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09/16/87 Gary W. Moehle Et Al. v. Jeffrey C. Miller

September 16, 1987





513 N.E.2d 612, 160 Ill. App. 3d 385, 112 Ill. Dec. 198 1987.IL.1357

Appeal from the Circuit Court of Tazewell County; the Hon. Donald C. Courson, Judge, presiding.


JUSTICE SCOTT delivered the opinion of the court. STOUDER and WOMBACHER, JJ., concur.


Washington Nursing Center, Inc., operated a nursing home in Washington, Illinois, which it leased from Washington Americana, Inc. Washington Nursing Center received revenue for services from the Illinois Department of Public Aid (hereinafter the Department) under the Federal Medicaid program administered by the Department. Following transfers of stock in Washington Americana in 1976 and 1977, the owners of the nursing home applied to the Department for a new reimbursement rate under the Medicaid program. The Department denied the request, a denial that was reversed on review by the circuit court of Tazewell County. The Department now seeks appellate reconsideration of the circuit court's order of reversal.

Until June 30, 1975, the officers and directors of Washington Nursing Center, Inc., were Florence L. Baltz, Max H. Baltz and Melvin O. Moehle. Until July 1, 1976, the shareholders of Washington Americana, Inc., were Florence L. Baltz, Max H. Baltz and Melvin O. Moehle. On July 1, 1976, Melvin O. Moehle and Lorraine N. Moehle purchased all the shares of Washington Americana which were owned by Florence L. Baltz and Max H. Baltz, and thereafter the Moehles were the sole owners of all the issued and outstanding shares of the corporation. On January 7, 1977, Washington Americana was dissolved and the real estate owned by the corporation was deeded to the Moehles as tenants in common. The Moehles had previously taken control of the Washington Nursing Center shares owned by the Baltzes.

On January 4, 1978, Melvin O. Moehle requested the Department to recalculate the capital rate established for Washington Nursing Center, Inc., contending that the stock sale and subsequent liquidation of the Washington Americana corporation should result in an increase in the capital cost reimbursement allowed by the Department with respect to the Washington Nursing facility. The Department refused any change in the reimbursement amount allowed to the nursing center, citing Illinois Department of Public Aid Rule 4.143 (August 4, 1978).

On May 4, 1979, Washington Nursing Center filed a complaint for declaratory judgment in the circuit court of Tazewell County. That complaint sought a judicial finding that the transactions in 1976 and 1977 were a change of ownership and that 1977 was the base year the Department was required to use in computing the nursing facility's capital cost reimbursement. The circuit court, on a motion for summary judgment, found in favor of the plaintiffs-appellees and against the Department. The Department prosecuted the instant appeal.

It is helpful to an understanding of this case to reiterate the Federal program here involved -- Medicaid -- and to expressly state the program not involved -- Medicare. The latter "is a federally sponsored program in which the federal government enters into a direct relationship with the private health care provider. Medicaid is also a federally sponsored program. However, it is distinguished from Medicare by the active participation of the states as middlemen in the payment procedure. Under Medicaid, the state, not the federal government, enters into a direct agreement with a local health care provider. The federal government's involvement is limited to reimbursing the state for a portion of its expenses." (Emphasis in original.) Woodstock/Kenosha Health Center v. Bowen (7th Cir. 1987), 810 F.2d 123, 124.

"The Medicaid Program embodied in Title XIX of the Social Security Act, 42 U.S.C. Sec. 1396 et. seq., provides for a partnership between federal and state government designed to share the cost of medical services to needy individuals with limited incomes and resources. Under Title XIX, a state must designate 'a single state agency to administer or to supervise the administration of the [state Medicaid] plan.' [Citation.] That state agency then draws up a medical assistance plan consistent with the guidelines contained in Title XIX and the regulations promulgated thereunder and submits it to the Department of Health and Human Services for approval. Upon approval of the plan by HHS, the state becomes eligible for federal matching funds for reimbursement of the cost of specific types of medical assistance. [Citation.]

In 1972, Congress amended the existing Medicaid legislation to provide for reimbursement of skilled and intermediate nursing care facilities on a 'reasonable cost related basis' for services rendered to Medicaid recipients. [Citation.] The 1972 amendment 'was apparently a result of Congressional displeasure with widespread state endorsement of flat rate payment systems which were perceived as failing to bring about quality care and the efficient, economical provision of such service.' [Citation.] By providing for payment on a 'reasonable cost related basis' in 42 U.S.C. Sec. 1396a(a)(13)rather than payment of the 'reasonable cost' of services as provided in 42 U.S.C. Sec. 1396a(a)(13)Congress intended to give states greater flexibility in formulating reimbursement methods that would assure quality care for low income nursing home residents while also controlling the spiraling costs of Medicaid." Illinois Council for Long Term Care v. Miller (N.D. Ill. 1980), 503 F. Supp. 1091, 1092-93.

The State of Illinois developed its own reimbursement methods utilizing the latitude offered by the Federal code. Specifically, the Illinois formula did not require the reimbursement of each institution's actual cost, but rather categorized nursing care institutions into classes according to age and provided that reimbursement would be the same for each class. The Department adopted this approach

"to prevent 'trafficking' or 'pyramiding' in nursing homes, a practice that apparently had become quite widespread in the industry. Studies of the nursing home industry had revealed that there was a substantial secondary market in nursing homes whereby nursing home operators would sell their facilities to each other at prices well in excess of construction costs in order to obtain increased reimbursement for capital costs. Basing reimbursement on such increased sales 'costs' does nothing to upgrade the quality of care available to the low income residents of the facility who are to be the ultimate beneficiaries of Medicaid. Rather, in such circumstances, reimbursement of actual capital costs creates an incentive to engage in sham transactions in which the buyer, assured of full capital cost reimbursement from the state, is willing to pay an inflated price for the nursing facility with no corresponding commitment to upgrade the standard of care provided by the facility. The cut-off date of July 1, 1977, was selected by [the ...

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