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December 4, 1995



Petition for Leave to Appeal Denied April 3, 1996.

Presiding Justice Campbell delivered the opinion of the court: Buckley, J., and Braden, J., concur.

The opinion of the court was delivered by: Campbell

PRESIDING JUSTICE CAMPBELL delivered the opinion of the court:

Plaintiff Westshire Retirement and Health Care Center ("Westshire") filed a five-count complaint in the circuit court of Cook County against defendants Illinois Department of Public Aid (IDPA) and IDPA Director Philip C. Bradley, challenging the validity and legality of a Medicaid reimbursement regulation promulgated by IDPA in 1985 ("the 1985 regulation"). On cross-motions for summary judgment, the circuit court held that the 1985 regulation was arbitrary and capricious and violated Illinois statutory law. The circuit court later ruled that plaintiff had failed to prove any damages. The trial court denied plaintiff's motions to amend its complaint and for rehearing. Plaintiff and Defendants now appeal.

A Brief History of the Statutes and Regulations Involved

Nursing-home care for needy residents of the State of Illinois is provided through Medicaid, which is a cooperative State and Federal program in which the State is partially reimbursed by the Federal government. The program is authorized under the Social Security Act (42 U.S.C. § 1396 et seq.) and implemented in accordance with Federal regulations. A state becomes eligible for federal Medicaid funds by having a state Medicaid plan that conforms to federal law approved by the Secretary of the Department of Health and Human Services.

Illinois' participation in the Medicaid program is governed by Article V of the Public Aid Code (305 ILCS 5/5-1 et seq. (West 1992) ("the Medical Assistance Act")) and implementing regulations promulgated by the IDPA (89 Ill. Admin. Code ch. 1, § 140.500 et seq.). The implementing regulations establish a method for calculating a nursing home's reimbursement rate based on three components. The first component is the capital rate, which applies to ownership and rental costs for buildings and equipment. The second component is the support rate, which applies to costs including food, maintenance, utilities, insurance and office expenses. The third component is the nursing rate, which applies to direct resident care costs, staff salaries, consultant fees, therapy fees and nursing supply costs. These three components are calculated separately and then combined into an overall per diem rate paid by IDPA for each day of nursing home care provided to each qualified resident. It should be noted that the rate for a fiscal year is based on the calendar year that commenced 18 months earlier; for example, costs for calendar year 1985 form the basis for rates in fiscal year 1988, which covers the period from July 1, 1987, through June 30, 1988.

This appeal concerns IDPA regulations relating to the capital rate reimbursement. Prior to June 1985, the regulations provided that the value of fixed assets was calculated by taking a base cost of a facility and adjusting it to account for inflation and accumulated depreciation. These capital items were then to be converted to a per diem rate. Regarding the base cost of a facility, the regulations provided that a sale or lease of the facility occurring after 1977 would not result in a revaluation of the original acquisition or construction cost of the facility. See 89 Ill. Admin. Code §§ 140.563, 140.570-772 (January 1, 1985).

Congress enacted the Deficit Reduction Act of 1984 ("DEFRA"), P.L. 98-369, on July 18, 1984. Various provisions of DEFRA amended federal law governing both the Medicare and Medicaid programs. One amendment of the Medicaid law provided

"that the State shall provide assurances satisfactory to the Secretary [of HHS] that the payment methodology utilized by the State for payments to hospitals, skilled nursing facilities and intermediate care facilities can reasonably be expected not to increase such payments solely as a result of a change of ownership, in excess of the increase which would result from the application of [ 42 U.S.C. § 1395x(v)(1)(O)]." (See 42 U.S.C. § 1396(a)(13)(B) (1984).)

DEFRA added 42 U.S.C. § 1395x(v)(1)(O) as an amendment to the Medicare law that provided in part as follows:

"In establishing an appropriate allowance for depreciation and for interest on capital indebtedness an (if applicable) a return on equity capital with respect to an asset of a hospital or skilled nursing facility which has undergone a change of ownership, such regulations shall provide that the valuation of the asset after such change of ownership shall be the lesser of the allowable acquisition cost of such asset to the owner of record as of July 18, 1984 ***, or the acquisition cost of such asset to the new owner." (42 U.S.C. § 1395x(v)(1)(O)(i) (1984).)

Congress later amended 42 U.S.C. § 1396(a)(13)(B) to exclude skilled nursing facilities from that section's requirements. (See 42 U.S.C. § 1396(a)(13)(B) (1986).) However, federal regulations permitted state Medicaid programs to continue to reimburse nursing facilities consistent with the DEFRA version of the statute. See 52 Fed. Reg. 39,928 (1987).

In June 1985, the IDPA published a proposed amendment to the capital cost reimbursement methodology in the Illinois Register. The proposed amendment adopted the above-quoted "lesser of" methodology of DEFRA as codified at 42 U.S.C. § 1395x(v)(1)(O)(i) (1984). The proposed amendment became effective as of December 2, 1985. See 89 Ill. Admin. Code, Ch. 1, § 140.571(e).

In 1986, the Illinois General Assembly passed Public Act 84-1321, which amended the Illinois Medical Assistance Act to bar the IDPA from using any depreciation factor in calculating capital cost reimbursement. (See 305 ILCS 5/5-5.5(b)(1) (West 1992).) As noted above, the IDPA did use such a factor at the time. Accordingly, in 1987, the IDPA proposed amendments to the Illinois Administrative Code regarding the calculation of capital cost reimbursement. The 1987 amendments, which became effective on July 1, 1987, removed not only section 140.571(a) regarding the depreciation factor, but also section 140.571(e), which contained the "lesser of" methodology for calculating capital costs. However, similar "lesser of" language was added in regulations specifically addressing the calculation of the ...

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