SC Administrative Law Court Decisions

STATEMENT OF THE CASE

This matter is before the Administrative Law Judge Division pursuant to the appeal of Bayview Nursing Center, Inc. ("Bayview") from a decision of the South Carolina Department of Health and Human Services ("DHHS") disallowing Medicaid reimbursement of certain provider expenses. DHHS filed a motion to dismiss Bayview's appeal for lack of jurisdiction.

A hearing was conducted on January 5, 1999 at the Administrative Law Judge Division in Columbia, South Carolina, at which time the parties presented oral arguments. For the reasons stated herein, the motion to dismiss is denied and the decision of DHHS is affirmed.

BACKGROUND

Bayview is a licensed nursing home in Beaufort, South Carolina. It has contracted with DHHS, as the State Medicaid agency, to provide long-term care services to Medicaid recipients in South Carolina under the Medicaid program. The Medicaid program is a joint venture between the states and the federal government to provide medical assistance to individuals meeting certain financial and other criteria. The states furnish the primary administrative oversight for Medicaid, and each state has a degree of flexibility in designing a program that can best meet the needs of its residents. Long-term care providers are reimbursed on a reasonable cost basis for all items of expense which they must incur to meet the definition of nursing facility services under federal

regulations. Providers are required to submit uniform cost reports for auditing by DHHS and the State Auditor's Office ("SAO").

On September 22, 1997, the SAO issued reports on its audit of Bayview's cost reports for the periods ending September 30, 1992, September 30, 1993 and September 30, 1994. In these reports, the SAO made adjustments disallowing certain costs reported by Bayview. These costs included interest expenses incurred on the working capital portion of a loan taken out by Bayview in 1988 or 1989 ("the 1989 loan"). The total loan amount was approximately $3,000,000 and the proceeds were apportioned among the refinancing of a mortgage, working capital, the purchase of treasury stock, and investment funds.

When the SAO previously audited Bayview's cost report for the 1991 reporting period, it determined that the borrowing for working capital was not necessary due to the availability of funds which could be used to eliminate the need for borrowing for working capital. These funds were in the form of an outstanding loan to Bayview's sole shareholder ("shareholder receivables") and investment funds. (Record on Appeal, Petitioner's Exhibit 13). Bayview did not appeal that determination. During the 1997 audit, DHHS determined that because the working capital portion of the loan had already been deemed unnecessary in a prior audit and no new working capital borrowings occurred in the 1992, 1993 and 1994 reporting periods, no interest on working capital debt was reimbursable.

Bayview requested a contested case hearing before the appeals division of DHHS on the disallowance of working capital interest expenses for the 1992, 1993, and 1994 reporting periods. After the DHHS hearing officer upheld the disallowance, Bayview filed this appeal with the Administrative Law Judge Division.

Did DHHS properly disallow reimbursement of working capital interest expenses for the 1992, 1993 and 1994 cost reporting periods due to unnecessary borrowing?

The provisions of the South Carolina Administrative Procedures Act ("APA") govern an appeal from a final administrative decision. Lark v. Bi-Lo. Inc., 276 S.C. 130, 276 S.E.2d 304 (1981). Under the APA, the Administrative Law Judge may reverse or modify the decision if substantial rights of the appellant have been prejudiced because the findings, inferences, conclusions or decisions are:

(a) in violation of constitutional or statutory provisions;

(b) in excess of the statutory authority of the agency;

(c) made upon unlawful procedure;

(d) affected by other error of law;

(e) clearly erroneous in view of the reliable, probative and substantial evidence on the whole record; or

(f) arbitrary or capricious or characterized by abuse of discretion or clearly unwarranted exercise of discretion.

S.C. Code Ann. § 1-23-380(A)(6) and (B) (Supp. 1998).

Substantial evidence is that evidence which, in considering the record as a whole, would allow reasonable minds to reach the conclusion that the administrative agency reached. E.g., Jennings v. Chambers Development Co., Op. No. 2877 (S.C.Ct.App. filed August 10, 1998) (Shealy Adv.Sh. # 28 at 23). This tribunal may not substitute its judgment for that of the administrative agency as to the weight of the evidence on questions of fact. Lark v. Bi-Lo, Inc., 276 S.C. 130, 276 S.E.2d 304 (1981). The possibility of drawing two inconsistent conclusions from the evidence does not prevent an administrative agency's finding from being supported by substantial evidence. Id. Where there is a conflict in the evidence, the administrative agency's findings of fact are conclusive. Id.; see also Harbin v. Owens-Corning Fiberglas, 316 S.C. 423, 450 S.E.2d 112 (Ct. App. 1994) (existence of any conflicting opinions between doctors is a matter left to the administrative agency).

The burden is on the appellant to show convincingly that the Board's order is without evidentiary support or is arbitrary or capricious as a matter of law. See Hamm v. Public Service Commission of South Carolina, 310 S.C. 13, 425 S.E.2d 28 (1992); Hamm v. American Tel. & Tel. Co., 302 S.C. 210, 394 S.E.2d 842 (1990).

Motion to Dismiss

DHHS moves to dismiss Bayview's appeal for lack of jurisdiction. DHHS asserts that Bayview's Notice of Intent to Appeal is not specific enough in its allegation of error. I disagree.

To invoke the jurisdiction of the Administrative Law Judge Division in an appeal of an agency decision, a notice of appeal including a general statement of the grounds for appeal as provided in S.C. Code Ann. § 1-23-380(A)(6) (Supp. 1998) must be filed within thirty days of the receipt of the decision being appealed. ALJD Rule 33; see also S.C. Code Ann. § 1-23-380(B) (Supp. 1998)(in cases involving appellate jurisdiction of the Administrative Law Judge Division, petition for review must be filed within thirty days after the final decision of the agency).⁽¹⁾

The failure to do so is fatal to the appeal, since the APA does not allow jurisdiction to vest in the absence of a sufficient notice of appeal. See Pringle v. Builders Transport, 298 S.C. 494, 381 S.E.2d 731, 732 (1989), citing Smith v. South Carolina Dept. of Social Services, 284 S.C. 469, 327 S.E.2d 348 (1985).

A petition for ... review pursuant to the Administrative Procedures Act must direct the court's attention to the abuse allegedly committed below, including a distinct and specific statement of the rulings of which the appellant complains. . . . [The reviewing court] lacks jurisdiction of the appeal if the notice is insufficient.

Pringle, 381 S.E.2d at 732 (1989).

Bayview's Notice of Intent to Appeal states the ruling of which it complains (failure to allow interest expense) and it lists four of the six general grounds for reversal listed in S.C. Code Ann. § 1-23-380(A)(6) (Supp. 1998). I find that Bayview's Notice of Intent to Appeal complies with ALJD Rule 33(B), which requires merely a general statement of the grounds of appeal as set forth in S.C. Code Ann. § 1-23-380(A)(6) (Supp. 1998). The Notice of Intent to Appeal also complies with case law interpreting the Administrative Procedures Act. Therefore, the Motion to Dismiss is denied.

Bayview requests this tribunal to require DHHS to pay its attorney's fees and costs incurred in responding to the Motion to Dismiss. I find that the Motion to Dismiss was not so clearly erroneous as to rise to the level of bad faith. Therefore, attorney's fees and costs on the motion are denied.

Interest as an Allowable Cost

In determining costs for which a provider may be reimbursed under the Medicaid program, DHHS follows the requirements of the State Medicaid Plan ("Plan"), which customizes federal Medicaid policies and rules to meet the particular needs of South Carolina citizens. Section F-1 of the Plan defines the meaning of "allowable costs." The term includes all items of expense which providers must incur in order to meet the definition of nursing facility services, as detailed in applicable federal regulations, and to comply with state regulations on health standards. Section F-1 also provides that allowable costs are determined in accordance with applicable federal regulations and the Provider Reimbursement Manual ("HCFA Pub. 15-1"), except those provisions which are modified by the State Plan. It is undisputed that all provisions in HCFA Pub.15-1 which are applicable to the issues in this appeal have not been modified by the State Plan.

Under HCFA Pub. 15-1 § 2100, all payments to providers must be (1) based on the reasonable cost of services covered under federal law; and (2) related to patient care. "Reasonable cost" includes all necessary and proper costs incurred in rendering the services. Section 2102.1 provides that it is the intent of the program that providers are reimbursed the actual costs of providing high quality care, regardless of how widely the costs may vary from provider to provider, except where a particular institution's costs are found to be substantially out of line with similar institutions in the same area. Implicit in the intention that actual costs be paid to the extent they are reasonable is the expectation that the provider seeks to minimize its costs and that its actual costs do not exceed what a prudent and cost conscious buyer pays for a given item or service. If costs are determined to exceed the level that such buyers incur, in the absence of clear evidence that the higher costs were unavoidable, the excess costs are not reimbursable under the program.

Costs "related to patient care" include all necessary and proper costs which are appropriate and helpful in developing and maintaining the operation of patient care facilities and activities. HCFA Pub. 15-1 § 2102.2. Further, intermediaries may employ various means for detecting situations in which costs seem excessive. HCFA Pub. 15-1 § 2103(B).

Interest on both current and capital indebtedness that is necessary and proper for the operation, maintenance, or acquisition of provider facilities is an allowable cost. HCFA Pub. 15-1 §§ 200 and 202.1. To be considered necessary, the interest must be: (1) incurred on a loan that is made to satisfy a financial need; (2) for a purpose related to patient care; and (3) incurred on a loan that is reduced by investment income. HCFA Pub. 15-1 § 202.2. If a borrowing or a portion of a borrowing is considered unnecessary, the interest expense on the borrowing, or the unnecessary portion of the borrowing, is not an allowable cost. Id. Patient care funds should be available for the provider's patient care purposes, enabling it to avoid interest expense attributable to unnecessary borrowing. Id. When a provider diverts patient care related funds to other uses, there is an impact on any subsequent borrowing. Id. Funds may be diverted in many ways with the most common being by transferring, making loans, or investing. Id.

When borrowed funds create excess working capital, interest expense on such borrowed funds is not an allowable cost. HCFA Pub. 15-1 § 202.2(A). The burden of proof is on the provider to show that there is a financial need for the borrowing and that the borrowing does not result in excess working capital. Id. If a provider transfers funds generated from patient care activities, or any funds that cannot be documented as funds not generated from patient care activities, to an organization related to the provider, the funds transferred are considered available to the provider. Id. If such funds could have been used to eliminate a borrowing or to result in a lesser borrowing, a portion of the borrowing equivalent to the amount transferred is considered unnecessary. Id. Interest on that portion of the loan is not allowable. Id.

Loan History

Bayview's working capital interest expenses for the cost reporting periods 1992-1994 were disallowed due to the unappealed finding, during the 1991 SAO audit, that characterized the underlying debt as unnecessary.⁽²⁾ At the end of the September 30, 1991 reporting period, the balance of the working capital portion of the loan was $244,644, the balance of the "investment funds" portion of the loan was $191,100, and the balance of an outstanding loan given to Bayview's sole shareholder was $354,216.⁽³⁾ During the 1992 reporting period, the 1989 loan was refinanced. The refinancing included the borrowing of additional funds for the construction of expansions to the facility. Additionally, during this cost reporting period, $116,758 of the loan proceeds previously allocated to investment funds was reallocated to working capital, increasing the reported balance on working capital debt in Bayview's 1992 cost report.⁽⁴⁾ No additional funds, however, were actually borrowed for working capital.

The balance of shareholder loans at the end of reporting period 1992 was $136,378, which included $74,793 from borrowed funds. This represented a decrease of approximately $225,000 from the prior year's balance. Bayview declared a $225,000 dividend to its shareholder which was directly transferred to decrease the balance of the shareholder loan. The reported balance on working capital debt decreased in both the 1993 and 1994 cost reports. There were no new borrowings for working capital in these reporting periods. During the cost reporting period ending September 30, 1993, Bayview distributed $83,000 in dividends to its shareholder. Of this amount, $33,000 was used to decrease the balance of shareholder receivables. During the cost reporting period ending September 30, 1994, Bayview distributed $250,000 in dividends to its shareholder.

Disallowance of working capital interest expenses

Bayview argues that the disallowance of interest expenses for 1992 through 1994 was not supported by the audit working papers. There is no merit to this argument. All working papers taken together support the disallowance of working capital interest expenses for the 1992-1994 reporting periods. The working papers generated for the 1997 audit reference prior reports and working papers as sources. (Record on Appeal, Petitioner's Exhibit 8). This is consistent with HCFA Pub. 13 § 4112-4.a4, which allows for cross-referencing to other working papers as a source of information and includes in the definition of "working papers" memoranda, analyses, abstracts of provider documents and commentaries obtained by the auditor. This supports the view that the "audit work papers," for purposes of HCFA Pub. 13 § 4112.5, properly encompass all working papers and planning memoranda for prior audits indicating the nature of the 1989 loan as unnecessary.

Timing of Financial Need Analysis

Bayview argues that the SAO and DHHS should have examined the relationship between working capital debt and shareholder loans for each separate cost reporting period to determine the debt's necessity instead of viewing this relationship only at the time of borrowing. Bayview reasons that reimbursement of working capital interest expense is determined by the availability of funds at the time of the cost reporting period under audit review regardless of the non-allowable nature of the debt when originally incurred. DHHS argues that the only appropriate and logical time to determine the character of the debt as necessary or unnecessary is at the time of borrowing. I agree.

Whether a provider has a financial need for borrowing can only be determined at the time of borrowing. If the available funds had in fact been used to eliminate the borrowing, as they should have been, there would be no loan balance on which to incur interest in subsequent years. This analysis is consistent with holdings of the Provider Reimbursement Review Board. See Little Company of Mary Hospital v. Blue Cross, Medicare and Medicaid Guide (CCH) ¶ 45,739 (P.R.R.B. October 21, 1997), 1997 WL 671334 (a financial need for the incurrence of debt must be demonstrated at the time the loan was actually incurred); cf. Bethesda Lutheran Medical Center v. Blue Cross, 1996 WL 860648 (P.R.R.B.) (when new debt refinances old debt, the new debt takes on the character, either necessary or unnecessary, of the old refinanced debt); Bethesda Lutheran Medical Center v. Blue Cross, 1994 WL 928192 (P.R.R.B.) (since the intermediary accepted 1980, 1982, and 1984 borrowings as necessary, and allowed the interest expense as reimbursable costs when it audited those years, then the interest claimed on the provider's 1988 cost report, for refinancing the prior years' debt, is allowable).

After a provider's borrowing has been deemed unnecessary, if the provider has a true financial need for a working capital loan in subsequent years, it can be satisfied by a new borrowing, which would trigger a re-examination of the relationship between working capital debt and funds deemed available to the provider.

Refinancing

When new debt refinances old debt, the new debt takes on the character, either necessary or unnecessary, of the old refinanced debt. Bethesda Lutheran Medical Center v. Blue Cross, 1996 WL 860648 (P.R.R.B. April 4, 1996). SAO, however, still has a responsibility to investigate the purpose and the allocation of any proceeds from additional borrowings in a refinancing arrangement, to determine if there is a "new borrowing" for purposes of examining financial need. Therefore, the balances for working capital debt and sources of available funds, such as investments, shareholder loans or transfers to other related entities, should be examined in each separate cost reporting period to determine if any new borrowings have occurred and the financial need for any new borrowings.

Bayview argues that its circumstances are special because the 1989 loan was a multi-year loan, in which certain amounts are to be designated for working capital for each cost reporting year; the full amount of proceeds were issued in year one and a portion is to be allocated as working capital in each following year.⁽⁵⁾ Bayview, however, also concedes that the allocation does not constitute a new loan each year, but is merely a designation of what is used for working capital. The SAO reasoned that even if the allocation of already-borrowed funds, previously allocated to investment funds, to working capital in subsequent years could be considered a "new borrowing," the reporting periods in dispute revealed excess shareholder dividends that could have eliminated the need for such an allocation.

I agree that the dividend distributions were available to eliminate the need for any increase in working capital debt for the cost reporting periods in question. Bayview argues that the shareholder is entitled to distributions and that he is entitled to use the distribution for any purpose, including paying back a loan from the provider. While this may be true, when a provider is a participant in the Medicaid program and has access to funds that it chooses to distribute to its shareholders, those funds must be considered available to the provider for purposes of determining the necessity of a borrowing, even if they are used to reduce the amount of shareholder receivables. While there is nothing legally wrong with the provider continuing to incur interest expense on a loan for working capital despite the availability of internal funds for this purpose, the provider cannot claim that it is necessary to do so. Cf. Hampton Nursing Center v. State Health and Human Services Finance Comm'n, 303 S.C. 143, 399 S.E.2d 434, 438 (Ct. App. 1990) (upholding the imputation of interest to the provider for the amount it could have earned on its interest-free loan to shareholders).

Curing

If funds are available to the provider at the time of borrowing that would eliminate the need for the borrowing, the provider's financial circumstances in subsequent cost reporting periods cannot undo or "cure" the character of the borrowing, unless the available funds were in a funded depreciation account, representing funds set aside for a purpose relating to patient care. This is known as the "spend-down" principle. See Rockford Memorial Hospital v. Aetna Life Insurance Co., Medicare & Medicaid Guide (CCH) ¶ 40,823 (P.R.R.B. September 28, 1992), quoting 56 Fed. Reg. 43,421 (1991) ("'Spenddown is a process whereby we permit providers to cure borrowing that we found to be unnecessary because of available funded depreciation by using those funded depreciation funds for a proper purpose.'") (emphasis added). HCFA policy to allow curing of an unnecessary borrowing where the available funds were in a funded depreciation account is a recognition that proper financial planning for patient-related capital expenditures may require maintaining a balance in that account. Id.; see also Mercy Hospital v. Blue Cross, Medicare & Medicaid Guide (CCH) ¶ 30,130 (P.R.R.B. Sept. 6, 1979). The premise for the spend-down principle is that funded depreciation funds previously available to the provider become unavailable once they are spent for patient care purposes, thereby curing the prior characterization of a borrowing as "unnecessary."

Bayview argues that the reduction of shareholder receivables in this case is analogous to the spend-down of funds in a funded depreciation account. A shareholder receivable account, however, does not represent funds set aside for a purpose related to patient care. Further, after the transfer of funds to the shareholder, which remain "available" for purposes of determining financial need, nothing can be done to change the character of those funds to "unavailable."

DHHS expresses the view that it is not normal for a facility to borrow working capital every year. This view, however, is inconsistent with the view expressed by HCFA that a borrowing for working capital is usually in the form of a short-term loan. See HCFA Pub. 15-1 § 202.1 ("Interest on current indebtedness is the cost incurred for funds borrowed for a relatively short term, usually for 1 year or less. Current borrowing is usually for purposes such as working capital for normal operating expenses."). DHHS concedes that if a provider did borrow working capital every year, then it would examine the interest expenses every year. DHHS argues that in Bayview's case, the balance of working capital debt was attributable to an allocation from a large loan instead of a new loan.

Based on the foregoing, I find that the substantial evidence in the record supports the final administrative determination of DHHS, and that no substantial rights of the appellant have been prejudiced due to any error of law or abuse of discretion.

IT IS THEREFORE ORDERED that the decision of the Department of Health and Human Services is AFFIRMED.

AND IT IS SO ORDERED.

______________________________

ALISON RENEE LEE

Administrative Law Judge

February 17, 1999

Columbia, South Carolina.

1. The Administrative Law Judge Division has authority to hear appeals from DHHS under the Medically Indigent Assistance Act pursuant to S.C. Code Ann. § 44-6-190 (Supp. 1998).

2. An unappealed finding becomes the law of the case. See Continental Ins. Co. v. Shives, 328 S.C. 470, 492 S.E.2d 808 (Ct. App. 1997).

3. $74,793 of this amount came from funds borrowed by the provider.

4. The evidence indicates that the remainder of the increase in the working capital balance from September 1991 to 1992 was accrued interest and allocated refinancing costs. (Record on Appeal, Petitioner's Exhibit 2).

5. The evidence in the record indicates only that previously-borrowed funds allocated to investments were reallocated to the working capital portion of the debt when funds were drawn to use as working capital on an as-needed basis; not necessarily every year. Such a reallocation occurred only in the 1992 reporting period.