the Order of the Department of Public Welfare in case of Appeal of: Fair Acres Geriatric Center, et al. dated June 13, 1985.


Gerald Gornish, with him, Jeffrey B. Schwartz, Steven E. Bernstein, and Brenda J. Glaser-Abrams, Wolf, Block, Schorr and Solis-Cohen, for petitioners.

Bruce G. Baron, Assistant Counsel, for respondent.

Howard M. Louik, Assistant County Solicitor, with him, James F. Nowalk, Assistant County Solicitor, and James J. Dodaro, County Solicitor, for Amicus Curiae, Allegheny County Institution District.

Judges Doyle and Palladino, and Senior Judge Barbieri, sitting as a panel of three. Opinion by Judge Palladino.

Author: Palladino

[ 107 Pa. Commw. Page 294]

Fair Acres Geriatric Center, the Delaware County nursing home, along with the county nursing homes of Lehigh, Westmoreland, Chester, Carbon and Mercer Counties (collectively Petitioners), appeal an order of the Department of Public Welfare (DPW). The order denied Petitioners' appeal concerning the amount of their reimbursements under the Pennsylvania Medical Assistance (MA) Program for one or more fiscal years ending December 31, 1978, 1979 and 1980. We affirm.

Audit adjustments were made by the Office of the Auditor General (Auditor General) for the fiscal years in question which significantly reduced the amount Petitioners received in their MA program reimbursements.*fn1

[ 107 Pa. Commw. Page 295]

The adjustments were the inclusion of the costs of services provided by salaried physicians which had been billed under Medicare Part B Program and the offset of the revenue received by Petitioners from the Medicare Part B Program for these services. Petitioners appealed the adjustments to DPW's Office of Hearings and Appeals (OHA). Hearings were held before an OHA hearing officer on October 21 and 27, 1982 and January 13 and February 9, 1983. The hearing officer recommended the appeals be denied; the Director of the OHA denied the appeals on June 13, 1985. Petitioners filed a petition for review with this court on July 13, 1985.

Petitioners are county owned and operated nursing homes. They are certified by DPW as providers of skilled nursing facility (SNF) and intermediate care facility (ICF) services under the Pennsylvania MA Program.*fn2 Prior to October 1, 1978, certified county facilities were reimbursed for the services provided to eligible MA recipients for the full amount of allowable costs, while reimbursements to private certified facilities were subject to a ceiling. In 1977-78 the federal government notified DPW that it could not continue to impose a net operating cost reimbursement ceiling on private facilities unless the county facilities were also made subject to a ceiling.

The county facilities anticipated that the ceilings would have an adverse impact on the amount of reimbursement

[ 107 Pa. Commw. Page 296]

    they would receive. A number of discussions were held with DPW representatives in which an attempt was made to determine if there were any unique support services provided by the county facilities, and not by the private facilities, the costs of which could be "passed through" i.e. not be subject to the ceiling. Petitioners determined that one method of maximizing the amount of reimbursement would be to isolate the costs of services provided by salaried physicians for which Medicare Part B reimbursement was available, bill them to Medicare, and exclude these costs and any revenue received from their "Financial and Statistical Annual Report" (annual report) required to be filed with the Auditor General. The result, assuming the remaining allowable costs were higher than the ceiling, would be that Petitioners would receive the maximum reimbursement allowable under the MA program plus the Medicare Part B reimbursement. (This is termed the "exclusion" method.)

On October 13, 1978, DPW issued regulations implementing the MA net operating cost reimbursement ceilings for county facilities retroactive to October 1, 1978. 8 Pa. B. 2826 (1978). In December 1978, the county facilities requested Glenn Johnson, Director of DPW's Bureau of Medical Assistance, to clarify DPW's policy on Medicare Part B services. On December 22, 1978 Johnson issued a letter which contained the following statement:

[C]clarification has been requested by some Homes [county facilities] on the application of Medicare Part B income for physician services or other ancillary services. As a general rule, the costs related to Medicare Part B services are to be excluded from total costs of the facility. Further technical discussion of this subject will occur at the January 5 meeting.

Appellant's Exhibit 3 (October 21, 1982 hearing).

[ 107 Pa. Commw. Page 297]

Petitioners interpreted this statement to mean the exclusion method would be appropriate. They enrolled as participants in the Medicare Program and used the exclusion method on their annual reports to the Auditor General. In December 1981, the Auditor General issued its audit of Fair Acres 1979 annual report in which the costs of services provided by salaried physicians covered by Medicare Part B were included as allowable costs and the Medicare Part B revenues were deducted from the MA reimbursable costs. (This is termed the "offset" method.) This resulted in Fair Acres being reimbursed less than ...

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