11-1800-12657-2

 

STATE OF MINNESOTA

OFFICE OF ADMINISTRATIVE HEARINGS

FOR THE DEPARTMENT OF HUMAN SERVICES

 

In the Matter of the Rate Appeal of Range Center – Mapleview, Shingle Creek Option, and REM Facilities

RECOMMENDED RULING REGARDING CROSS MOTIONS FOR SUMMARY DISPOSITION

 

This matter is pending before Administrative Law Judge Barbara L. Neilson on cross-motions for summary disposition filed by the Department of Human Services and counsel for the REM Facilities.  Cynthia B. Jahnke, Assistant Attorney General, 445 Minnesota Street, Suite 900, St. Paul, Minnesota 55101-2127, appeared on behalf of the Minnesota Department of Human Services.  Gregory Merz, Attorney at Law, Gray, Plant, Mooty, Mooty & Bennett, 3400 City Center, 33 South Sixth Street, Minneapolis, Minnesota  55402-3796, appeared on behalf of the REM Facilities.  Oral argument concerning the cross-motions was heard on June 22, 2000, at which time the record with respect to the motions closed. 

Richard A. Lanigan, Certified Public Accountant, Lanigan and Kolb, LLP, Suite 111, 277 Coon Rapids Boulevard NW, Coon Rapids, Minnesota  55433, informed the Administrative Law Judge early in this proceeding that Range Center – Mapleview and Shingle Creek Option did not wish to be actively involved in the case and were willing to concur with any decision the Administrative Law Judge reaches in this matter regarding the REM Facilities. 

Notice is hereby given that, pursuant to Minn. Stat. § 14.61, the final decision of the Commissioner of Human Services shall not be made until this Report has been made available to the parties to the proceeding for at least ten days, and an opportunity has been afforded to each party adversely affected to file exceptions and present argument to the Commissioner.  Exceptions to this Recommended Order, if any, shall be filed with Michael O’Keefe, Commissioner of Human Services, 444 Lafayette Road, St. Paul, Minnesota 55155.

Based upon all the files, records, and proceedings herein, and for the reasons set forth in the accompanying Memorandum, the Administrative Law Judge makes the following:

RECOMMENDATION

IT IS HEREBY RESPECTFULLY RECOMMENDED that:

1.                  The Motion for Summary Disposition filed by the REM Facilities be GRANTED.

2.                  The Motion for Summary Disposition filed by the Department be DENIED.

 

Dated:  July 27, 2000.

                                                                                    _____________________________

                                                                                    BARBARA L. NEILSON

                                                                                    Administrative Law Judge

NOTICE

Pursuant to Minn. Stat. § 14.62, subd. 1, the agency is required to serve its final decision upon each party and the Administrative Law Judge by first class mail.

MEMORANDUM

Each of the parties in this contested case proceeding has moved for summary disposition on the grounds that there are no material issues of fact in dispute and the party is entitled to disposition of this case in its favor as a matter of law.  Summary disposition is the administrative equivalent of summary judgment.[1]  Summary judgment is appropriate where there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law.[2]  A genuine issue is one that is not a sham or frivolous.  A material fact is a fact whose resolution will affect the result or outcome of the case.[3]

To successfully resist a motion for summary disposition, the nonmoving party must show that specific facts are in dispute which have a bearing on the outcome of the case.[4]  The  existence of a genuine issue of material fact must be established by the nonmoving party by substantial evidence; general averments are not enough to meet the nonmoving party's burden under Minn. R. Civ. P. 56.05.[5]  The evidence presented to defeat a summary judgment motion, however, need not be in a form that would be admissible at trial.[6]  The nonmoving party also has the benefit of the most favorable view of the evidence.  All doubts and inferences must be resolved against the moving party.[7]

Neither party has raised any fact issue regarding the claims presented in this case.  The only issue to be decided is the proper categorization of expenses related to the routine servicing and ordinary upkeep of vehicles that are used by intermediate care facilities for the mentally retarded to transport residents.  This issue is appropriate for resolution by summary disposition.

Background

The REM Facilities are intermediate care facilities for persons with mental retardation (“ICFs/MR”).  The REM Facilities and other ICFs/MR are reimbursed for services provided to recipients of Medical Assistance by the Minnesota Medical Assistance program under rules adopted by the Department of Human Services for providing residential care services to persons with mental retardation.[8]  The current rate-setting system, which is referred to as “Rule 53,” was adopted by the Department in 1985.[9]  Under Rule 53, the Department reimburses ICFs/MR for services and costs based upon a facility’s historic cost of providing those services.[10]  The rate established for a provider for a particular rate year is based on the allowable costs from a previous cost-reporting year, increased by an indexed inflation factor based on the Consumer Price Index.[11]

ICFs/MR participating in the Medical Assistance program must file annual cost reports showing the costs that they incurred during the previous reporting period.[12]  These costs are reported on the facility’s cost report in one of six cost categories:  program operating costs, maintenance operating costs, administrative operating costs, payroll taxes and fringe benefits, special operating costs, and property-related costs.[13]  The first two cost categories—program operating costs and maintenance operating costs--are involved in the present case. 

The Department annually reviews cost reports filed by ICFs/MR in “desk audits” to assess compliance with applicable statutes and rules.  The Department also conducts periodic on-site “field audits” of cost reports.[14]  After a facility receives notice from the Department of its rate for the upcoming rate year, it may appeal the adjustments made during the desk audit if a successful appeal would result in a change to the facility’s total payment rate.[15]  After the Department receives an appeal, it must review the appeal and issue a written determination.  If an ICF/MR disagrees with the Department’s determination, it may request a contested case hearing to determine the proper resolution of specified appeal items.  Such a demand nullifies the written appeal determination issued by the Commissioner for that appeal item.[16]

This contested case proceeding involves the cost report submitted by the REM Facilities for the 1996 reporting year.  In that year, the REM Facilities reported certain costs associated with vehicle upkeep in the program operating cost category on its cost report covering the 1996 reporting period.  These costs included costs for regular service and maintenance, such as replacing tires, batteries, and windshield wiper blades, servicing brakes, and “winterizing.”[17]  On desk audit, the Department reclassified these costs from the program operating cost category to the maintenance operating cost category.[18]  This distinction is significant because the total costs that can be reported in the maintenance cost category are limited, while costs reported in the program operating cost category are not.  Because of the reclassification, the REM Facilities were disqualified from receiving an efficiency incentive or were put over the maintenance rate limit, which had the effect of reducing the payment rate.[19]  The REM Facilities requested reconsideration by the Department.[20]  The Department reconsidered the reclassification but refused to reverse the determination of the desk auditor.[21]  The REM Facilities subsequently requested this contested case proceeding.[22]

In 1990, the Association of Residential Resources in Minnesota (“ARRM”), which is a trade association of ICF/MR providers, and others commenced an action in Federal District Court against the Commissioner of Human Services relating to the reimbursement system applicable to ICF/MRs.[23]  The parties later entered into a partial Settlement Agreement that resolved a number of ARRM’s claims.  In connection with that settlement, the Department and ARRM agreed that, “[t]o the extent a vehicle is recognized as a program vehicle, its operating costs will be classified, and allowed to the extent otherwise allowable, as follows:  a.  Gasoline, routine servicing and repairs of vehicles will be classified as program costs.”[24]  Under the terms of the Settlement Agreement, this provision applied to cost reporting periods up to and including December 31, 1994.[25]  The Settlement Agreement thus was no longer in effect during the period relevant to REM’s 1996 cost report.

Relevant Rule Provisions

The parties agree that it is important to consider Minn. R. 9553.0040, subp. 1(G), in deciding how to categorize the costs at issue in this case.  As explained more fully below, REM contends that the plain language of Minn. R. 9553.0040, subp. 1(G) requires that the vehicle-related costs at issue be categorized in the program operating cost category.  In contrast, the Department argues that Minn. R. 9553.0040, subp. 1(G) and (K) and subpart 2, together with Minn. R. 9553.0035, subp. 8, clearly require that the costs at issue be reclassified to the maintenance operating cost category. 

These rule provisions at issue in this case provide in pertinent part as follows:

9553.0030  REPORTING BY COST CATEGORY

Subpart 1.  Program operating costs.  The direct costs of program functions must be reported in the program operating cost category.  These costs include:

* * *

G.          The operating costs and vehicle insurance expense of a facility owned vehicle except staff compensation costs, or reimbursement for mileage for use of a personal vehicle, to the extent that the vehicle is used to transport residents for program purposes;

* * *

K.        Repairs necessitated solely as the result of destructive resident behavior.

Subpart 2.  Maintenance operating costs.  The costs listed in this subpart are included in the maintenance operating cost category.

D.                Direct costs of plant operations and maintenance services include:

* * *

(4)               nondepreciable equipment and repairs not subject to capitalization under part 9553.0035, subpart 8, except as in subpart 1, item K; . . . .

Minn. R. 9553.0035, subpart 8 (the rule provision referenced in subp. 2(D)(4) of Minn. R. 9553.0400) in turn provides as follows:

Subp. 8.  Capitalization.  For rate years after September 30, 1986, the cost of purchasing or repairing capital assets shall be capitalized under items A to D, subject to part 9553.0060, subpart 1.

* * *

B.  Repairs that cost $500 or less may be treated as an expense.  Repairs that cost more than $500 and that extend the estimated useful life of the asset by at least two years must be capitalized.  Improvements made solely for the purpose of making an asset useful for purposes other than those for which it was originally used or more useful for the same purposes must also be capitalized if the cost exceeds $500.  Except for repairs necessitated solely as a result of destructive resident behavior, repairs treated as an expense must be classified in the maintenance operating cost category.  Repairs necessitated solely as a result of destructive resident behavior and treated as an expense must be classified as a program operating cost.

Definitions of certain of the key terms used in these rules are contained in Minn. R. 9553.0020.  These definitions include the following:

Subp. 5.  Capital assets.  “Capital assets” means a facility’s land, physical plant, land improvements, depreciable equipment, leasehold improvements, capitalized improvements and repairs, and all additions to or replacements of those assets.

* * *

Subp. 14.  Depreciable equipment.  “Depreciable equipment” means the standard moveable resident care equipment and support service equipment generally used in an ICF/MR.  Depreciable equipment includes the equipment specified in the major moveable equipment table of the depreciation guidelines.

* * *

Subp. 32.  Physical plant.  “Physical plant” means the building or buildings in which a program licensed to provide services to persons with mental retardation or related conditions . . . is located, and all equipment affixed to the building and not easily subject to transfer as specified in the building and fixed equipment tables of the depreciation guidelines, and auxiliary buildings . . .  and the allocated portion of office space . . . .

* * *

Subp. 40.  Repair.  “Repair” means the cost of labor and materials needed to restore an existing capital asset to sound condition after damage or malfunction or to maintain an existing capital asset in a usable condition.

Discussion

The REM Facilities assert that the plain language of Minn. R. 9553.0040, subp. 1, is controlling and requires that costs associated with the regular upkeep of vehicles used to transport residents for program purposes be classified in the program operating cost category.  The REM Facilities argue that the Department improperly relies upon Minn. R. 9553.0040, subp. 2(D)(4) as a basis for its assertion that the costs of program vehicle “repair” should be categorized as maintenance costs.  That rule provision, in REM’s view, merely requires that costs of repair be included in the maintenance operating cost category to the extent that they are related to “plant operations and maintenance.”  The REM Facilities thus assert that the rule upon which the Department relies does not apply to the costs of “repairing” program vehicles.

The REM Facilities further assert that classification of the vehicle expenses at issue in this matter as program operating expenses would be consistent with the Department’s past practice.[26]  James M. Horan, REM’s Chief Financial Officer, filed an affidavit in which he indicated that “[m]y experience had been that it was DHS’s practice to categorize such costs as program costs.”[27]  He asserted in October 26, 1994, and October 25, 1996, letters to the Department that REM had reported these costs in the program operating cost category in prior years and they were neither reclassified nor disallowed until the 1989 cost reports were desk audited.[28]  In response to these letters, the Department accepted REM’s position and allowed the program vehicle operating costs to remain in the program cost category in connection with the cost reports relating to 1993 and 1995 historical costs.[29]  Thus, the Department settled the 1989-93 and 1995 cost reports for REM on this issue in REM’s favor.[30]  The REM Facilities did not appeal any desk audit items relating to the cost report of 1994 historical costs.[31] 

The REM Facilities also stress that the ARRM Settlement Agreement reflected the Department’s agreement to categorize “gasoline, routine servicing and repairs” of program vehicles as program costs.  REM argues that the Department would not have agreed to the inclusion of this provision in the Settlement Agreement unless the treatment of such expenses as program costs was a reasonable interpretation of the existing rule.[32]  Although this provision of the Settlement Agreement applied only to cost reporting periods up to and including December 31, 1994, the REM Facilities pointed out that the Department continued to classify vehicle expenses and vehicle routine maintenance to the program cost category even after that time.[33]  The REM Facilities contend that the Department’s current approach represents a significant departure from its past practices and is an impermissible attempt to amend the rule without complying with the Administrative Procedure Act under Ebenezer Society v. Minnesota Department of Human Services.[34]

In response, the Department argues that the plain language of Rule 53 requires that the vehicle-related costs at issue in this proceeding, which the Department characterizes as vehicle “repairs,” be classified in the maintenance operating cost category.  The Department points out that the definition of “repair” in Rule 53 includes costs “needed to restore an existing capital asset to sound condition after damage or malfunction or to maintain an existing capital asset in a usable condition”[35] and the definition of “capital asset” includes “depreciable equipment.”[36]  The Department contends that the costs at issue here fall within the definition of “repairs” because the items identified were needed to “restore or maintain” the facility’s vehicles, which are “depreciable equipment” and thus constitute “capital assets.”  The Department acknowledges that rule part 9553.0040, subp. 1, classifies vehicle operating costs as program operating costs, but contends that the only “repairs” that may categorized as program operating costs are those that fall within the narrow exception in subpart K for “[r]epairs necessitated solely as the result of destructive resident behavior.”  That exception does not apply here.[37]  Accordingly, the Department contends that it is not appropriate to report the “repairs” at issue here in the program operating cost category.  The Department asserts that, under rule part 9553.0035, subp. 8, repairs that are not subject to capitalization (i.e., those that cost $500 or less) and costs relating to repairs of capital assets must be reported in the maintenance operating cost category. 

The Department does not dispute that the vehicles in question were used to transport residents for program purposes or that it was appropriate to classify “operating costs” such as fuel and oil for these vehicles in the program cost category.  However, the Department argues that costs to “repair” a vehicle, which includes costs to “maintain” a vehicle, are not properly included in a vehicle’s operating costs since the rule specifically treats repairs differently.  Although the Department concedes that “the costs could conceivably be considered ‘operating costs’ of a vehicle,” it asserts that “the more specific treatment of ‘repairs’ in the rule must be applied in this case.”[38]  Accordingly, the Department argues that its reclassification of the vehicle “repairs” to the maintenance operating cost category is required by the plain language of Rule 53.

With respect to the argument of the REM Facilities regarding the prior practice of the Department, the Department argues that “[t]he prior and current practice of DHS is to classify vehicle repairs as maintenance costs.”[39]  The Department filed a supporting affidavit of Diane Krueger, who is the Director of the Department’s Provider Appeals Division, indicating that “DHS prior and current practice is to classify vehicle repairs, which are not the result of destructive resident behavior, in the maintenance operating cost category under Minn. R. 9553.0040.”[40]  Ms. Krueger further attests that she reviewed the appeal of the REM Facilities regarding the categorization of vehicle expenses for the 1995 reporting year and her decision to allow the vehicle costs to be reported in the program cost category “was erroneous and not consistent with the applicable rule provisions or DHS policy and practice.”[41]  She pointed out that, for the 1996 reporting year involved in the present appeal, she affirmed the desk auditor’s adjustment classifying the costs claimed by the REM Facilities to the maintenance cost category.[42]  The Department emphasizes that the provider instruction manuals that were issued by the Department for the reporting years ending December 31, 1995, and December 31, 1996, and mailed each year to ICFs/MR, instructed providers to “[r]eport repair of vehicles on Line 6541.”[43]  Line 6541 is a line on the Rule 53 cost report that covers equipment repairs in the maintenance operating cost category.  The Department contends that these cost reporting manuals “provide substantial evidence of the Department’s past practice in interpreting Rule 53.”[44]  The Department argues that the REM Facilities have not established a different past practice.  The Department also asserts that its admitted error in reversing the desk auditor’s adjustment of REM’s cost report in a prior year does not negate the agency’s long-standing practice, consistent with the ruling of the Court of Appeals in Mary T. Associates, Inc. v. Minnesota Department of Human Services.[45] 

Finally, the Department argues that the ARRM Settlement Agreement cannot be used as an indication of the Department’s prior practice of classifying vehicle repairs.  In this regard, the Department points out that the agreement only applied to cost reporting periods prior to the period that is at issue in this contested case proceeding.[46]  The Department also emphasizes that the agreement by its own terms required that its provisions not be used as evidence of the Department’s interpretation of law or rule.  The Department contends that REM is merely speculating when it indicated that the Department, in signing the ARRM Settlement Agreement, apparently decided that the classification of routine servicing and repairs of program vehicles as program costs was consistent with Rule 53.  The Department also asserts that it would not be fair to say that the Department must continue to classify vehicle repairs in the program operating cost category now that the ARRM Settlement Agreement has expired.  As a result of the limited duration of the ARRM Settlement Agreement and the Department’s “long-standing prior practice,” the Department argues that the position of the REM Facilities must fail.

Based upon a careful consideration of the competing arguments made by the parties, the Administrative Law Judge has recommended that summary disposition be entered in favor of the REM Facilities and that the Department’s motion be denied.  Under well-established canons of statutory construction, it is evident that, “[w]hen the words of a law in their application to an existing situation are clear and free from all ambiguity, the letter of the law shall not be disregarded under the pretext of pursuing the spirit.”[47]  In other words, “[w]hen the language of a statute is clear and unambiguous, the plain meaning of the words in the statute is controlling.”[48]  The canons of construction are not limited in application to statutes, but apply equally to rules.[49]

In this case, Minn. R. 9553.0040, subp. 1, clearly states that “the operating costs and vehicle expenses of a facility owned vehicle” used to transport residents for program purposes must be reported in the program operating costs category.  Although the term “operating costs” is not defined in Rule 53, the generally accepted meaning of the “operating costs” of a vehicle would include costs for vehicle upkeep and maintenance such as replacing tires, batteries, and windshield wipers, servicing brakes, and “winterizing” vehicles.  Thus, the plain and unambiguous language of subpart 1 contemplates inclusion of these costs in the program operating costs category.

In contrast, Minn. R. 9553.0040, subp. 2(D), upon which the Department primarily relies, specifies that the “[d]irect costs of plant operations and maintenance services,” including “nondepreciable equipment and repairs not subject to capitalization” under Minn. R. 9553.0035, subp. 8, must be included in the maintenance operating costs category (emphasis added).  Rule 53 does not define the phrase “plant operations and maintenance services.”  The common usage of the term “plant” is as a shorthand reference for “physical plant.”  That term is defined in Rule 53 to mean a facility’s buildings, fixtures, auxiliary buildings, and office space.  Because vehicles are not buildings or equipment affixed to buildings, there is no indication that vehicles were intended to be encompassed within the meaning of the term “plant” or that they were intended to be included in the reference to “plant operations and maintenance services” set forth in Minn. R 9553.0040, subp. 2(D). 

It is evident that the definition of “repair” contained in the general definitional section of Rule 53[50] is very broad and would encompass the cost of labor and materials needed “to maintain an existing capital asset in a usable condition.”  It is not, however, appropriate to look at that definition in a vacuum and presume that vehicle upkeep costs must necessarily be included in the maintenance operating cost category just because such costs may fall within the broad definition of “repair” for some purposes of the rules.  Rather, the appropriate inquiry in this case is whether vehicle upkeep costs are “repairs” that are related to “plant operations and maintenance services” and therefore fall within the types of costs that must be included in the maintenance operating cost category under Minn. R. 9553.0040, subp. 2(D) rather than the program operating cost category under Minn. R 9553.0040, subp. 1.  Based upon the definition of “physical plant” and the commonly understood meaning of “plant operations and maintenance services,” the Administrative Law Judge concludes that the costs at issue in this case do not properly fall in the maintenance operating cost category.  As the REM Facilities noted in their Reply Brief, “[t]he rule relating to capitalization of costs does not expand the universe of costs to be included in the maintenance cost category, pursuant to subpart 2.D., beyond those costs relating to physical plant operations and maintenance.”[51]  Therefore, it is concluded that, under the plain language of Rule 53, vehicle upkeep costs are properly

included in the program operating costs category.  Because the rule is not ambiguous, there is no need to examine the past practice of the Department in interpreting the rule.[52]

The ARRM Settlement Agreement cannot be relied upon as an indication that this is the correct interpretation of Rule 53, as is made clear by the explicit language of the agreement:

Agreement of No Effect in Other Proceedings:  Except to enforce the terms of this agreement, this agreement may not be used as evidence or precedent in any future proceeding, by the parties to this agreement or any other person, nor does it constitute or involve in any way any admission by any party to this agreement of any fact or interpretation of law or rule. [53]

However, the ARRM Settlement Agreement is relevant to this matter because the Department apparently was of the view at the time that it entered into the Agreement that Rule 53 operated as a constraint on its ability to compromise in connection with the settlement.[54]  Thus, the fact that the Department was willing to enter into an agreement that allowed the costs of “gasoline, routine servicing and repairs of vehicles” to be classified as program operating costs demonstrates that the Department did not believe that such an agreement was contrary to explicit provisions of Rule 53 and lends additional support to the conclusion reached by the Administrative Law Judge in this case.

B.L.N.