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NORTHWOOD NURSING AND CONVALESCENT HOME v. COMMONWEALTH PENNSYLVANIA (12/27/89)

decided: December 27, 1989.

NORTHWOOD NURSING AND CONVALESCENT HOME, INC., APPELLANT,
v.
COMMONWEALTH OF PENNSYLVANIA, DEPARTMENT OF PUBLIC WELFARE, APPELLEE



Appeal from the Order of Commonwealth Court of Pennsylvania dated October 2, 1987, at No. 1315 C.D. 1986, affirming the Order of the Department of Public Welfare dated April 10, 1986 in File Nos. 23-83-138 and 23-83-355. Nix, C.j., and Larsen, Flaherty, McDermott, Zappala and Papadakos, JJ.

Author: Flaherty

[ 523 Pa. Page 485]

OPINION OF THE COURT

This is an appeal from the order of Commonwealth Court, 10 Pa. Commw. 40, 531 A.2d 873, which affirmed an order of the Department of Public Welfare (DPW) involving a question of cost accounting for skilled nursing care facilities under the Pennsylvania Medical Assistance Program (Medicaid). The appellant argues that DPW incorrectly interpreted the regulations and guidelines governing cost accounting and erroneously attributed to appellant a proportional share of the interest income of its parent corporation, thus reducing appellant's reimbursable interest expense. We granted allocatur to review what appears to be a lack of uniformity in similar cases previously decided by Commonwealth Court.

Appellant, Northwood Nursing and Convalescent Home, Inc. (Northwood), is a skilled nursing care facility qualified as a care provider under Medicaid. Northwood is a wholly owned subsidiary of Nursecare Health Centers, Inc. (Nursecare), a home office under the medical assistance program which owns and operates Northwood and another nursing home in New Jersey.

Pennsylvania's medical assistance plan*fn1 is coordinated with, and partially funded by, the federal medical assistance program under Title XIX of the Social Security Act, 42 U.S.C. ยง 1396 et seq. The plan provides for the reimbursement of skilled nursing care providers on a cost reimbursement basis. Federal*fn2 and state*fn3 manuals provide the regulations which govern the program. Where the two manuals

[ 523 Pa. Page 486]

    differ, the provisions of the state manual govern the program. 10 Pa.Bulletin 3107 (1980), 55 Pa.Code ยง 1181.65(d)(1).

The federal manual provides detailed accounting and reimbursement rules for complex organizations. Those rules apply to organizations in which a provider is owned or controlled by a home office or a related party. They are designed to apply whether the separate parts of the organization are separately incorporated or not. The manual provides for a separate cost accounting from each provider. It also provides rules requiring a provider to account for certain transactions by a home office which may properly be allocated to the provider. The state manual is far less detailed in its treatment of cost accounting for complex organizations.

In a routine audit of expense reports, the DPW disallowed Northwood's claimed interest expenses of $15,010 for 1981 and of $14,257 for 1982. The DPW ruled that those expenses must be set off against Northwood's proportional share of Nursecare's net interest income.*fn4 In both years, Northwood's proportional share of Nursecare's interest income exceeded Northwood's interest expense. Northwood appealed those rulings to the Office of Hearings and Appeals. The hearing examiner found the DPW rulings to be proper; the Office of Hearings and Appeals adopted the hearing examiner's report. On appeal, Commonwealth Court affirmed.

Northwood argues that Commonwealth Court erred in affirming the order of the DPW, claiming that neither the federal manual nor the state manual calls for the set-off of home office interest income against the allowable interest expenses of care providers as a general rule. Northwood

[ 523 Pa. Page 487]

    contends that the prior decisions of Commonwealth Court indicate that no set-off should apply in a case like this one.

Only the federal manual dealt with the allocation of home office interest income to the care providers run by the home office. Section ...


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