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Commonwealth of Pennsylvania Department of Public Welfare v. U.S.

March 31, 2010

COMMONWEALTH OF PENNSYLVANIA DEPARTMENT OF PUBLIC WELFARE, PLAINTIFF,
v.
U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES, ET AL., DEFENDANTS



(Chief Judge Kane)

MEMORANDUM

Before the Court are cross-motions for summary judgment filed by Plaintiff Commonwealth of Pennsylvania Department of Public Welfare ("Pennsylvania" or "the Commonwealth") and Defendants United States Department of Health and Human Services ("HHS") and Kathleen Sebelius, HHS Secretary.*fn1 Pennsylvania challenges an administrative decision by the HHS Departmental Appeals Board ("DAB") upholding the HHS Secretary's decision to disallow certain costs paid to Pennsylvania by the federal government. In particular, the parties dispute whether a portion of the cost that Pennsylvania incurs in operating community residential facilities for the developmentally disabled is properly included in the cost of providing waiver services, which is reimbursable under Medicaid, or whether all "occupancy costs" for the facilities are barred by the statutory exclusion of "room and board" costs for community residential facilities.

After careful review of the administrative record and consideration of the briefs and oral argument of the parties, together with the applicable law, the Court finds that the DAB's decision that the costs at issue were barred by the "room and board" exclusion was not arbitrary or capricious. Therefore, the Court will affirm the DAB's decision and grant summary judgment in favor of Defendants.

I. BACKGROUND

Medicaid provides "joint federal and state funding of medical care for individuals who cannot afford to pay their own medical costs." Arkansas Dep't of Health and Human Servs. v. Ahlborn, 547 U.S. 268, 275 (2006). It was enacted in 1965 as Title XIX of the Social Security Act, as added, 79 Stat. 343, 42 U.S.C. § 1396 et seq. (2000 ed. and Supp. III). Id.States are not required to participate in Medicaid, yet all do. Id. "The program is a cooperative one; the Federal Government pays between 50% and 83% of the costs the State incurs for patient care, and, in return, the State pays its portion of the costs and complies with certain statutory requirements for making eligibility determinations, collecting and maintaining information, and administering the program." Id. (citing 42 U.S.C. § 1396a); see also Children's Seashore House v. Waldman, 197 F.3d 654, 655-56 (3d Cir. 1999).*fn2 Medicaid is administered by the HHS Secretary, who in turn has delegated her authority to regional Centers for Medicare and Medicaid Services ("CMS"). Ahlborn, 547 U.S. at 275.

Since its inception in 1965, Medicaid has allowed States to receive federal financial participation ("FFP") for the cost of medical assistance provided to eligible individuals in intermediate care facilities for the mentally retarded ("ICF/MRs"). (Doc. No. 22 at 5.) In 1981, Medicaid began providing funding for state-run home and community-based care through a waiver program, which is referred to as the home and community-based services waiver ("HCBS waiver"). (See Doc. No. 26 at 3); Olmstead v. L.C., 527 U.S. 581, 601 (1999). "The waiver program provides Medicaid reimbursement to States for the provision of community-based services to individuals who would otherwise require institutional care, upon a showing that the average annual cost of such services is not more than the annual cost of institutional services." Olmstead, 527 U.S. at 601 n.12 (citing 42 U.S.C. § 1396n(c)).*fn3

The HCBS waiver allows for Medicaid to reimburse a State's "habilitation services" in community residential facilities. Such habilitation services are defined by statute as ones "designed to assist individuals in acquiring, retaining, and improving the self-help, socialization, and adaptive skills necessary to reside successfully in home and community based settings . . . ."

42 U.S.C. § 1396n(c)(5)(A); see also 42 U.S.C. § 1396n(c)(4)(B); 42 C.F.R. § 440.180(b). Although Medicaid allows for habilitation services within residential facilities to be reimbursed, federal reimbursement for the cost of "room and board" has been explicitly precluded. See 42 U.S.C. § 1396n(c)(1); see also H.R. Rep. No. 97-208, at 965-68 (1981) (Conf. Rep.), reprinted in 1981 U.S.C.C.A.N. 1010, 1327-30.

During the period at issue in this case, the Commonwealth had two HCBS waivers in effect which allowed it to receive FFP toward "community habilitation services" for individuals who are developmentally disabled and who otherwise would be eligible for care in an ICF/MR.*fn4 (Doc. No. 22 at 13; Doc. No. 26 at 8-10.) The initial waiver, effective from July 1, 2000, through June 30, 2005, defined such habilitation services consistent with 42 U.S.C. § 1396n(c)(5)(A). (See Doc. No. 26 at 9-11.) The agreement stated that "provider training costs, supervisory costs, purchased personnel costs, and costs of necessary supplies, equipment, and adaptive appliances" were included, yet specifically stated that FFP was not available for the cost of room and board. (Id. at 10-11.) The waiver also included a provision requiring Pennsylvania to make formal requests for any amendment to the waiver.*fn5 In December 2006, Pennsylvania secured a five-year renewal of the waiver on terms similar to the 2000 agreement.

(See DAB Op. at 8-9.)*fn6

As Pennsylvania has explained in its brief, "most residents of the community residential facilities . . . receiv[e] services for the great bulk of their waking hours." (Doc. No. 22 at 14.) The HCBS waiver contemplates such extensive service, as Pennsylvania's waiver agreement states that its habilitation services are to be "provided for 24 hours a day based on the need of the individual receiving services." (Id.) Because habilitation services are offered on-site to individuals, "almost every room in the community residential facility has multiple purposes and uses." (Id. at 15.) For example, "[s]taff use the kitchen not only to prepare food, but also to provide habilitation services to individuals who are learning to become more independent by preparing simple meals and caring for kitchen equipment." (Id. at 15-16.) Likewise, the facility bedrooms and bathrooms are used for resting and bathing, but also as a place for staff to teach daily living activities such as good personal hygiene and grooming. (Id. at 16.)

From July 2001 until the spring of 2006, Pennsylvania did not request Medicaid funding for any facility costs for habilitation services provided to individuals in the community residential facilities. (DAB Op. at 5.) In late 2005, Pennsylvania sought to "recomputate its claims for FFP for its community residential facilities" by including a "portion of occupancy costs associated with provision of [habilitation] services (as opposed to room and board)."*fn7 (Doc. No. 22 at 18.) To that end, Pennsylvania engaged MAXIMUS, a consulting firm which helped to develop a formula to "determin[e] the portion of the occupancy costs that should be allocated to provision of waiver services, as opposed to sleeping, eating, or other activities of daily living." (Id.) Pursuant to the advice from MAXIMUS, . . . Pennsylvania officials chose an allocation method . . . which was based on an estimate that residents of the community facilities were, on average in a typical 24-hour period, sleeping for 8 hours, engaged in "habilitative activities or other waiver activities" for 13 hours, and eating or otherwise engaged in activities of daily living that do not involve receiving services for 3 hours. . . . [A]ccording to Pennsylvania, many of the habilitation services are provided while residents are engaged in activities of daily living, such as bathing, dressing, grooming, preparing food, eating, taking medications, and taking part in other activities. Pennsylvania nevertheless chose to treat most of this time as habilitation services time rather than daily living activities time.

Based on this estimate, Pennsylvania allocated 54.1667% (or 13/24) of most categories of its occupancy costs (including rent, utilities, interest, depreciation, insurance, housekeeping, building repairs and renovations, furnishings and equipment) to "waiver services" or "habilitation services." (DAB Op. at 6-7 (internal citations omitted).)

In early 2006, Pennsylvania informed CMS of the new allocation plan that it had adopted for the facility costs relating to habilitation services in its community residential facilities. (Doc. No. 22 at 20.) In August 2006, Pennsylvania filed its first claim with CMS using the new allocation approach. (Id.) On June 21, 2007, CMS disallowed Pennsylvania's claims for reimbursement for the portion of facility costs. (Id.) In its rejection letter, CMS asserted that the newly allocated claims were for room and board and that Pennsylvania was required to seek an amendment to its HCBS waiver before attempting to reallocate its facility costs. (Id.)

On July 19, 2007, Pennsylvania filed a notice of appeal with the DAB based on CMS's disallowance.*fn8 (Id.) On February 6, 2008, the DAB issued a decision in which it upheld the position taken by CMS. (Doc. No. 22 at 21.) In it, the DAB recognized that "Congress excluded room and board costs from Medicaid reimbursement for HCBS services," and therefore Pennsylvania's attempt to seek reimbursement for a portion of its occupancy costs must fail. (DAB Op. at 2.)

This case appears before the Court as an appeal from the final determination made by the DAB. Pennsylvania filed suit on April 28, 2008, and is seeking declaratory and injunctive relief reversing the decision of the DAB. (Doc. No. 22 at 3.)

II. STANDARD OF REVIEW

This Court's standard of review of Pennsylvania's challenge is governed by the Administrative Procedure Act ("APA"), 5 U.S.C. § 706 (2000). Robert Wood Johnson Univ. Hosp. v. Thompson, 297 F.3d 273, 280 (3d Cir. 2002). Pursuant to the APA, a reviewing court shall set aside agency action that is 'arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.'" Chao v. Roy's Constr., Inc., 517 F.3d 180, 186 (3d Cir. 2008). "The scope of judicial review of agency rulemaking under the APA's 'arbitrary and capricious' standard is 'narrow, and a court is not to substitute its judgment for that of the agency.'" Gardner v. Grandolsky, 585 F.3d 786, 790 (3d Cir. 2009) (citation omitted); see also Albert Einstein Med. Ctr. v. Sebelius, 566 F.3d 368, 373 (3d Cir. 2009). Even where a reviewing court "'may not supply a reasoned basis for the agency's action that the agency itself has not given,' it may nevertheless 'uphold a decision of less than ideal clarity if the agency's path may reasonably be discerned.'" Gardner, 585 F.3d at 790 (citation omitted). This "broad deference is particularly appropriate in contexts that involve a complex and highly technical regulatory program," such as Medicaid. See Albert Einstein Med. Ctr., 566 F.3d at 373 (citation and internal quotation marks omitted). "A court may conclude that a regulation is arbitrary and capricious only if the agency relied on facts other than those intended by Congress, did not consider an important aspect of the issue confronting the agency, provided an explanation for its decision which runs counter to the evidence before the agency, or is entirely implausible." Gardner, 585 F.3d at 790 (citation and internal quotation marks omitted). "Reversal is appropriate only where the administrative action is irrational or not based on relevant factors." NVE, Inc. v. Dep't of Health and Human Servs., 436 F.3d 182, 190 (3d Cir. 2006) (citation omitted).

In giving deference to the DAB's opinion, the Court must follow the rule set forth in Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984). Under Chevron, the appropriate level of deference owed to the HHS Secretary's interpretation of a statute "depends on the clarity of a statute." Commonwealth of Pa., Dep't of Pub. Welfare v. United States Dep't of Health and Human Servs., 928 F.2d 1378, 1383-84 (3d Cir. 1991). Where Congress's intent is clear, "no deference is owed an agency's inconsistent interpretation because both the agency and the reviewing court must 'give effect to the unambiguously expressed intent of Congress.'" Id. at 1384 (quoting Chevron, 467 U.S. at 842-43) (further citations omitted). However, where a statute is ambiguous or is silent on the specific issue, "a reviewing court must uphold the agency's regulation as long as the regulation is reasonable and is based on a permissible interpretation of the statute." Id. (citations omitted); see also Commonwealth of Pa. v. United States, 752 F.2d 795, 798 (3d Cir. 1984) (stating that when statutory language "fairly admits of several interpretations, a reviewing court must uphold the agency's interpretation if it is reasonable, notwithstanding the court's belief that some other policy was preferable").*fn9

III. DISCUSSION

Three separate arguments serve as the basis of Pennsylvania's brief in support of its motion for summary judgment. First, the parties dispute whether the DAB acted in an arbitrary and capricious manner in finding that the facility costs that Pennsylvania sought to add to its allocation plan included "room and board" costs which were non-reimbursable. Second, if the facility costs at issue were not all "room and board" costs, Pennsylvania asserts that the DAB erred in holding that a portion of these occupancy costs could not be appropriately allocated out under its HCBS waiver. Finally, the parties dispute whether ...


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