Major Victory for Saratoga County Maplewood Manor in Appeal of OMIG Audit

Last week, Maplewood Manor, a nursing home owned and operated by Saratoga County and represented by Jeffrey J. Sherrin of O’Connell & Aronowitz, earned a major victory in its appeal of an audit conducted by the New York State Office of the Medicaid Inspector General (“OMIG).  In a Decision After Hearing dated January 16, 2013, an Administrative Law Judge overturned the OMIG audit, which originally concluded that Maplewood Manor had been improperly reimbursed for the capital costs of a $3.7 million cogeneration plant because the nursing home’s base year Medicaid reimbursement rate included duplicative utility costs.  The decision is noteworthy because the ALJ refused to accept OMIG’s extension of the Daughters of Sarah case to Maplewood Manor.

Maplewood Manor is a 277-bed skilled nursing facility located in Ballston Spa, New York, and is governed by the Saratoga County Board of Supervisors.  By the early 2000s, the boilers and air conditioners at Maplewood Manor, which first opened in 1973, needed replacement and the limitations of the lighting systems and back-up generators were beginning to negatively impact the nursing home’s ability to ensure the comfort and safety of its residents.

At that time, Saratoga County sought out proposals to upgrade Maplewood Manor and to reign in its energy costs.  A committee of the Board of Supervisors eventually accepted a proposal for a “cogeneration project which would construct a cogeneration plant at Maplewood Manor and improve the nursing home’s HVAC, lighting, and emergency backup generator systems.

A cogeneration plant is a system of generating electricity which utilizes the byproduct of that generation, which is heat, to achieve efficiencies and to control utility costs.  Natural gas is used to power the electricity generators and the heat byproduct is then used either to warm the building in the winter months, or to cool the building in the summer through the use of an absorption chiller.  Prior to building the cogeneration plant, Maplewood Manor paid a local utility company for both natural gas and electricity.  The natural gas powered the nursing home’s aging boilers and the electricity was used for the nursing home’s remaining power needs.

Under New York’s Medicaid laws, a nursing home’s reimbursement rate includes a capital cost component, meaning that a facility is able to receive reimbursement for capital improvements to its facility, including cogeneration plants, through an adjustment to its reimbursement rate.  A facility’s utility costs are included in the operating component of the reimbursement rate.

Maplewood Manor received all of the necessary approvals for its cogeneration project and eventually received an adjustment to its Medicaid reimbursement rate.  On October 4, 2001, the Department of Health (“DOH), by the Director of its Office of Health Systems Management (“OHSM), notified Maplewood Manor that its Certificate of Need (“CON) application to upgrade lighting, renovate its HVAC system and construct a cogeneration plant had been reviewed and approved.  One year later, Maplewood Manor, in accordance with the applicable regulations, advised the Bureau of Architecture and Planning and the Bureau of Long Term Care reimbursement (“BLTCR) that the project was 89 percent complete and requested a rate revision that included the capital costs for the project.  Maplewood included a detailed Schedule of Certified Costs and supporting schedules with this submission.  On October 21, 2002, the Director of the Review and Analysis Group in the Department’s OHSM notified Maplewood Manor that its schedule of certified costs had been reviewed, revised and approved.  On October 30, 2003, the BLTCR advised Maplewood Manor that its 2002 and 2003 Medicaid rates had been revised,  effective December 1, 2002, to reflect the costs of the project.  Then, on January 20, 2005, OHSM advised Maplewood Manor that its final schedule of certified costs for the project, dated, August 23, 2003, had been reviewed and revised again and had been approved in the amount of $3,745,136.  The BLTCR was copied on the relevant correspondence and later approved Maplewood Manor’s subsequent rate appeals filed in 2006, 2007, and 2009 regarding the inclusion of capital costs for the cogeneration plant in its Medicaid reimbursement rate.

Despite these approvals, OMIG, in a March 2009 audit report, disallowed the reimbursement of costs of the cogeneration project, including the HVAC, lighting, and backup generator improvements.  When conducting an audit, the OMIG does not have the authority to substitute its judgment for the BLTCR’s in determining the rate setting methodology, but it may correct mistakes made by the BLTCR during the rate setting process.  In the audit report for Maplewood Manor, OMIG claimed that the BLTCR had made such a mistake when it increased Maplewood Manor’s Medicaid rate to include reimbursement for the capital cost of Maplewood Manor’s cogeneration project.

OMIG’s theory for the disallowance was that the addition of the cogeneration project’s capital cost to the Medicaid rate provided the nursing home with duplicate reimbursement for its electricity.  OMIG argued that because Maplewood Manor’s costs for natural gas and electricity were included in the operating portion of its base year reimbursement rate, the capital cost component associated with the cogeneration project–which the BLTCR had added to Maplewood Manor’s Medicaid rate–should be disallowed.  OMIG cited a decision after hearing related to the audit of another facility, Daughters of Sarah, as supporting its conclusion of duplicate costs.

The issue in Daughters of Sarah related to a facility which contracted with a laundry and linen services vendor and included that expense in its 1983 base year operating costs.  In 1993, that facility replaced the vendor with an in-house laundry and purchased its own linens and washing machines. When that facility included those capital costs in its annual reports, the OMIG concluded that incorporating both the 1983 vendor costs and the in-house laundry capital expenses into the facility’s reimbursement rate constituted duplicate reimbursement.  When that matter was brought to an administrative hearing, the Chief Health Care Fiscal Analyst of the BLTCR testified that he would not have included any in-house laundry costs in the capital component of the facility’s rate if he had known about the inclusion of laundry vendor costs in the base-year rate.  The ALJ in Daughters of Sarah was persuaded by that testimony and also found that testimony was corroborated by evidence which showed that the audit disallowances were required by the BLTCR rate setting methodology.

In the instant matter, OMIG viewed the cogeneration process of converting natural gas to electricity as the service previously provided to Maplewood Manor by the utility company and analogized this service to the service provided by the laundry contractor in the Daughters of Sarah case.  OMIG therefore determined that the cogeneration project was analogous to the in-house laundry in Daughters of Sarah which was determined to be a duplicate reimbursement.

In response, Maplewood Manor argued that the BLTCR had approved increases in its Medicaid rate because the cogeneration project was a capital expense which permitted the facility to utilize the heat byproduct resulting when natural gas is combusted to produce electricity. As a result of the cogeneration plant, Maplewood Manor now purchases less electricity, purchases more natural gas, and uses the heat byproduct of the cogeneration plant to supply heating and cooling for the building.  Maplewood Manor has always purchased energy from the utility company; that expense was included in its 1983 base year operating costs because Maplewood Manor purchased both natural gas and electricity from the utility company at that time, and the nursing home has continued to purchase these two forms of energy ever since.

After hearings were held, the ALJ comprehensively rejected OMIG’s claims that BLTCR had made an error in approving additional reimbursement for the cogeneration project and that no one within the BLTCR gave the matter the “requisite level of consideration to exercise its judgment.  In contrast to OMIG’s position, the ALJ found that Maplewood Manor established that no fewer than six people within either the BLTCR or the OHSM had approved reimbursement of the capital costs of the cogeneration plant.  Furthermore the testimony of a former Department of Health official, who was Director of the Bureau of Architectural and Engineering Facility Planning as well as the Director of the Bureau of Financial Analysis and Review in the early 2000s, established that DOH looked favorably on the development of cogeneration plants at that time because they could conserve energy and extend the useful life of other equipment at the facilities, such as boilers.

The ALJ also rejected the application of the Daughters of Sarah determination to the cogeneration project at Maplewood Manor. Unlike the Daughters of Sarah, there was no testimony or evidence in this case suggesting that the BLTCR was unaware that Maplewood Manor’s utility expense was included in its operating rate.  In fact, the ALJ ruled that such unawareness was “highly improbable.  Instead, the ALJ found that the BLTCR “approved a rate increase for the cogeneration plant as a capital expense and could have reasonably done so consistent with its methodology.

In reaching that conclusion, the ALJ found several points of evidence which confirmed, unlike the Daughters of Sarah, that disallowance of the capital costs for the cogeneration plant was not required by the BLTCR’s methodology.  For example, the ALJ not only found that testimony of the two BLTCR employees called by OMIG was not corroborated by any documentary evidence from upper level management which would demonstrate that a cogeneration plant must be automatically disallowed, but that the documentary evidence actually established a point to the contrary: that the BLTCR had previously approved a cogeneration project for the Genesee County Nursing Home.  Therefore, the ALJ concluded that “BLTCR made a knowing, purposeful and discretionary decision to allow the capital costs for the cogeneration project, and accordingly reversed the audit adjustment disallowing reimbursement of the cogeneration project.  DOH will now have to reimburse Maplewood Manor for the amounts withheld in the wake of the original audit determination.

If you would like more information about this decision, please contact Jeffrey J. Sherrin at (518) 462-5601.

(Past results are reported to provide the reader with examples of the type of litigation in which we practice and does not and should not be construed to create an expectation of result in any other case as all cases are dependent upon their own unique fact situation and applicable law.)