DATE: July 13, 1998
In the Case of:
Heartland Manor at Carriage Town,
Petitioner,
- v. -
Health Care Financing Administration.
Civil Remedies CR516
App. Div. Docket No. A-98-065
Decision No. 1664
The Health Care Financing Administration (HCFA) appealed the February 26, 1998 decision by Administrative Law Judge (ALJ) Stephen J. Ahlgren, Heartland Manor at Carriage Town, DAB CR516 (1998) (ALJ Decision). Petitioner, a skilled nursing facility, had requested an ALJ hearing on a determination by HCFA dated May 21, 1997. HCFA had moved to dismiss Petitioner's request for an ALJ hearing under 42 C.F.R. Part 498, governing appeals procedures for determinations that affect Medicare program participation. Section 498.3(d) of the regulations lists administrative actions that are not initial determinations subject to appeal. Among those actions is "[t]he finding that an entity that had its provider agreement terminated may not file another agreement because the reasons for terminating the previous agreement have not been removed or there is insufficient assurance that the reasons for the exclusion will not recur." 42 C.F.R. . 498.3(d)(4). HCFA found that Petitioner was a previously terminated entity and that Petitioner did not meet the statutory and regulatory criteria for reentry as a Medicare participating provider. Accordingly, HCFA found that, under the governing regulations, its May 21, 1997 action was not an "initial determination" subject to appeal.
The ALJ concluded that Petitioner had a right to reconsideration and appeal. The ALJ found that the facility underwent a change of ownership following its termination from the Medicare program in 1989. Thus, the ALJ found that Petitioner was not a provider or entity that had its previous provider agreement terminated and which is seeking reentry into the Medicare program, but was a prospective provider seeking to participate for the first time in Medicare. Under 42 C.F.R. .. 498.3(b) and 498.5, a decision that a prospective provider does not qualify as a provider in the Medicare program is an initial determination subject to reconsideration and an opportunity for an ALJ hearing. Holding that HCFA's May 21, 1997 action constituted such a determination, the ALJ concluded that Petitioner had a right to receive a reconsideration of the determination. Since HCFA had not yet reconsidered the decision, however, the ALJ found that Petitioner's request for an ALJ hearing was premature. Accordingly, the ALJ dismissed Petitioner's request under 42 C.F.R. . 498.70(b) ("The party requesting a hearing . . . does not . . . have a right to a hearing").
The standard of review on a disputed issue of law is whether the ALJ decision is erroneous. We conclude, as discussed fully below, that the ALJ erred in concluding that Petitioner was a prospective provider and in concluding that HCFA's May 21, 1997 action constituted an appealable initial determination. Under the Social Security Act (Act) and HCFA regulations, read as a whole, a skilled nursing facility's status as an entity that had its provider agreement terminated or as a prospective provider cannot be determined without looking to the institution/facility in which patients receive care. Moreover, the statute and regulations distinguish a facility's owner from the facility itself, and, therefore, ownership cannot reasonably be viewed as determinative of Medicare participation status. We further conclude that the legislative history, HCFA's manuals, and the central principle underlying the certification and participation requirements -- protecting the health and safety of beneficiaries -- compel this result.
We do not conclude lightly that Petitioner has no hearing right. Concerns for providers, however, do not justify an interpretation that is inconsistent with the statutory and regulatory scheme as a whole and that could undermine congressional intent in committing to agency discretion the evaluation of whether there is reasonable assurance that vulnerable Medicare beneficiaries will be protected if placed in a facility where serious noncompliance problems previously arose. Moreover, to affirm the ALJ's conclusion that providers in Petitioner's position should have an opportunity for reconsideration and appeal would seriously undermine the remedy of termination and its consequences.
Accordingly, we affirm the ALJ's dismissal of Petitioner's request for review under 42 C.F.R. . 498.70(b), but on a different ground. We further conclude that Petitioner does not have a right to a reconsideration of HCFA's May 21, 1997 action.
I. Applicable Authority
Section 1819(f) of the Act provides that the Secretary of Health and Human Services (Secretary) bears the duty and responsibility "to assure that requirements which govern the provision of care in skilled nursing facilities . . . are adequate to protect the health, safety, welfare, and rights of residents. . . ." To qualify to participate in the Medicare program as a skilled nursing facility, a facility must be certified as meeting certain requirements imposed by statute, as well as requirements that the Secretary has determined to be necessary for the health and safety of individuals to whom services are furnished. The survey and certification process for skilled nursing facilities, established under section 1819(g) of the Act, is the means by which HCFA and its agents assess compliance with federal health, safety, and quality standards. In addition, section 1866 of the Act sets forth the criteria under which the Secretary may enter into a provider agreement, refuse to enter into such an agreement, or terminate an existing provider agreement.
The Secretary's regulations at 42 C.F.R. Part 488 implement the Act's survey, certification and enforcement provisions. Part 483 of the regulations addresses the statutory participation requirements for long term care facilities, which include skilled nursing facilities. The Act's provider agreement requirements are implemented at 42 C.F.R. Part 489.
Under section 1866(b)(2) of the Act and 42 C.F.R. . 489.53(a)(3), HCFA may terminate an agreement with any skilled nursing facility if HCFA finds that the provider no longer meets the appropriate conditions of participation or requirements for skilled nursing facilities. Under a separate subsection, 1866(c)(1), Congress provided that where the Secretary has terminated an agreement with a provider, "such provider may not file another agreement . . . unless the Secretary finds that the reason for the termination . . . has been removed and there is reasonable assurance that it will not recur." Section 489.57 of the regulations implements the statute as follows:
When a provider agreement has been terminated by HCFA under . 489.53 . . . a new agreement with that provider will not be accepted unless HCFA . . . finds--
Appeal rights relating to provider termination actions are established under section 1866(h)(1) of the Act, which states: ". . . an institution or agency dissatisfied with a determination by the Secretary that it is not a provider of services or with a determination described in subsection (b)(2) shall be entitled to a hearing thereon by the Secretary . . . ." Congress did not provide for appeals of determinations under section 1866(c)(1) of the Act.
The regulations at 42 C.F.R. Part 498 implement the appeals provisions of the Act that are relevant in this case. Section 498.5 of the regulations addresses appeal rights of providers and prospective providers. Under section 498.5(a)(1), a prospective provider dissatisfied with an initial determination that it does not qualify as a provider may request reconsideration, and section 498.5(a)(2) states that the prospective provider dissatisfied with a reconsidered determination under paragraph (a)(1) is entitled to a hearing before an ALJ. Section 498.3 of the regulations sets forth the procedures for reviewing initial determinations, listed under subsection 498.3(b). The initial determinations subject to review include "[w]hether a prospective provider qualifies as a provider." Subsection 498.3(d) lists administrative actions that are not initial determinations subject to appeal. Among the actions listed is "[t]he finding that an entity that had its provider agreement terminated may not file another agreement because the reasons for terminating the previous agreement have not been removed or there is insufficient assurance that the reasons for the exclusion will not recur." 42 C.F.R. . 498.3(d)(4).
Accordingly, the regulations explicitly establish that HCFA determinations authorized under section 1866(c)(1) of the Act and 42 C.F.R. . 489.57 are considered not to be initial determinations subject to reconsideration and appeal. Rather, these decisions are classified as administrative actions over which HCFA retains discretionary authority.
II. Background
The following summary of the facts of this case is based on that part of the ALJ's findings of fact and conclusions of law (FFCLs) and the ALJ's discussion of those FFCLs to which neither party excepted, and provides a background for analysis. This summary is provided for the convenience of the reader and is not intended to modify or reverse any FFCLs.
Between January 1989 and March 1993, the Flint, Michigan skilled nursing facility now known as Heartland Manor at Carriage Town was called Chateau Gardens and was owned and operated by Chateau Gardens, Inc. FFCLs 1, 2. As a result of a survey conducted in July 1989, HCFA determined in a letter dated August 11, 1989, that there was an immediate threat to patient health and safety at the facility. FFCL 3. Accordingly, HCFA terminated the facility's Medicare provider agreement effective August 19, 1989. FFCL 3.
On January 1, 1994, the Hurley Foundation, a subsidiary of Hurley Medical Center, purchased Chateau Gardens and renamed it Heartland Manor at Carriage Town (Heartland). FFCL 4. Thereafter, Petitioner (Heartland Manor at Carriage Town) applied to participate in the Medicare program on numerous occasions, but has been denied in all instances. FFCL 5. Following a survey conducted on July 22, 1994, HCFA determined that the deficiencies that led to the facility's termination in 1989 had recurred. Following a survey conducted on August 19, 1996, HCFA again found that the deficiencies that led to the 1989 termination had recurred and informed Petitioner that because it had "not removed the causes of the termination or established reasonable assurance that those causes [would] not recur," HCFA would not issue a provider agreement to Petitioner. In each instance, HCFA advised Petitioner that its findings were not subject to appeal under 42 C.F.R. . 498.3(d)(4). FFCLs 6-7.
In March 1997, Petitioner, representatives of the Michigan Department of Consumer and Industry Services (the State survey agency), and HCFA met to discuss the problems Petitioner had encountered in attempting to become a participating provider. HCFA treated this, and all other requests by Petitioner to participate, as a request by a once terminated facility attempting to reenter the program. Following the meeting, HCFA agreed to conduct another survey. FFCL 8.
On May 2, 1997, the Michigan State survey agency conducted a survey of Heartland. FFCL 8. As a result of the survey, HCFA issued a letter on May 21, 1997 denying Petitioner's request to enter the Medicare program as a skilled nursing facility due to its alleged noncompliance with program requirements for previously terminated providers. FFCL 8. Citing nine requirements with which it found the facility was not in compliance, HCFA wrote that the survey revealed substandard quality of care at the facility and that the most serious deficiencies constituted actual harm. HCFA Ex. 7. HCFA further wrote that, under 42 C.F.R. . 498.3(d)(4), its finding was not subject to appeal. HCFA Ex. 7. By letter dated June 2, 1997, Petitioner requested a reconsideration of HCFA's decision. FFCL 9. By letter dated July 2, 1997, HCFA informed Petitioner that HCFA would not reconsider the matter because its action did not constitute an appealable initial determination. FFCL 9.
III. Analysis
In the discussion below, we first address how the ALJ Decision evaluated the central question presented. We then set forth the FFCLs in the ALJ Decision to which HCFA has excepted. Next, we summarize Petitioner's contentions on appeal. We then present an analysis of the governing statutes, regulations, relevant legislative history and program issuances. After applying these provisions to the facts presented in this case and responding to Petitioner's contentions, we set forth our conclusions regarding the issue presented and the findings in the ALJ Decision.
A. The ALJ Decision
As summarized above, the ALJ found that Petitioner was a prospective provider and that the May 21, 1997 HCFA action constituted an initial determination as to whether Petitioner qualified as a provider. The ALJ reasoned that because the facility changed ownership and control following the 1989 termination of Chateau Gardens from the Medicare program, Heartland Manor was neither: 1) a "provider" within the meaning of 42 C.F.R.. 498.2, "inasmuch as it does not have, and has never had in effect, an agreement to participate in Medicare," nor 2) the same provider or entity that had its previous agreement to participate in Medicare terminated. ALJ Decision at 6-7. "There is nothing in the record," the ALJ wrote, "to suggest that the new owners had any ties to the previous owners, or that the purchase was anything other than an arm[']s length transaction." ALJ Decision at 7.
The ALJ Decision noted that under section 1866(c)(1) of the Act, where the Secretary has terminated an agreement with a provider, "such provider may not file another agreement unless the Secretary finds that the reason for the termination has been removed and there is reasonable assurance that it will not recur." The ALJ stated that, in using the term "such provider," Congress made clear that section 1866(c)(1) of the Act should apply only to a skilled nursing facility that was under the same ownership when its participation agreement was terminated. Similarly, the ALJ stated, by using the terms "that provider" and "its previous agreement," section 489.57 of the regulations "is quite clear . . . that it applies only to 'that' specific provider which had a previous agreement, had that agreement terminated, and is seeking readmission to the program." ALJ Decision at 11. The ALJ further stated that the regulations do not provide that, where a facility under old ownership had its participation agreement terminated, "the new owners will be prohibited from applying for participation in the program as prospective providers." ALJ Decision at 9. In sum, presuming that the owner of the facility is the provider, the ALJ concluded, "once an agreement is terminated, it ceases to exist for all but HCFA and the specific provider against whom the action was taken. A new owner cannot be assigned something which does not exist. It has no option other than to apply as a prospective provider." ALJ Decision at 12.
B. Exceptions and Contentions on Appeal
The ALJ Decision contained 17 FFCLs, including 12 uncontested findings. HCFA specifically excepted to FFCLs 13 and 14, which stated:
13. Petitioner is not a "provider" as defined by 42 C.F.R. . 498.2, inasmuch as it does not have, and has never had in effect, an agreement to participate in Medicare.
14. Further, Petitioner is not a provider or entity that had its previous provider agreement terminated and which is seeking readmission or reentry into the Medicare program for the reasons discussed below.
ALJ Decision at 6-7. In addition, HCFA urged the Board to find that HCFA's May 21, 1997 action was a determination committed to agency discretion by statute and regulation, and not subject to reconsideration or administrative or judicial appeal. Accordingly, HCFA also excepted to FFCLs 15, 16, and 17, which provided:
15. Petitioner is a "prospective provider" within the meaning of 42 C.F.R. . 498.2, that is, a SNF that seeks to participate in Medicare as a provider.
16. Following a survey on May 2, 1997, HCFA notified Petitioner on May 21, 1997 that Petitioner did not qualify to participate in the Medicare program. I find that this decision was, in fact, an "initial determination" within the meaning of 42 C.F.R. . 498.3(b)(1).
17. I further find that inasmuch as Petitioner is a prospective provider, it had a right to reconsideration pursuant to 42 C.F.R. . 498.22. . . . ALJ Decision at 7.
Petitioner submitted that the Board should deny HCFA's request for review and hold that: 1) Petitioner is a prospective provider seeking to participate in Medicare; and 2) HCFA's May 21, 1997 decision was an initial determination subject to review. Agreeing with the uncontested factual findings in the ALJ Decision, Petitioner added that subsequent to May 1997, two surveys were conducted, the first of which found Petitioner deficiency-free and the second of which initially found 14 violations of Medicare requirements, including two "G" level violations. Following a meeting with the Michigan State survey agency and use of the informal deficiency dispute resolution process, the "G" level citations were removed and, based on the remaining deficiencies, Petitioner was found to have only level II noncompliances. At this level, Petitioner asserted, "[i]f HCFA were to consider Petitioner a prospective provider, it would now be in the Medicare program." Petitioner Br. at 4.
Petitioner further submitted that the decision as to whether a new owner participates in Medicare as a prospective or reentry provider resides with the owner, not with HCFA. According to Petitioner, that a facility may exercise this option does not undermine congressional intent to protect resident health and safety because prospective providers are subjected to the same survey process as reentry providers and "must be in compliance just like any other provider." Petitioner Br. at 7. Petitioner further noted that HCFA retains the authority to enter a facility and conduct a survey at any time and to terminate a facility's participation quickly, if necessary.
Petitioner also took the position that HCFA's interpretation of the relevant regulations is unreasonable. Petitioner submitted that the key issue "is whether a facility is permitted to challenge the findings that HCFA makes in the survey process." Petitioner Br. at 9. According to Petitioner, the Michigan State survey agency is known to cite a very high frequency of facilities as not in substantial compliance at initial surveys, and Heartland was "completely in the norm with all other facilities in the State of Michigan." Petitioner Br. at 10. Heartland argued that it should not be required to undergo the "insurmountable task associated with re-entering the Medicare program in 1997" merely because the prior owner was terminated from Medicare in 1989. Petitioner Br. at 10. In addition, Heartland argued that since the survey and certification scheme has changed since the termination, it is impossible to know whether the reasons for the termination are similar to current regulatory requirements.
Petitioner submitted that the proper interpretation of the Act was briefed below and that HCFA errs in relying on provisions that apply only to facilities that are participating in Medicare. Petitioner also argued that the manuals on which HCFA relied have not been properly promulgated, do not have the force and effect of law, are merely interpretive, and were not published until March 1998. Petitioner argued specifically that, even if the Board looked to the documents, section 3210 of the State Operations Manual addressing changes of ownership, together with United States v. Vernon Home Health, Inc., 21 F.3d 693 (5th Cir. 1994), cert. denied 513 U.S. 1015 (1994), supports Heartland's position concerning a new owner's right to choose how it will be treated.
Petitioner submitted that its position is also supported by the regulation addressing changes of ownership, 42 C.F.R. . 488.414(d)(3)(ii), which allows a provider to show that poor past performance is no longer a factor. Petitioner argued that Heartland has demonstrated this to the satisfaction of the state. Further, while HCFA relied on subsection 488.414(d)(3)(i) of the regulation, providing that a facility may not avoid a remedy simply because it goes through a change of ownership, Petitioner asserted that a remedy can take place only if a facility is currently participating in Medicare. Also, Petitioner contended, Heartland was purchased in an arm's length transaction. Thus, Petitioner asserted, the concern that a change of ownership may be used to circumvent the reentry requirements does not apply in this case.
With respect to the Act's legislative history, Petitioner took the position that it did not dispute the goal of ensuring high quality of care to patients. Moreover, Petitioner contended, the concerns underlying the reentry screening process have been addressed by the reform legislation. Petitioner asserted that a facility will no longer be permitted to continue to be noncompliant without the imposition of serious remedies, and prospective providers are themselves now evaluated under an extraordinary screening process. Finally, Petitioner contended that the issue in the case is not whether it has met certain certification requirements, but whether it may have the opportunity to challenge HCFA's substantive determinations.
C. Discussion of the Issues
The central question presented in this case is whether, for purposes of applying the appeals provisions of section 1866 of the Act and 42 C.F.R. Part 498, HCFA's May 21, 1997 action was a determination concerning Petitioner as to: 1) "whether a prospective provider qualifies as a provider," under section 498.3(b)(1) of the regulations; or 2) a "finding that an entity that had its provider agreement terminated may not file another agreement because the reasons for terminating the previous agreement have not been removed or there is insufficient assurance that the reasons for the exclusion will not recur," under section 498.3(d)(4) of the regulations. A conclusion that Petitioner was a prospective provider that did not qualify as a provider would render HCFA's May 21, 1997 action an initial determination subject to reconsideration and an ALJ hearing under the appeals provisions of section 1866 of the Act and 42 C.F.R. .. 498.3(b)(1) and 498.5. A conclusion that Petitioner is an entity that had its provider agreement terminated, appealing a finding under 42 C.F.R. . 498.3(d)(4), would render HCFA's May 21, 1997 decision an administrative action not subject to appeal.
Statutes and Regulations
The starting point for purposes of analyzing the question presented in this case is the language of section 1866 of the Act and 42 C.F.R. .. 489.57 and 498.3(d)(4). As quoted above, section 1866(c)(1) of the Act states that where the Secretary has terminated an agreement with a provider, such provider may not file another agreement unless the Secretary finds that the reason for the termination has been removed and that there is reasonable assurance that it will not recur. Section 489.57 of the regulations states that when HCFA terminates a provider agreement, "a new agreement with that provider will not be accepted" unless HCFA finds: that the reason for the termination has been removed, that there is reasonable assurance that it will not recur, and that the provider has fulfilled all of the responsibilities "of its previous agreement." Section 498.3(d)(4) of the regulations lists the following action as an administrative decision that is not subject to appeal:
The finding that an entity that had its provider agreement terminated may not file another agreement because the reasons for terminating the previous agreement have not been removed or there is insufficient assurance that the reasons for the exclusion will not recur.
In relying on the above-quoted language of section 1866(c)(1) of the Act and section 489.57 of the regulations to conclude that the provisions do not apply to a facility that has undergone a change of ownership following termination, the ALJ equated provider status with ownership. The statute and regulations quoted above do establish that the reentry criteria apply to an entity only if the entity is the same entity as the provider that was previously terminated. The provisions are silent, however, with respect to whether the terms "provider" and "entity" are synonymous with "owner," as the ALJ effectively concluded. Thus, we see no basis, in the provisions on which the ALJ relied, for concluding that Medicare classifies Petitioner as a provider, terminated entity, or prospective provider based on ownership.
From reading the statute and regulations as a whole, in light of their purpose, we conclude that the ALJ erred in concluding that ownership was determinative of Petitioner's provider status. The statute and regulations support HCFA's associating the concept of an "entity" that was previously terminated from the Medicare program with the facility, including the physical plant, that was purchased by the new owner. Further, the statute and regulations specifically distinguish owners from the institutions/facilities that participate as providers. Moreover, under the specific language of the Act, the appeal rights set forth in the statute which govern participation determinations attach to an institution/facility, not to the owner of that institution/facility.
Our examination of the language of the statute and regulations includes the following relevant provisions:
Section 1861(u) of the Act states that "'provider of services' means a hospital, critical access hospital, skilled nursing facility . . . ." Section 498.2 of the regulations defines the term "provider" to mean "a hospital, rural primary care hospital (RPCH), skilled nursing facility (SNF), [etc.] . . . that has in effect an agreement to participate in Medicare . . . .." The regulations also define the term "prospective provider" at 42 C.F.R. 498.2 to mean "any of the listed entities [including a skilled nursing facility] that seeks to participate in Medicare as a provider."
Section 1861(j) of the Act states that the term "'skilled nursing facility' has the meaning given such term in section 1819(a)." Section 1819(a) of the Act in turn defines skilled nursing facility to mean "an institution (or a distinct part of an institution) which is primarily engaged in providing to residents skilled nursing care and related services . . . or rehabilitation services . . ., has in effect a transfer agreement . . . with one or more hospitals . . . and meets the requirements [relating to the provision of services and residents' rights]." (Emphasis added.) Section 1819 and the implementing regulations at Part 483 set out requirements that must be met to qualify as a "skilled nursing facility." These requirements include requirements associated with the building/physical plant in which patients receive care such as life safety from fire, emergency power, space and equipment, resident room design, call system, toilet and bathing facility, and ventilation criteria. 42 C.F.R. . 483.70.
Section 488.301 of the regulations defines "skilled nursing facility" to mean a Medicare nursing facility and defines "facility" to mean "a SNF or NF, or a distinct part SNF or NF, in accordance with . 483.5 of this chapter."
Section 483.5 reads:
Facility means, a skilled nursing facility (SNF) or a nursing facility (NF) which meets the requirements of sections 1819 or 1919(a), (b), (c), and (d) of the Act . . . . For Medicare and Medicaid purposes (including eligibility, coverage, certification, and payment), the "facility" is always the entity which participates in the program, whether that entity is comprised of all of, or a distinct part of a larger institution. . . (Emphasis added.)
Section 1819 of the Act is entitled "REQUIREMENTS FOR, AND ASSURING QUALITY OF CARE, IN SKILLED NURSING FACILITIES." A skilled nursing facility must meet provisions of the Life Safety Code (unless waived) or other State law "which adequately protects residents of and personnel in skilled nursing facilities," as well as other requirements related to physical environment. 1819(d)(2) and (3). A skilled nursing facility must meet applicable Federal, State, and local laws "which apply to professionals providing services in such a facility" and such other requirements the Secretary may find necessary, including requirements "relating to the physical facilities thereof." 1819(d)(4). The Secretary has general responsibility for assuring enforcement of requirements for "provision of care in skilled nursing facilities . . . ." 1819(f).
Implicit in these provisions, read together, is the concept that the term "provider," as applied to skilled nursing facilities, is integrally tied to the physical plant of the institution (or distinct part) in which patients are placed.
Notably, section 1866(h)(1) of the Act (formerly section 1869(c)), establishing the appeal rights at issue in this case, reads: ". . . an institution or agency dissatisfied with a determination by the Secretary that it is not a provider of services or with a determination described in subsection (b)(2) shall be entitled to a hearing thereon by the Secretary . . . ." (Emphasis added.) Thus, while the statute does not directly address the question whether ownership should be a determinative factor in identifying or classifying provider status, section 1866 of the Act uses the term "institution" for the entity that has an appeal right. Had Congress intended appeal rights to attach to owners of institutions, as opposed to institutions, the statute would have been worded differently.
Moreover, by directing that a skilled nursing facility be identified by looking to the participating entity, whether "comprised of all of, or a distinct part of a larger institution," section 483.5 of the regulations not only reinforces the conclusion that provider status should be tied to identification of an institution/facility (including the physical plant), but implicitly rejects the conclusion that provider status is linked to ownership. That is, the regulation appears to contemplate that a single institution comprised of several distinct parts or types of facilities may be owned by a single person or entity. In such a case, the regulation directs the Medicare program to look to the distinct physical part of the operation which furnishes skilled nursing facility services, not the owner, in order to identify the provider. Under the program, each type of facility is separately certified; a separate provider agreement would be executed by the owner for each facility. 42 C.F.R. . 489.3.
Our conclusion that the Medicare program does not equate provider status with ownership is also compelled by other sections in the Act and regulations that draw a distinction between owners and facilities. Section 1819(d) of the Act states that, when there is a change in "the persons with an ownership or control interest . . . in the facility . . . the skilled nursing facility must provide notice to the State agency responsible for the licensing of the facility" of the change and the identity of the new persons. Section 489.18 of the regulations separates the identity of a facility owner from the institution and provides that participation rights and obligations generally attach to the facility or institution rather than to the facility owner. The regulation states that "[w]hen there is a change of ownership . . . the existing provider agreement will automatically be assigned to the new owner . . . . An assigned agreement is subject to all applicable statutes and regulations and to the terms and conditions under which it was originally issued." The ALJ held that this regulation does not apply to the instant case because it pertains only to a change of ownership that takes place when a facility is operating under an existing provider agreement. While we agree that, on its face, section 498.18 applies where there is an existing provider agreement, this section, when read together with the sections of the Act and regulations discussed above, supports the conclusion that in evaluating certification and participation requirements, the Medicare program distinguishes owners from providers, and in doing so, ties certification requirements and participation rights to institutions/facilities rather than to the owners.
Section 488.414(d)(3) of the regulations also distinguishes owners from the institutions/facilities themselves. Further, this provision codifies the principle that an entity should not be able to avoid a compliance remedy by undergoing a change of ownership. The regulation reads:
(3) Change of ownership. (i) A facility may not avoid a remedy on the basis that it underwent a change of ownership. (ii) In a facility that has undergone a change of ownership, HCFA does not and the State may not restart the count of repeated substandard quality of care surveys unless the new owner can demonstrate to the satisfaction of HCFA or the State that the poor past performance no longer is a factor due to the change in ownership.
The ALJ concluded that section 488.414 was inapplicable to this case because, he determined, it "appl[ies] only to those instances where a facility has an existing provider agreement which is assigned to a new owner." ALJ Decision at 10. Similarly, Petitioner asserted that subsection (i) of the regulations does not apply to this case because "[a] remedy can only occur if a facility is currently participating in the Medicare program." Petitioner Br. at 20. We note, however, that 42 C.F.R. . 488.406(a), listing the remedies under Subpart F of Part 488, including section 488.414, which are available to impose on providers with deficiencies, reads: "In addition to the remedy of termination of the provider agreement, the following remedies are available . . . ." Accordingly, we read the term "remedy" in section 488.414(d)(3) to include involuntary termination, and we conclude that the regulation supports the determination that a provider may not avoid the consequences of termination by undergoing a change of ownership.
Further, we conclude that the rationale underlying section 488.414(d)(3)(i) of the regulations, to preclude facilities from circumventing remedies by engaging in certain business transactions, should be taken into account in evaluating the question before us. While the ALJ wrote that "there may or may not be a logical basis" for distinguishing changes of ownership which take place following a termination from those that take place while a provider is participating in the Medicare program, he concluded that "the plain fact is that, in using the words 'such provider,' Congress has limited the requirements of section 1866(c)(1) of the Act to the provider whose agreement was terminated." ALJ Decision at 10-11. The language of section 1866(c)(1), however, simply does not address the issue of how to identify "such provider whose agreement was terminated." Accordingly, to identify "such provider whose agreement was terminated," we must look to other sections of the Act and regulations, including 42 C.F.R. . 488.414, for guidance. These provisions, read as a whole in light of their purpose, do not support the ALJ's conclusion that a change in ownership following termination creates a new prospective provider.
Petitioner submitted that the need to prevent facilities from circumventing the consequences of termination does not bear on this case because Heartland was purchased in an arm's length transaction. We note however, that the regulation serves as a prophylactic measure to ensure that providers will not be able to avoid compliance remedies by engaging in sham, change of ownership transactions. The regulation does not call on the Secretary to distinguish sham transactions from arm's length transactions. Moreover, insofar as Part 488 of the regulations provides that involuntary termination represents but one of many remedies available to impose on noncompliant providers, it is only logical that the principle underlying section 488.414(d)(3)(i) be applied to cases involving changes of ownership following termination, as it does to all other noncompliance remedies.
Further, we conclude that to ignore the Secretary's rule concerning changes of ownership in the context of a facility sale that takes place following termination would subvert decisions to terminate facilities from the program and encourage facilities to circumvent the consequences of the remedy. Specifically, if terminated facilities were permitted to apply to the program as prospective providers following changes of ownership, as Petitioner contends, the first owners of the institutions would have no incentive to take the steps necessary to come into compliance with program requirements in order to reenter the program, but would instead be motivated to sell the facilities. That is, under new ownership, the facilities would be subjected to less exacting certification scrutiny, and, consquently, the facilities would likely be of greater value to the original owner if sold rather than held.
HCFA articulated the principle supporting section 488.414(d)(3) of the regulations in the preamble to the nursing home reform rules published on November 10, 1994. Responding to comments that HCFA should consider the compliance history of a facility to remain secondary because facilities that have changed ownership and/or personnel may not be able "to otherwise emerge positively due to poor compliance in the past," HCFA wrote:
A facility's prior compliance history should be considered regardless of a change of ownership. A facility is purchased "as is." The new owner acquires the compliance history, good or bad, as well as the assets. While we agree that after consideration of the facility's compliance history, HCFA or the State may conclude that such history is no longer a valid predictive factor of the facility's ability to achieve and maintain compliance (for example, following a change of ownership where the new owner "cleans house"), the burden of proof is on the new owner to demonstrate that poor past performance no longer is a predictive factor.
59 Fed. Reg. at 56,174. Indeed, subsection (ii) of the regulation ensures that if a new owner demonstrates that poor past performance is no longer a factor because of the change in ownership, HCFA and the State may restart the count of repeated substandard quality of care surveys.
While Petitioner argued that section 488.414(d)(3)(ii) in fact supports its case, we conclude that Petitioner's reliance on the subsection was misplaced. Petitioner appeared to contend that it could rely on the regulation because, following the two surveys of the facility conducted after May 1997, the Michigan State survey agency ultimately found the facility to be at only level II noncompliance. We note that the referenced Michigan agency's actions took place after the time of the HCFA actions involved in this case. Accordingly, the subsequent determinations are not at issue in this case. Further, the regulation, governing action when there is repeated substandard quality of care in a facility, states that a specific determination must be made by HCFA or the State that, because of the change of ownership, the facility's past poor performance is no longer a factor. The record does not show, however, that such a specific finding was ever made in connection with the subsequent surveys which Petitioner cites, or at any other time. Moreover, we note that even if a finding under section 488.414(d)(3)(ii) is made, it results only in restarting the count of substandard quality of care surveys; the regulation does not authorize a change of status for a reentry provider or otherwise enable the reentry provider to avoid a reasonable assurance period. Indeed, a separate subsection of the regulation, section 488.414(d)(2) specifically provides that "[t]ermination would allow the count of repeated substandard quality of care surveys to start over."
We also reject Petitioner's position that the passage of time since the 1989 termination of the facility from the Medicare program supports a conclusion that Petitioner should be considered a prospective provider, rather than a provider seeking to reenter the Medicare program. First, we note that neither the statute nor regulations provide that the passage of time may be taken into account in determining an entity's status in the program. In addition, we note that while the action in this case took place in 1997, Petitioner has been attempting to reenter the program since 1994. Further, as discussed below, the substantive criteria used to calculate the reasonable assurance period for a previously terminated provider include factors, such as the entity's geographic location and physical plant, that could contribute to deficiencies in a way that time alone would not cure. Accordingly, we conclude that it would potentially undermine the purpose of the requirements governing previously terminated providers to permit a reentry provider to be considered a prospective provider on the basis that the termination took place several years earlier.
Based on the foregoing analysis, we conclude that the relevant sections of the Act and regulations, read as a whole, compel the conclusion that the Medicare program does not classify a provider on the basis of ownership. Rather, the language of the governing sections of the Act and regulations provide that in questions involving appeals of certification matters, an entity's status as either a prospective provider seeking to participate as a skilled nursing facility or an entity seeking reentry into the program is linked to the physical facility or institution in which patients receive care.
Legislative History
We further conclude that the history of the nursing home reform legislation enacted by Congress in the late 1980s supports our reading of the Act and regulations. As reflected in the House Report on the legislation, H.R. Rep. No. 100-391(I), 100th Cong., 1st Sess. (1987), Congress revised the Medicare skilled nursing facility certification requirements in part to respond to past abuses and threats to patient health and safety under the earlier guidelines. The House Report cited a then recent report by the General Accounting Office (GAO) which reviewed the compliance histories of nearly 8,300 skilled nursing facilities. Based on the review, GAO found that 41 percent of skilled nursing facilities were out of compliance during three consecutive inspections with one or more of the Medicaid requirements that were likely to affect patient health and safety. The Report concluded that "[n]ursing homes can remain in the Medicare and Medicaid programs for years with serious deficiencies that threaten patient health and safety by taking corrective action to keep from being terminated each time they get caught." Id. at 451.
Particularly significant for purposes of this case, the House Report noted that a study by the Institute of Medicine of the National Academy of Sciences on the requirements governing nursing home certification under Medicare and Medicaid had found large numbers of nursing homes that were "chronically out of compliance when surveyed, may or may not be subject to mild sanctions, temporarily correct their deficiencies under a plan of correction, and then quickly lapse into noncompliance until the next annual survey." The House Report stated that the proposed amendments were expected to end what it called this "yo/yo or roller coaster phenomenon"; "the Secretary and the States are expected to eliminate substandard providers from the program and to deter repeat violations, not to allow substandard providers to remain in the program through a policy or practice of consultation." Id. at 471.
As summarized above, Petitioner submitted that as a result of the changes in the certification requirements following the enactment of the nursing home reform legislation, the concerns that originally gave rise to the requirements imposed on terminated providers seeking reentry into the program no longer exist. Specifically, Petitioner contended, a facility will not be permitted to continue to be noncompliant without the imposition of serious remedies, and prospective providers are themselves now subjected to an extraordinary screening process. Further, Petitioner asserted, the only differences between the treatment of prospective providers and reentry providers are: "(1) HCFA's decisions of deficiency determinations are reviewable when the facility is considered a prospective provider; [and] (2) No reasonable assurance period is REQUIRED [for prospective providers]." Petitioner Br. at 7.
We note, however, that while the legislation enacting nursing home reform resulted in substantial changes in the certification process for Medicare skilled nursing facilities, Congress chose to retain the provisions in section 1866(c)(1) of the Act and section 1866(h) of the Act as they existed before the amendments. Similarly, the Secretary retained the implementing regulations of the provisions, 42 C.F.R. .. 489.57 and 498.3(d)(4).
We conclude that the retention of these provisions was intentional because they support the underlying goals of the reform legislation. Specifically, an entity that has been subjected to the remedy of involuntary termination in the program should be required to undergo a particularly rigorous review before being allowed to reenter the program in order to prevent a particularly disruptive "yo-yo" phenomenon of termination from, and temporary reentry into, the program. Thus, while we agree with Petitioner that as a result of the nursing home reform legislation, providers no longer can continue to be noncompliant without being subjected to serious remedies, we conclude that the high level of scrutiny imposed on providers seeking reentry is integral to the compliance scheme envisioned by Congress when it reformed the compliance and certification requirements for skilled nursing facilities in the late 1980s.
We reject Petitioner's argument that the nursing home reform legislation had the effect of changing participation requirements in such a way that it is impossible to evaluate whether the deficiencies found as a basis for termination under the prior requirements have been removed or are likely to recur. While Petitioner argued generally that current regulatory requirements and standards of practice could not be related to the reasons for termination in 1989, HCFA in fact has made such evaluations here. Moreover, Petitioner did not point to any specific deficiency found in 1989 to illustrate its argument.
We also reject Petitioner's suggestion that the new requirements provide sufficient incentives to ensure continuing compliance, and, therefore, minimize the risk of recurring deficiencies and the need for reasonable assurances. Even if this is true, it does not render inapplicable provisions that are intended to protect beneficiaries from a facility that cannot maintain compliance. As HCFA pointed out, once a facility is readmitted to the program, certain steps need to be taken in order to terminate participation. Thus, readmitting a facility without adequate assurance that deficiencies will not recur may place the health and safety of patients at risk over a considerable period of time. HCFA Reply at 3.
Policy Issuances
While not binding upon the ALJ or the Board, the relevant sections of HCFA's manuals that were in effect during the period at issue reasonably interpret the Act and regulations and show that, historically, HCFA has defined the status of terminated providers consistent with its position in this case. Most notably, section 1007 of the Regional Office Manual (December 1985 revision, HCFA Ex. 13), interpreting the key provisions of the Act and regulations at issue, addressed the requirement that a skilled nursing facility provide reasonable assurance that its compliance would be maintained in order to be readmitted into Medicare after an involuntary termination. The section read that "[i]n order for an entity to be readmitted to the Medicare or Medicaid program following involuntary termination it must provide reasonable assurance that compliance will be maintained." (Emphasis added.) The manual then set forth a series of questions to assist the Regional Office in setting the length of the reasonable assurance period for a previously terminated entity.
Significantly, the manual divided the reasonable assurance period questions into three categories: A. "Applicant's Compliance History"; B. "Institution's Compliance History"; and C. "Previous Adverse Action." The first question in category A of section 1007 referred to the Medicare and Medicaid compliance history of the "entity." Thus, this section equated the term "applicant" with the term "entity," not "owner." Notably, the fourth and last question in section A read: "Has adverse action been initiated against the current owner but not put into effect? Has there been a change of ownership or management or a court appointed receiver since the adverse action?" Thus, the manual provision not only distinguished the facility from the owner, but also squarely contemplated the scenario presented in this case, a change of ownership following an adverse action, or termination. Contemplating this scenario, the manual classified the situation as one where the facility would continue to be evaluated under the reasonable assurance provisions for reentry providers. That is, the manual provided that the new owner would be subjected to the criteria applicable to a previously terminated provider seeking readmission, not the criteria applicable to a new, prospective provider.
Further relevant, both the text and content of subsection 1007.B of the Regional Office Manual are consistent with our conclusion that, based on the statute and regulations, for purposes of evaluating appeals of compliance and participation matters, provider status should be tied to the institution or facility, rather than the owner. First, both the title of subsection B and the questions in the category referred to the facility as the "institution," thus interpreting section 1866 of the Act and sections 489.57 and 498.3 of the regulations consistent with our conclusions about those provisions. Further, the content of the subsection B questions demonstrates the rationale for linking provider status to the facility or institution. Specifically, the questions read:
While Petitioner questioned the relevance and applicability of HCFA's program issuances, it nevertheless stated that if one looks to the manuals for guidance, section 3210 of the State Operations Manual and Vernon, 21 F.3d 696, support its position. Specifically, Petitioner submitted that the manual and federal court decision support its contention that when a new owner purchases a previously terminated facility, "the new owner may choose to enter the Medicare program as a prospective provider or as a re-entry provider." Petitioner Br. at 7. The manual section quoted by Petitioner states:
When a provider undergoes a [change of ownership,] the provider agreement is already automatically assigned to the new owner unless the new owner rejects assignment of the provider agreement. If the new owner rejects this assignment, the provider organization will not be able to participate in the Medicare program without going through the same process as any new provider, i.e., applying for participation, undergoing ... an initial survey, [etc.].
Based on the above provision, Petitioner submitted that at the time of a change of ownership, the decision as to how the new owner will be treated resides with the new owner.
We note that the Petitioner quoted from the March 1998 revision of section 3210 of the Manual, which was not in effect when the actions at issue in this case took place. The earlier, 1985 version of the section did not address a new owner's authority to reject assignment, but merely stated: "When an institution having a provider agreement . . . undergoes a change in ownership, the provider agreement is automatically assigned to the successor owner." Further, the plain language of the revised version of the manual quoted by Petitioner, as well as the dicta in Vernon on which Petitioner relied, limit a new owner's authority to reject assignment of an agreement and apply to the Medicare program as a new provider to situations where there is an existing provider agreement, i.e., where the provider agreement of the former owner was not terminated. Moreover, in a separate subsection, 3210.1B.3, of the March 1998 version of the manual, HCFA states that where there is a change of ownership during the reasonable assurance period, following termination, the "new owner may request approval for reentry, subject to operation of the facility for a certain period of time without recurrence of the deficiencies which were the basis for termination." (Emphasis added.) The manual also states that the reasonable assurance period will not be altered because of a change of ownership. Thus, we conclude that Petitioner's reliance on the manual is misplaced.
Further, we conclude that to read section 3210 of the State Operations Manual to support Petitioner's contention that a new owner of a previously terminated provider retains sole authority to decide whether it can apply as a prospective provider or a reentry provider in the Medicare program would defeat the purpose of the certification and participation requirements. That is, where a skilled nursing facility has an existing provider agreement, it is presumed to be in such compliance with the Medicare certification criteria that it is allowed to operate as a participating provider. Where such a participating provider changes ownership, allowing the facility to apply as a new provider in the program merely gives the new owner an option of being subjected to greater scrutiny than if it simply continued to operate under the existing agreement. Accordingly, the choice not to accept assignment of an existing provider agreement allows the new owner to take other considerations of operating its business into account, while promoting the paramount goal of the certification requirements -- protecting the health and safety of patients. The same outcome, however, does not flow from the choice that Petitioner argued resides with the new owner of a previously terminated provider. In sum, to allow the new owner the option to participate as a prospective provider, as opposed to a reentry provider, would be to relax the compliance criteria that otherwise would apply to the entity, thus potentially sacrificing the goal of patient protection.
Finally, and of particular significance, Petitioner has emphasized that the critical issue in this case is not whether Heartland has in fact met the applicable certification criteria, but whether Petitioner will be afforded the opportunity to contest the May 2, 1997 survey findings. We are mindful of the stakes involved in questions concerning the availability of appeals in Departmental programs. For the reasons detailed above, however, we conclude that Congress and the Secretary specifically exempted the type of determination at issue in this case from appeal. Further, the policy considerations reflected in the legislative history of the nursing home reform legislation, together with HCFA's expertise in administering the certification and participation requirements, lead us to conclude that it is appropriate to vest in the agency the discretion to make independent decisions with respect to whether, in the case of a previously terminated provider, the reasons for the termination have been removed and there is reasonable assurance that they will not recur.
Moreover, we note that the facility did have an opportunity to appeal the survey findings on which the 1989 termination was based. Thus, it did not become a terminated entity without first having been provided an appeal right. Having been subjected to the most serious remedy for noncompliant providers and given an opportunity to appeal the termination findings, the facility was then accorded a status which Congress and the Secretary determined should be accompanied by different procedural protections than those accorded to prospective providers. For the reasons detailed above, we conclude that the rationale for subjecting terminated providers to more exacting scrutiny to reenter the Medicare program and diminished procedural protections is not diminished by a change of ownership following termination.
Based on the foregoing analysis, we conclude that the ALJ erred in rejecting HCFA's determination that Petitioner was an entity seeking reentry into the Medicare program at the time of the May 1997 survey and HCFA action. Specifically, we conclude that the ALJ erred in construing the language of the governing sections of the Act and regulations to equate provider status with facility ownership. Under the language of the Act and regulations, Petitioner's status cannot be determined on the basis of facility ownership. Rather, the language of the governing sections of the statute and regulations, together with the legislative history and manual provisions discussed above, compels us to conclude that in questions involving appeal rights in Medicare certification, compliance, and participation matters, an entity's status as either a prospective provider seeking to provide skilled nursing facility services or a terminated provider seeking reentry into the program must be tied to the distinct institution/facility, including the physical plant, in which patients receive care, rather than to the identity of the owner.
Applying this determination to the facts presented in this case, we conclude that at the time of the May 1997 survey and HCFA determination at issue, Petitioner was a previously terminated provider seeking reentry into the Medicare program. Accordingly, HCFA's May 21, 1997 decision constituted an administrative action not subject to review under 42 C.F.R. . 498.3(d)(4).
IV. Conclusion
For the reasons discussed above, we affirm those FFCLs to which no exceptions were made, FFCLs 1-12. We reverse FFCLs 13, 14, 15, 16, and 17, and adopt the following substitute FFCLs:
FFCL 13. Petitioner is a provider that had its previous provider agreement terminated and is seeking reentry into the Medicare program.
FFCL 14. Petitioner is not a "prospective provider" within the meaning of 42 C.F.R. . 498.2.
FFCL 15. Following a survey conducted on May 2, 1997, HCFA notified Petitioner on May 21, 1997, that Petitioner did not meet the criteria for reentry into the Medicare program. HCFA Ex. 7. This decision was an administrative action within the meaning of 42 C.F.R. . 498.3(d)(4) and was not an initial determination under 42 C.F.R. . 498.3(b).
FFCL 16. Because the May 21, 1997 decision was not an initial determination under 42 C.F.R. . 498.3, Petitioner is not entitled to a reconsidered determination from HCFA or a hearing before an ALJ on the action.
FFCL 17. As no review rights attach to the May 21, 1997 action, Petitioner's request for review must be dismissed pursuant to 42 C.F.R. . 498.70(b).
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Cecilia Sparks Ford
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Donald F. Garrett
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Judith A. Ballard
Presiding Board Member