Argued: December 9, 2013
BEFORE: HONORABLE MARY HANNAH LEAVITT, Judge HONORABLE P. KEVIN BROBSON, Judge HONORABLE ROCHELLE S. FRIEDMAN, Senior Judge
ROCHELLE S. FRIEDMAN, Senior Judge
Allegheny Valley School (AVS) appeals from the April 17, 2013, final order of the Secretary of the Department of Public Welfare (DPW), which upheld the Bureau of Hearing and Appeals' (BHA) denial of AVS's administrative appeal. We affirm.
AVS is a non-profit facility that provides residential care, habilitation, and treatment to more than 900 children and adults with intellectual and behavioral health disabilities (commonly referred to as "intermediate care facility services for persons with intellectual disabilities" or "ICF/ID"). Non-state-operated ICF/IDs, such as AVS, receive payment from DPW in accordance with DPW's regulations. In 2008, 82% of AVS's total revenue came from the Pennsylvania Medical Assistance Program and 12% came from county programs.
On May 30, 2008, NHS Human Services acquired AVS. Before the acquisition, AVS's Board of Directors (Board) had authorized the transfer of money held in a funded depreciation account to a deferred compensation plan created for AVS's chief executive officer (CEO), who had been with AVS since 1960. The Board's intent was to provide the CEO with a retirement benefit comparable to that of CEOs of similar non-profit health care organizations. A national compensation consulting firm, the Hay Group, developed the deferred compensation plan. According to the Hay Group's findings, the inclusion of the deferred compensation plan as part of the CEO's compensation package placed him near the 50th percentile of similarly situated CEOs.
In order to fund the CEO's deferred compensation plan, in May 2008, AVS transferred all of the money held in its funded depreciation account, totaling $3, 402, 670, to the deferred compensation plan and closed the depreciation account. Of that total, $905, 806 represented investment income that had been earned on the account. The total value of the CEO's deferred compensation plan, accrued leave payout, and severance package was approximately $3, 648, 000.
DPW's Bureau of Financial Operations (BFO) conducted an audit of the deferred compensation plan and issued a report on May 19, 2010. While BFO acknowledged AVS's right to establish the deferred compensation plan, as well as the plan's reasonableness, BFO recommended that the interest income earned on the funded depreciation account be subject to offset in accordance with section 226.4.B of the Medicare Provider Reimbursement Manual (HIM-15). BFO rejected AVS's proposal to place the full amount of the investment income, plus interest, into a restricted capital development account because that is not expressly provided for in the regulations.
On August 26, 2010, DPW's Office of Developmental Programs issued a decision incorporating BFO's audit report and notified AVS that the amount of investment income in the funded depreciation account at closure—$905, 806—must be used to reduce AVS's allowable interest expense.
AVS timely appealed to BHA. BHA held an administrative hearing and issued an adjudication on October 4, 2012. BHA found that AVS's withdrawal of all of the money from its funded depreciation account, including $905, 806 in investment income, to fund its CEO's retirement package did not fall within any of the exceptions to the investment income offset requirement in section 226.4.B of HIM-15. Therefore, BHA held that the investment income must be offset from AVS's allowable interest expense. BHA further held that nothing in HIM-15 or other applicable laws permits AVS to avoid the offset requirement by making a subsequent deposit into another restricted account. By final order dated April 17, 2013, the Secretary of DPW affirmed BHA's decision. AVS timely appealed from that decision.
On appeal, AVS asserts that DPW misinterpreted and misapplied the applicable regulations and acted arbitrarily and capriciously in refusing to allow AVS to cure the error relating to its use of restricted investment income. We disagree.
AVS concedes that it used the money from its funded depreciation account for a purpose not recognized by HIM-15. AVS claims, however, that it should be permitted to "cure" its non-conforming use by placing the money into a restricted capital account. AVS argues that allowing the transfer to a restricted capital account would not cause DPW any demonstrable harm. While that may be true, we conclude that DPW properly disallowed the transfer. Nothing in HIM-15 or other applicable regulations permits a provider to avoid the investment income offset requirement of section 226.4.B of HIM-15 by making a subsequent deposit into another restricted account. Section 226.4.B's language is clear and directly on point.
Next, AVS asserts that HIM-15 is neither relevant nor controlling in this case because Chapter 6211 of DPW's regulations authorizes the transfer of investment income into a restricted capital account. Specifically, AVS claims that DPW's regulations at 55 Pa. Code §§6211.81(h) and 6211.85(b) afford ICF/ID providers flexibility in establishing and maintaining restricted accounts and using earned investment income.
Contrary to AVS's assertion, HIM-15 does, in fact, govern this case. Section 6211.79(q) of DPW's regulations states that "[t]o qualify for treatment as a funded depreciation account, the funds shall be clearly designated in the provider's records as funded depreciation accounts and shall be maintained in accordance with the provisions of HIM-15." 55 Pa. Code §6211.79(q) (emphasis added). Here, AVS demonstrated that the funds at issue were specifically ...