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Village Villa, et al v. Kansas Health Policy Authority

January 11, 2013

VILLAGE VILLA, ET AL., APPELLANTS,
v.
KANSAS HEALTH POLICY AUTHORITY, APPELLEE.



Appeal from Shawnee District Court; DAVID E. BRUNS, judge.

SYLLABUS BY THE COURT

SYLLABUS BY THE COURT 1. Medicaid is a joint federal-state program providing medical assistance to eligible individuals. Its purpose is to provide medical and rehabilitation assistance to those who qualify as poor, aged, blind, or disabled. States are not required to participate in the Medicaid program, but once one elects to do so, it must comply with applicable federal regulations. 2. Determining whether an administrative regulation violates the United States Constitution requires statutory construction, which is a question of law. An appellate court has unlimited review of such issues. 3. When a statute or regulation is challenged as an equal protection violation, the first step is to determine the nature of the classifications at issue and examine whether those classifications result in arguably indistinguishable classes of individuals being treated differently. Equal protection is implicated only if there is differing treatment of similarly

situated individuals. In the second step, a court examines the rights affected by the classifications, which dictates the level of scrutiny to be applied-strict scrutiny, intermediate scrutiny, or the deferential scrutiny of rational basis. The final step requires determining whether the relationship between the classifications and the object desired to be obtained withstands the applicable level of scrutiny. 4. K.A.R. 30-10-1a(a)(7), (9), and (36)(C) are applied when determining whether there is a change of provider ownership for Medicaid reimbursement purposes. These regulations distinguish between parties that own or have equity in 5 percent or more of a provider facility and those who own or have equity in less than 5 percent. The latter are able to purchase a provider facility in which they own or have equity and be treated as new owners for the purposes of calculating rates. Those owning 5 percent or more are not. Thus, these regulations treat similarly situated entities differently. 5. K.A.R. 30-10-1a(a)(7), (9), and (36)(C) are subject to the rational basis test when challenged as an equal protection violation. A party attacking these regulations as unconstitutional for failing to satisfy the rational basis standard has the burden to negate every conceivable rational basis that might support the classifications these regulations create. 6. K.A.R. 30-10-1a(a)(7), (9), and (36)(C) bear a reasonable relationship to a valid legislative purpose and do not violate equal protection principles.

7. Constitutional procedural due process analysis is a two-step process in which the court first determines whether due process is implicated, and, if it is, then determines what process is due. At the first level, the claimant must establish some property or liberty interest such that the protections of the Due Process Clause are invoked. This property or liberty interest is not inherent in the Due Process Clause but must be rooted in state law. 8. Claims made in passing without argument or citations to authority are deemed waived and abandoned.

The opinion of the court was delivered by: Biles, J.

Affirmed.

The opinion of the court was delivered by BILES, J.

This is a Medicaid reimbursement appeal under the Act for Judicial Review and Civil Enforcement of Agency Actions, K.S.A. 77-601 et seq. (now the Kansas Judicial Review Act, K.S.A. 2011 Supp. 77-601 et seq.). Three corporations, each of which owns a nursing home facility, want their reimbursement rates recalculated because they believe there was a change of ownership authorizing the adjustments. The Kansas Department on Aging (KDOA) and Kansas Health Policy Authority (KHPA) denied recalculation because of common ownership between the buyers and sellers, which they determined barred the rate changes. On review, the district court agreed. On appeal, the corporations maintain that the agency orders are invalid, violate the Equal Protection and Due Process Clauses of the United States Constitution, and are vague. We disagree and affirm.

FACTUAL AND PROCEDURAL BACKGROUND

Prior to January 1, 2005, Virgil Goracke owned 20 percent of three nursing home facilities-Indian Trails Manor, Inc., d/b/a Indian Trails Mental Health Living Center, Inc.; Manor of Nortonville, Inc., d/b/a Village Villa; and Flint Hills, Inc., d/b/a Vintage Manor. There is no dispute these entities were Medicaid-certified nursing facilities. Goracke signed the 2003 and 2004 Medicaid cost reports for each facility as "Secretary and Owner." He also solely owned a separate company responsible for managing these three facilities.

Effective January 1, 2005, three other corporations owned entirely by Goracke purchased the three nursing homes. Goracke renamed them: Village Villa, Inc., f/k/a Manor of Nortonville, Inc., d/b/a Village Villa; Providence Living Center, Inc., f/k/a Indian Trails Manor, Inc., d/b/a Indian Trails Mental Health Living Center; and Flint Hills Care Center, Inc., f/k/a Flint Hills, Inc., d/b/a Vintage Manor. Goracke signed the 2005 Medicaid cost reports for each facility as "President and Owner."

Medicaid is a joint federal-state program providing medical assistance to eligible individuals. Its purpose is to provide medical and rehabilitation assistance to those who qualify as poor, aged, blind, or disabled. See 42 U.S.C. § 1396 et seq. (2006); State v. McWilliams, 295 Kan. 92, 96, 283 P.3d 187 (2012). States are not required to participate in the Medicaid program, but once one elects to do so, it must comply with applicable federal regulations. See 42 U.S.C. § 1396a(1) (2006); Country Club Home, Inc. v. Harder, 228 Kan. 756, 763, 620 P.2d 1140 (1980), modified 228 Kan. 802, 623 P.2d 505 (1981). Kansas made this election for the relevant time period.

Effective July 1, 2006, KHPA became responsible for the state Medicaid plan's supervision and administration. K.S.A. 2006 Supp. 75-7409. At that time certain "powers, duties and functions of the division of health policy and finance within the department of administration and the director of health policy and finance [were] transferred to and imposed upon the [KHPA]." K.S.A. 2006 Supp. 75-7413. At the time the present matter arose, KHPA was responsible for defending the regulations now questioned, which were promulgated by the Secretary of Social and Rehabilitation Services. See K.S.A. 39-708c.

Since then, mergers within Kansas government altered the agencies responsible for the state's Medicaid program administration. Through Executive Reorganization Order No. 38, effective July 1, 2011, Governor Sam Brownback abolished KHPA and established the Kansas Division of Health Care Finance within the Kansas Department of Health and Environment. This order transferred all KHPA statutory powers, duties, and functions to the Kansas Department of Health and Environment, the Division of Health Care Finance, the Secretary, and the Director. As such, the responsibility for the supervision and administration of the Kansas Medicaid program is now with the Kansas Department of Health and Environment. See L. 2012, ch. 102, sec. 40.

A Medicaid services provider does not bill eligible patients for covered services. Rather, the provider is reimbursed by the government according to pre-established rates. See 42 U.S.C. § 1396a(30)(A) (2006); K.S.A. 39-708a; K.S.A. 39-708c(s), (x). A statutory amendment enacted during the 2006 Kansas legislative session changed the base year for computing the Medicaid reimbursement rates at issue in this case.

Specifically, the law stated that beginning with fiscal year 2007, base year rates would be calculated by averaging together 2003, 2004, and 2005 cost reports. K.S.A. 2006 Supp. 75-5958.

KDOA, which under K.S.A. 2006 Supp. 75-5903(a) and K.S.A. 2006 Supp. 75-5908(d) was responsible for receiving and disbursing funds made available under any federal program for the aging including the Medicaid program, published a notice in the Kansas Register about this change in the base year. Additionally, in notifying providers operating a facility for 12 or more months on December 31 that they were to file a calendar year cost report, KDOA's notice told providers that if a "non-arms length change of provider takes place . . . the facility will be treated as an ongoing operation."

KDOA sent letters to Village Villa, Providence Living Center, and Flint Hills Care Center (collectively Village Villa) announcing the new Medicaid per diem rate for each facility effective July 1, 2006. The letters indicated that the base data for calculating the new rates was the combined cost data from each facility's calendar year costs reports for 2003, 2004, and 2005. The letters also alerted the recipients to their right to request a fair hearing if they disagreed with the new rates. This notice was in compliance with K.A.R. 30-7-65.

In response, Village Villa requested a hearing with the Kansas Department of Administration challenging the new reimbursement rates for each facility. It argued that because the facilities underwent a change of ownership in 2005, the rates should be based exclusively on the new owner's first calendar year cost reports, i.e.,only the 2005 cost reports, which presumably would have generated more Medicaid revenue.

KDOA moved for summary judgment, arguing the applicable regulations prevented it from applying anything other than the average of the 2003, 2004, and 2005 cost reports because Village Villa had not undergone a "change of ownership" as defined in K.A.R. 30-10-1a(a)(7).Village Villa countered that KDOA was misapplying the regulations and that such application was unconstitutional because it did not require the agency to evaluate the arm's length legitimacy of each transaction.

The hearing officer rejected Village Villa's arguments, finding that the parties to each transaction were "related" under K.A.R. 30-10-1a(36)(C) because Goracke had owned 20 percent of the facilities being sold to corporations owned entirely by Goracke, constituting "common ownership" under K.A.R. 30-10-1a(9). Thus, "by operation of law for Medicaid reimbursement purposes-there was no change of ownership and no arms-length transaction," and the correct method for calculating the reimbursement rate was averaging the 2003, 2004, and 2005 cost reports.

The hearing officer also correctly noted there was no administrative authority to address Village Villa's claim that the reimbursement regulations were unconstitutional. See Zarda v. State, 250 Kan. 364, Syl. 3, 826 P.2d 1365, cert. denied 504 U.S. 973 (1992); Kaufman v. State Dept. of SRS, 248 Kan. 951, 954, 811 P.2d 876 (1991) ("Administrative boards and agencies may not rule on constitutional questions; therefore, the issue of the constitutionality of a state statute or an administrative regulation must be raised when the case is appealed to a court of law.").

Village Villa appealed the hearing officer's initial order to KHPA, which agreed with the ruling that the parties to the January 2005 transaction were "related." And it too noted it had no authority to address the constitutional claims.

Village Villa then petitioned the Shawnee County District Court for judicial review of KHPA's final order under the Act for Judicial Review and Civil Enforcement of Agency Actions. The district court affirmed KHPA's holding that there had not been a "change of ownership" from the January 2005 transaction even if there had been an "arm's length transaction" for other purposes. The court also concluded the reimbursement regulations were constitutional. Village Villa timely appealed the district court's decision. This court transferred the case on its own motion under K.S.A. 20-3018(c).

DISCUSSION

The Secretary of Social and Rehabilitation Services promulgated the regulation for determining whether the January 2005 acquisition by Goracke's corporations constituted a change of ownership for Medicaid reimbursement purposes under the authority granted by K.S.A. 39-708c. The relevant subsections of that regulation are K.A.R. ...


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