Opinion
100554/2018
10-17-2019
FORT HUDSON NURSING CENTER, INC., Plaintiff, v. MEDICAID INSPECTOR GENERAL of the State of New York, Commissioner of Health of the State of New York, and Director of the Budget of the State of New York, Defendants.
Bond, Shoeneck & King, PLLC, Rochester (John F. Darling of counsel), for plaintiff. Letitia James, Attorney General, Albany (Michael G. McCartin of counsel), for defendants.
Bond, Shoeneck & King, PLLC, Rochester (John F. Darling of counsel), for plaintiff.
Letitia James, Attorney General, Albany (Michael G. McCartin of counsel), for defendants.
Robert J. Muller, J.
Plaintiff owns and operates a residential health care facility in the Town of Fort Edward, Washington County, which facility participates in the Medicaid program. In New York, Medicaid is administered by the Department of Health (hereinafter DOH), as overseen by defendant Commissioner of Health (see Public Health Law § 201 [1] [v] ; Social Services Law § 363-a ). The program provides for, inter alia , the reimbursement of residential health care facilities "for care provided to eligible residents by setting per diem rates per patient that are prospective in nature and consider both capital and operating costs" (Matter of North Gate Health Care Facility, LLC v. Zucker , 174 AD3d 1201, 1201 [2019] ; see Matter of Blossom View Nursing Home v. Novello , 4 NY3d 581, 585 [2005] ). "Reimbursement for the operating cost component of [residential] health care facilities is based upon allowable operating costs incurred and reported in a base year, with those costs adjusted to account for inflation between the base year and the applicable rate period" (Matter of North Gate Health Care Facility, LLC v. Zucker , 174 AD3d at 1201 ; see 10 NYCRR 86-2.10, 86-2.12 ; see generally Public Health Law § 2808 ).
The Office of the Medicaid Inspector General (hereinafter OMIG) — as overseen by defendant Medicaid Inspector General — was created as an independent office within the DOH to focus on, inter alia , the "recovery of improperly expended medical assistance funds" ( Public Health Law § 31 [1] ). In this regard, OMIG conducts audits after rates are established for residential health care facilities and, "if the audit uncovers discrepancies, [OMIG] will adjust the rates to account for [the] inaccuracies" (Matter of North Gate Health Care Facility, LLC v. Zucker , 174 AD3d at 1201 ; see Public Health Law § 32 [14] ; 10 NYCRR 86-2.7 ; 18 NYCRR 517.3, 517.14 ; 42 CFR 447.253 [g]; see also Public Health Law § 2807 [5] ).
"Where an audit finds overpayments, OMIG issues a draft audit report identifying those items" ( West Midtown Mgt. Group, Inc. v. State of NY, Dept. of Health, Off. of the Medicaid Inspector Gen. , 31 NY3d 533, 536 [2018] ; see 18 NYCRR 517.5 ). "The draft audit report contains the amount of the overpayment ‘[w]hen feasible,’ the proposed action and its legal basis, and provides an opportunity for the provider to object" (West Midtown Mgt. Group, Inc. v. State of NY, Dept. of Health, Off. of the Medicaid Inspector Gen. , quoting 18 NYCRR 517.5 [a] ), with such objection due "within 30 days of receipt of [the report]" ( 18 NYCRR 517.5 [b] ). A final audit report is then issued, with the audit adjustments resulting in "rollovers" whereby the revisions are applied to all rate periods affected by the audited costs (see Matter of Northern Metro. Residential Healthcare Facility, Inc. v. Novello , 72 AD3d 1383, 1386 [2010] ; 18 NYCRR 517.14 ).
In 2006, the Legislature amended Public Health Law § 2808 to change the base years for calculating reimbursement rates, although the amendment — known as the "rebasing law" — did not become effective until 2009 (see L 2006, ch 109, § 1, part C, § 47; Matter of North Gate Health Care Facility, LLC v. Zucker , 174 AD3d at 1202 ; Matter of Adirondack Med. Center-Uihlein v. Daines , 119 AD3d 1175, 1176 [2014] ). The Legislature then enacted the "scale back law" as a result of the fiscal crisis in 2009, "which essentially reduced expenditures that the rebasing law would otherwise have mandated" (Matter of North Gate Health Care Facility, LLC v. Zucker , 174 AD3d at 1202 ; see L 2009, ch 58, § 1, part D, § 2).
The scale back law "provided that, notwithstanding the rebasing law, or any other contrary provision of law, ‘with regard to adjustments to Medicaid rates of payment for inpatient services provided by residential health care facilities for the period April 1, 2009 through March 31, 2010, made pursuant to the rebasing law,’ [the Commissioner] was permitted to make proportional adjustments to the reimbursement rates in order to ensure that the aggregate increase in rates did not exceed, nor fall below, $210 million" ( Matter of Avenue Nursing Home & Rehabilitation Ctr. v. Shah , 112 AD3d 1178, 1180 [2013] [brackets omitted], quoting L 2009, ch 58, § 1, part D, § 2; accord Matter of North Gate Health Care Facility, LLC v. Zucker , 174 AD3d at 1202 ; see Matter of Bronx-Lebanon Highbridge Woodycrest Ctr. v. Daines , 147 AD3d 442, 442 [2017] ). The last sentence of the statute states that "[a]djustments made pursuant to [the] section shall not be subject to subsequent correction or reconciliation" (L 2009, ch 58, § 1, part D, § 2).
On December 4, 2007, plaintiff was notified that OMIG would be "conducting an audit of the records ... support[ing its] Report of Residential Health Care Facility ... for the July 1, 2004 through June 30, 2005 base year[, which] report [was] the basis for the operating and capital portion of [its] July 1, 2004 through December 31, 2006 Medicaid rates." OMIG then sent a draft audit report to plaintiff on July 1, 2009 identifying an overpayment of $82,226 for the period of July 1, 2004 through December 31, 2006. The draft audit report further provided as follows:
"The overpayment does not reflect the impact on rates subsequent to December 31, 2006 that utilized the July 1, 2004 through June 30, 2005 base period for operating expense. Any overpayment resulting from operating expense disallowances in the July 1, 2004 through June 30, 2005 base period report for rates subsequent to December 31, 2006 will be addressed in the future."
Plaintiff thereafter submitted certain objections to the draft audit report and OMIG issued a final audit report on September 25, 2009. The final audit report identified an overpayment of $69,987 for the period of July 1, 2004 through December 31, 2006, an amount adjusted downward based upon OMIG's consideration of plaintiff's objections.
On September 25, 2009, OMIG issued a notice of rate changes to plaintiff for the period of January 1, 2007 through December 31, 2007, with the notice stating as follows:
"The July 1, 2004 through June 30, 2005 base year is also used to calculate the operating portion of the January 1, 2007 through December 31, 2007 rates. Based on the enclosed audited rates ..., the Medicaid overpayment is $50,531."
OMIG then issued another notice of rate changes to plaintiff on July 26, 2011 for the period of January 1, 2008 through March 31, 2009. This notice stated:
"Previously issued [n]otices of [r]ate [c]hanges have addressed overpayments through December 31, 2007. However, the July 1, 2004 through June 30, 2005 base year [was] also used to calculate the operating portion of the January 1, 2008 through March 31, 2009 rates. Based on the enclosed audited rates ..., the Medicaid overpayment currently due is $64,855."
It appears that plaintiff paid OMIG the amount requested in both the September 2009 and July 2011 notices of rate changes.
On March 9, 2016, plaintiff — together with several other residential health care facilities throughout the State — entered into the Medicaid Universal Settlement Agreement (hereinafter the Settlement Agreement) with the DOH, OMIG and Division of Budget, as overseen by defendant Director of the Budget of the State of New York. The Settlement Agreement resolved a number of pending rate appeals as well as pending litigation brought by the facilities against the agencies.
On August 17, 2018, OMIG issued a third notice of rate changes to plaintiff for the period of April 1, 2009 through December 31, 2011. This notice stated as follows:
"Previously issued [n]otices of [r]ate [c]hanges have addressed over or underpayment through March 31, 2009. However, the July 1, 2004 through June 30, 2005 base year is also used to calculate the operating portion of the April 1, 2009 through December 31, 2011 rates. Based on the enclosed audited rates ..., the Medicaid overpayment currently due is $140,306."
Plaintiff then commenced this declaratory judgment action on December 13, 2018 seeking to invalidate the August 2018 notice of rate changes. Plaintiff asserts three causes of action: (1) the revision of Medicaid rates contained within the August 2018 notice of rate changes is untimely; (2) the revision of Medicaid rates contained within the August 2018 notice of rate changes is barred by the scale back law; and (3) the revision of Medicaid rates contained within the August 2018 notice of rate changes violates the terms of the Settlement Agreement. Defendants filed an answer and simultaneously moved to convert the action to a CPLR article 78 proceeding and, further, to dismiss the converted proceeding. Oral argument was held relative to the motion on August 2, 2019, with plaintiff permitted to supplement its opposition papers. The motion is now fully submitted and addressed hereinbelow.
Defendants were given an opportunity to reply to this supplemental submission but declined to do so.
Turning first to that aspect of the motion which seeks to convert the action to a CPLR article 78 proceeding, " ‘[w]here ... governmental activity is being challenged, the immediate inquiry is whether the challenge could have been advanced in a CPLR article 78 proceeding’ " ( Matter of Adirondack Med. Center-Uihlein v. Daines , 119 AD3d 1175, 1176 [2014], quoting Spinney at Pond View, LLC v. Town Bd. of the Town of Schodack , 99 AD3d 1088, 1089 [2012] [internal quotation marks and citation omitted]; accord Thrun v. Cuomo , 112 AD3d 1038, 1040 [2013], lv denied 22 NY3d 865 [2014] ).
Here, plaintiff's first and second causes of action are "challenging the determination[ ] of an administrative agency applying ... legislation, rendering [these] the type[s] of challenge[s] that should be brought under CPLR article 78" ( Matter of Adirondack Med. Center-Uihlein v. Daines , 119 AD3d at 1176 ; see Walton v. New York State Dept. of Correctional Servs. , 8 NY3d 186, 194 [2007] ; Matter of Grand Manor Nursing Home Health Related Facility, Inc. v. Novello , 39 AD3d 1062, 1064 [2007], lv denied 9 NY3d 812 [2007] ). With that said, however, the third cause of action sounds in breach of contract and, as such, does not fall within the purview of CPLR article 78 (see Giblin v. Village of Johnson City , 75 AD3d 887, 888 [2010] ; Gooshaw v. City of Ogdensburg , 67 AD3d 1288, 1289 [2009] ).
Although not raised by defendants, the Court notes that "[a] cause of action for declaratory judgment is ‘unnecessary and inappropriate when the plaintiff has an adequate, alternative remedy in another form of action, such as breach of contract’ " (Ithilien Realty Corp. v. 180 Ludlow Dev. LLC , 140 AD3d 621, 622 [2016], quoting Apple Records v. Capitol Records , 137 AD2d 50, 54 [1988] ; see Arthur Young & Co. v. Fleischman , 85 AD2d 571, 571 [1981] ).
Based upon the foregoing, the first aspect of defendants' motion is granted to the extent that plaintiff's first and second causes of action are converted to CPLR article 78 claims, thus rendering this a combined CPLR article 78 proceeding and plenary action.
Turning now to the second aspect of the motion, defendants contend that plaintiff's first claim must be dismissed for failure to state a cause of action (see CPLR 3211 [a] [7] ). With that said, on a motion to dismiss for failure to state a cause of action, the Court "must ‘afford the pleadings a liberal construction, accept the facts alleged therein as true, accord the plaintiff the benefit of every possible inference and determine whether the facts alleged fit within any cognizable legal theory’ " ( Nelson v. Capital Cardiology Assoc., P.C. , 97 AD3d 1072, 1073 [2012], quoting Matter of Upstate Land & Props., LLC v. Town of Bethel , 74 AD3d 1450, 1452 [2010] ).
Here, defendants contend that there is no specified time period within which the DOH must carry out its duties under 18 NYCRR 517.14, the regulation which directs that rate revisions be rolled over to all rate periods affected by audited costs. In this regard, defendants rely upon The Shore Winds, LLC v. Zucker (Sup Ct, Albany County, Oct. 1, 2018, Zwack, J., index No. 901916-18), wherein Supreme Court observed "[t]here is no law or regulation that requires [n]otice of [r]ate [c]hanges [to] be completed or applied to a facility within a specified time period" (id. at 10). Defendants further contend that the DOH is required to rollover the audit adjustments to all rate periods affected by the audited costs and "cannot be estopped from exercising [its] duties by any delay in issuing" the notice of rate changes (Matter of New Surfside Nursing Home, LLC v. Daines , 103 AD3d 637, 640 [2013], affd 22 NY3d 1080 [2014] ; see Matter of Frye v. Commissioner of Fin. of City of NY , 62 NY2d 841, 844 [1984] ).
In opposition, plaintiff contends that defendants' excessive delay of over six years in issuing the August 2018 notice of rate changes renders the notice null and void. In this regard, plaintiffs rely upon Matter of Cortlandt Nursing Home v. Axelrod (66 NY2d 169 [1985] ), which states that "[w]here administrative delay has significantly and irreparably handicapped a private party in mounting a defense in an adversary administrative proceeding, the agency, or court reviewing a final administrative order, is authorized to dismiss the proceeding" ( id. at 180 ; see Matter of Clearview Ctr., Inc. v. New York State Off. of the Medicaid Inspector Gen. , 172 AD3d 1582, 1587 [2019] ). According to plaintiff, it "has been prejudiced by ... expending, in good faith, the reimbursement received so long ago on continuing to provide necessary care and services to [its] residents ...."
Even affording plaintiff's first claim a liberal construction and accepting the facts alleged therein as true, the Court finds that plaintiff has failed to state a cause of action. The case relied upon by plaintiff is wholly inapposite, as it pertains to administrative delay prior to the issuance of a final order. Here, the final audit report was issued in September 2009, with the subsequent notices of rate changes then issued pursuant to18 NYCRR 517.14. Further, while The Shore Winds, LLC v. Zucker (supra ) is not controlling authority, it is certainly persuasive. There is indeed no law or regulation setting forth a specified time period within which a notice of rate changes must be issued, and — given the final audit report and the notices of rate changes issued in September 2009 and July 2011, respectively — plaintiff was surely aware that the August 2018 notice of rate changes would be coming at some point.
Defendants next contend that plaintiff's second claim must be dismissed for failure to state a cause of action (see CPLR 3211 [a] [7] ). In this regard, defendants rely upon North Gate Health Care Facility, LLC v. Zucker (174 AD3d 1201 [2019], supra ) (hereinafter North Gate ), which found that the scale back law does not deprive defendants of the power to adjust Medicaid reimbursement rates where audits disclose inaccuracies in the cost calculations submitted by a facility for its base year (see id. at 1203-1204 ).
In opposition, plaintiff contends that North Gate is not dispositive to the case at bar because it "does not address the deprivation of reimbursement effectuated by the duplication created by applying both the audit reductions and the ‘scale back law.’ " This contention, however, is without merit. This issue was in fact addressed in North Gate , with the Third Department finding that "the two adjustments [are] not duplicative because the scale back adjustments effected an industry-wide reduction and the audit adjustments corrected miscalculations for each [facility] individually" ( id. at 1204-1205 ).
Under the circumstances, the Court finds that plaintiff's second claim must also be dismissed for failure to state a cause of action.
Finally, defendants contend that plaintiff's third cause of action must be dismissed because the Court lacks subject matter jurisdiction. Specifically, defendants contend that the third cause of action — which sounds in breach of contract — must be brought in the Court of Claims.
Indeed, the Court of Claims "shall have jurisdiction [t]o hear and determine a claim of any person, corporation or municipality against the state ... for the breach of contract, express or implied, ... of its officers or employees while acting as such officers or employees ..." ( Court of Claims Act § 9 [2] ). The Court therefore finds that the third cause of action must be dismissed based upon a lack of subject matter jurisdiction (see Gerrish v. State Univ. of NY at Buffalo , 129 AD3d 1611, 1613 [2015] ; Automated Ticket Sys. v. Quinn , 70 AD2d 726, 727 [1979], mod on other grounds 49 NY2d 792 [1980] ).
Briefly, plaintiff contends in opposition that because it "is not making a monetary ‘claim’ against a state agency, ... the Court of Claims would not have appropriate jurisdiction of [sic] this case." This contention, however, is unavailing. The Court of Claims has jurisdiction over breach of contract causes of actions against state agencies irrespective of the relief sought (see Automated Ticket Sys. v. Quinn , 70 AD2d at 727 ).
Based upon the foregoing, the second aspect of defendants' motion is granted to the extent that the combined CPLR article 78 proceeding and plenary action is dismissed in its entirety.
Dismissal of the third cause of action is without prejudice to the commencement of an action in the Court of Claims for breach of contract, should plaintiff wish to proceed in this fashion.
Therefore, having considered the Affirmation of Michael G. McCartin, Esq. with exhibit attached thereto, dated February 5, 2019, submitted in support of the motion; Affidavit of Keith Amato with exhibits attached thereto, sworn to February 4, 2019, submitted in support of the motion; Affidavit of Ann Foster, sworn to February 4, 2019, submitted in support of the motion; Memorandum of Law of Michael G. McCartin, Esq., dated February 5, 2019, submitted in support of the motion; Affirmation of John F. Darling, Esq., dated February 21, 2019, submitted in opposition to the motion; Correspondence of Michael G. McCartin, Esq., dated February 26, 2018, submitted in support of the motion; and Correspondence of John F. Darling, Esq., dated August 5, 2019, submitted in opposition to the motion; and oral argument having been held on August 2, 2019 with John F. Darling, Esq. appearing on behalf of plaintiff and Michael G. McCartin, Esq. appearing on behalf of defendants, it is hereby
ORDERED that the first aspect of defendants' motion is granted to the extent that plaintiff's first and second causes of action are converted to CPLR article 78 claims, thus rendering this a combined CPLR article 78 proceeding and plenary action; and it is further
ORDERED that the second aspect of defendants' motion is granted to the extent that this combined CPLR article 78 proceeding and plenary action is dismissed in its entirety; and it is further
ORDERED that any relief not specifically addressed has nonetheless been considered and is expressly denied.
The above constitutes the Decision and Order of this Court.
The original of this Decision and Order has been e-filed by the Court. Counsel for defendants is hereby directed serve a copy of the Decision and Order with notice of entry in accordance with CPLR 5513.