In the Matter of New Surfside Nursing Home, LLC, et al., Appellants,v.Richard F. Daines,, et al., Respondents.BriefN.Y.Jan 16, 2014Appeal No.: APL-2013-00153 Court ni Appeal* In the Matter of the Application of NEW SURFSIDE NURSING HOME, LLC and MEADOW PARK REHABILITATION AND HEALTH CARE CENTER, LLC, Petitioners-Appellants, -against- RICHARD F. DAINES, M.D., COMMISSIONER OF NEW YORK STATE DEPARTMENT OF HEALTH, and ROBERT L. MEGNA, BUDGET DIRECTOR OF THE NEW YORK STATE DIVISION OF BUDGET, Respondents-Respondents. For Relief Pursuant to Article 78 of the Civil Practice Law and Rules of the State of New York. APPELLANTS' LETTER SUBMISSION PURSUANT TO RULE 500.11 Dated: September 19, 2013 HAMBURGER, MAXSON, YAFFE, KNAUER & McNALLY, LLP Attorneys for Petitioners 225 Broadhollow Road, Suite 30IE Melville, New York 11747 631.694.2400 TABLE OF CONTENTS INTRODUCTION 2 POINT I IN DETERMINING THAT THIS PROCEEDING WAS UNTIMELY, THE APPELLATE DIVISION ERRONEOUSLY CREATED AN "AUDIT" EXCEPTION TO THE MEDICAID-RATE-SHEET- RECEIPT-RULE ESTABLISHED BY THIS COURT IN NEW YORK STATE ASS'N OF COUNTIES v. AXELROD AsA Matter Of Law, The Article 78 Proceeding Was Timely Commenced Within Four Months Of The State's Issuance Of Revised Medicaid Rate Sheets To The Nursing Homes B. The Cases Cited ByThe Majority Panel OfThe Second Department In Support OfIts Contrary Determination Are Irrelevant POINT II AS A MATTER OF LAW, JUDICIAL ESTOPPEL BARS THE STATE'S CONTENTIONS REGARDING THE "FINALITY" OF THE AUDIT REPORTS, GIVEN IT'S SUCCESSFUL ASSERTION IN A COURT OF CLAIMS ACTION THAT MEADOW PARK'S CLAIMS HAD "NOTACCRUED" BECAUSE IT HAD "NOT RECEIVED REVISED MEDICAID RATE SHEETS" POINTIIITHE STATE VIOLATED GOVERNING REGULATIONS IN CONTROVERTING REIMBURSEMENT AT THE "RESTORATIVE THERAPY" LEVEL FOR THE SUCCESSFUL COGNITIVE REHABILITATION SERVICES PROVIDED IN THE APPELLANTS' NEUROBIOLOGICAL PROGRAM UNITS 16 22 26 A. B. POINT IV The Neurobiological Program 26 The State Violated Governing Regulations In Controverting The Neurobiological Program Patients From The Heavy Rehabilitation (Restorative Therapy) Patient Designation . .. Even li, Arguendo, The Appellants' Provision Of Successful Cognitive Therapy To Patients In Their Neurobiological Program Did Not Qualify For Reimbursement At The "Restorative Therapy" Level, There Was No Lawful Basis For Controverting The Patients Down To The Lowest Reimbursement Care Category THE COURTS BELOW ERRONEOUSLY DISMISSED THE PETITION BASED UPON STRAW MAN ARGUMENTS PRESENTED BY THE STATE 30 39 45 POINT V THIS CASE DOES NOT TURN UPON OR INVOLVE JUDICIAL REVIEW OF THE EXERCISE OF AGENCY EXPERTISE OR FACT FINDING, AND ITTHEREFORE DOES NOT TRIGGER THE AGENCY DEFERENCE RULE 49 POINT VI THE DISSENTING OPINION ISSUED BY JUSTICE AUSTIN ILLUSTRATES THE IMPORTANCE OF A BRIGHT LINE RULE 51 CONCLUSION 54 n Hamburger, Maxson, Yaffe, Knauer & McNallx llp Attorneys at Law 225 Broadhollow Road, Suite 30IE Melville, New York 11747 631.694.2400 DAVID N. YAFFE firstname.lastname@example.org FaX: 631.694.1376 HMYLAW.COM September 19, 2013 VIA FEDERAL EXPRESS Andrew W. Klein, Chief Clerk New York State Court of Appeals 20 Eagle Street Albany, NY 12207-1095 Re: In the Matter of New Surfside Nursing Home, LLC, et al., Appellants v. Richard F. Daines, et al., Respondents Appeal No.: APL-2013-00153 Our File No.: 2063.8 Dear Mr. Klein: This firm represents the petitioners-appellants, New Surfside Nursing Home, LLC ("NewSurfside") and Meadow Park Rehabilitation and Health Care Center, LLC ("Meadow Park") (collectively referred to as "Appellants" or the "Nursing Homes"). Pursuant to yourJuly 19, 2013 letter and the provisions of section 500.11(c)(2) of the Court of Appeals Rules of Practice, I respectfully submit this letter to address the Appellants' position on the merits and to object to the Court's SSM review pursuant to section to 500.11. Hamburger, Maxson, Yaffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 2 Included with this original letter (and two copies) is our firm's check in the amount of $315.00, a corporate disclosure statement pursuant to subsection 500.1(f), and proofof service of this letter. Three copies of the Appellants' Appendix before the Second Department have been separately filed with this Court together with three copies of the Appellants' Brief, Respondents' Brief and Appellants' Reply Brief. INTRODUCTION This appeal presents significant issues ofstatewide importance to the nursing home industry and to their population of mentally ill and brain- injured patients, that should properly be heard in a normal course appeal with full briefing and oral argument before the Judges of this Court. Following the Second Department's affirmance ofa judgment of the Queens County, Supreme Court, denying the petition and dismissing the Article 78 proceeding, the Second Department exercised its very rarely-granted power Hamburcer, Maxsoim. Y\ffe, Knauer & McIMally, LLP Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 3 to authorize leave to appeal to this Court, stating, "[q]uestions of law have arisen, which, in our opinion, ought to be reviewed by the Court ofAppeals." The questions of lawpresented on this appeal are fully preserved and reviewable. They do not involve mixed questions of law and fact or affirmed findings of fact. Those questions are: (1) whether, for purposes ofdetermining the timeliness of this proceeding challenging a Department of Health ("DOH") determination affecting the Nursing Homes' Medicaid reimbursement rates, the majority of the Second Department properly carved out an "audit" exception to the bright line rule set forth in New YorkState Ass'n of Counties v. Axelrod. 78 N.Y.2d 158,165,573 N.Y.S.2d 25,29 (1991), establishing that the limitation period runs from the date of a facility's receipt of revised Medicaid rate sheets; (2) whether, judicial estoppel bars the State's "audit" exception argument here, because DOH successfully opposed, as premature, an earlier Hamburger, Maxson, Y\ffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 4 action by Meadow Park challenging the same audit, upon the ground that Meadow Park had not received revised Medicaid rate sheets; and (3) whether it was arbitrary and capricious for the State's contract auditors to refuse to recognize any improvement in the Nursing Homes' population of mentally ill and brain injured patients that was not "physical," notwithstanding DOH regulations confirming that a "restorative therapy" RUG-II designation isproperly grounded upon successful "physical and/or occupational therapy" (A.1 138, 10 NYCRR § 86-2.30(1), Patient Review Instrument Form, Question 27 [emphasis added]), and confirming that "occupational therapy" properly consists of"therapeutic use ofgoal-directed activities, exercises, or techniques to maximize the client's physical and/or mental functioning in life tasks" and may properly "[r]elate to . . . cognitive or psychosocial skills" (8 NYCRR § 76.7[c][l],  [emphasis added]). 'Page references preceded by "A." refer to pages contained in the Appellants'Appendix to the Second Department. Hamburger, Maxson, Y\ffe, Kjmauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 5 POINT I IN DETERMINING THAT THIS PROCEEDING WAS UNTIMELY. THE APPELLATE DIVISION ERRONEOUSLY CREATED AN "AUDIT" EXCEPTION TO THE MEDICAID-RATE-SHEET- RECEIPT-RULE ESTABLISHED BY THIS COURT IN NEW YORK STATE ASS'N OF COUNTIES v. AXELROD. This case arises out of the State's issuance on March 30, 2010 of eight years of previouslywithheld revised Medicaid rate sheets — consisting ofmore than 800 pages2 —to New Surfside and Meadow Parkfor the years 2000 through 2009. See, A. 495 and A. 571. The issuance ofthese rate sheets enforced for the first time the results of audits previously conducted by outside contractors for the State, which purported to controvert the RUG-II 2Exhibits "M" and "O" to the Verified Petition consisted of a March 30, 2010 cover letter from DOH to Meadow Park accompanied by the delivery of more than 400 pages of Medicaid rate calculations (Exhibit "M") and a March 30, 2010 cover letter from DOH to New Surfside accompanied by the delivery of more than 400 pages of Medicaid rate calculations (Exhibit "O"). For the sake of expedience, these 800 pages ofrate calculations were excluded from the Appellants' Appendix, which instead providesjust the DOH cover letters. See, A. 495 and A. 571. Hamburger, Maxson, Yaffe, Knauer &t McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 6 patient designation3 reported by the facilities for patients treated in their specialized neurobiological units. The revised rate sheets were followed by a demand from the State for recoupment from New Surfside in the amount of $14.51 million and from Meadow Park in the amount of $12.68 million (A. 841-42). The Second Department's conclusion that the petition was untimely and should have been "brought within four months after the petitioners' receipt of the audit results," was based upon its creation of an 3This Court's decision in Blossom View Nursing Home v. Novello, 4 N.Y.3d 581, 797 N.Y.S.2d370 (2005) describes the RUG-II system (Resource Utilization Group system)for establishingnursing home Medicaid reimbursement rates. As this Court observed, "[t]he direct component of [a nursing home's] operating costs is based upon a patient classifica tion system that establishes 16 RUG-II categories grouped into five 'hierarchies,' each of which is characterized by specifically diagnosed physical and mental conditions Each of the RUG-II categories represents a different combination of the two components — condition (the hierarchy) and functional ability (the ADL) — and reflects the costs associ ated with caring for nursing home residents classified within the particular category, expressed as a numeric value or casemix index (CMI). Generally, the higher the CMI, the more intensive and costly the care required. The number of a nursing home's residents classified in the various RUG-II categories determines the facility's overall CMI and thus significantly influences its per diem Medicaid reimbursement rate. Consequently, it is essential for each resident's condition and functional ability to be assessed accurately. This is accomplished by means of the PRI [Patient Review Instrument]." Blossom View, 4 N.Y.3d at 585-86, 797 N.Y.S.2d at 372-73. Hamburger, Maxson, Y\ffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 7 "audit" exception contrary to the Medicaid-rate-sheet-receipt-rule established by this Court in New York State Ass'n of Counties v. Axelrod. 78 N.Y.2d 158, 165, 573 N.Y.S.2d 25, 29 (1991), that diverges from the "actual, concrete injury" test enunciated by this Court in Matter of Essex County v. Zagatta. 91 N.Y.2d 447, 453, 672 N.Y.S.2d 281, 284 (1998). Nonetheless, the majority panel at the Second Department held, "[t]he cases relied upon by the petitioners, cited by our dissenting colleague for the proposition that the audit results were not final and binding until revised Medicaid rate sheets were issued in 2010, do not involve audit results and do not compel a different result." Decision & Order, p. 3. This was plain error. A. As A Matter Of Law. The Article 78 Proceeding Was Timely Commenced Within Four Months Of The State's Issuance Of Revised Medicaid Rate Sheets To The Nursing Homes. CPLR article 78 proceedings "must be commenced within four months after the determination to be reviewed becomes final and binding upon the petitioner." CPLR 217(1). This Court has repeatedly instructed Hamburger, Maxson, Y\ffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 8 that, "[t]o determine if agency action is final, therefore, consideration must be given to the completeness of the administrative action and a pragmatic evaluation [must be made] of whether the decisionmaker has arrived at a definitive position on the issue that inflicts an actual, concrete injury." Matter of Essex County v. Zagatta. 91 N.Y.2d at 453, 672 N.Y.S.2d at 284 (emphasis added), citing, Church of St. Paul & St. Andrew v. Barwick. 67 N.Y.2d 510, 519, 505 N.Y.S.2d 24, cert, denied 479 U.S. 985, 107 S.Ct. 574 (1986). In NewYork State Ass'n ofCounties, this Court, affirmatively and without equivocation, instructed that the triggering act for an Article 78 proceeding challenging governmental actions affecting nursing home Medicaid reimbursement rates is the nursing home's receipt ofMedicaid rate sheets enforcing the rate change. In that case, which involved a nursing home association challenge to the State's issuance of a new regulation imposing a reduction of nursing home Medicaid reimbursement rates, this Court reversed a contrary ruling by the Third Department holding that the Article 78 proceedingwasuntimely because,although it had been commenced Hamburger, Maxson, Yaffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 9 within four months ofthe issuance ofrevised rate sheets to the nursing homes, it had been commenced more than four months after the effective date of the new DOH regulation upon which the rate sheets were based. See, New York State Ass'n of Counties. 156 A.D.2d 14, 17, 553 N.Y.S.2d 923, 924-25 (3d Dept. 1990). The Third Department had concluded that, based upon the issuance of the new regulation, nursing homes "had sufficient information to calculate the impact of the new regulation on their reimbursements and whether they would be aggrieved." Id. However, this Court reversed and instructed that, the "lawsuit is timely because it was commenced within four months ofits members' receipt ofthe rate recomputation notices which, for the first time, apprised the facilities of their actual reimbursement rates." New York State Ass'n of Counties. 78 N.Y.2d at 165, 573 N.Y.S.2d at 29 (emphasis added). The rate-sheet-receipt-rule has never been diminished by subsequent rulings, and has been repeatedly cited as governing authority on Hamburger, Maxson, Y\ffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 10 the issue by the Third and Fourth Departments. See, e.g., New York State Health Facilities Ass'n. Inc. v. Axelrod. 199 A.D.2d 752, 753, 605 N.Y.S.2d 497, 498 (3d Dept. 1993) (citations omitted) (emphasis added), rev'd on other grounds, 85 N.Y.2d 326, 624 N.Y.S.2d 563 (1995) ("[a] determination of the Department of Health affecting a facility's Medicaid reimbursement rates is generally deemed 'final and binding' for CPLR article 78 purposes upon receipt ofthe rate recomputation notice apprising thefacility ofits actual reimbursement rate or upon the receipt of a determination following an administrative appeal"); accord, Consolation Nursing Home. Inc. v. Commissioner of the N.Y.S. Dept. of Health. 194 A.D.2d 149, 152, 605 N.Y.S.2d 493, 494-95 (3d Dept. 1993), rev'd on other grounds, 85 N.Y.2d 326, 624 N.Y.S.2d 563 (1995); Westmount Health Facility v. Commissioner of the New York State Dept. of Health. 205 A.D.2d 991, 993, 613 N.Y.S.2d 965, 966 (3d Dept. 1994) (where a nursing home's Article 78 proceeding was deemed untimely because it was not commenced "within four months of receipt of its rate sheets"); St. Ann's Home for the Aged v. Daines. 67 A.D.3d 1326, 1327, 888 N.Y.S.2d 698, 699- Hamburger, Maxson, Y\ffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 11 700 (4th Dept. 2009) ("Ifthe issue is notappealable administratively, the time to commence a proceeding pursuant to CPLR article 78 [to review such an issue] begins to run upon receipt of the initial rate computation sheet, which is DOH's final determination"). The notion advanced by the Second Department in this case, that the State's mailing ofaudit results is somehow entitled to different treatment because "the petitioners fully understood the implication of DOH's determination upon receipt of those results" (Decision &Order, p. 3), flies in the face of this Court's rulings. First, the governing standard is not "implication," rather it is "actual, concrete injury." See again, Matter ofEssexCounty. 91 N.Y.2dat 453, 672 N.Y.S.2d at 284. Second, if anything, the enactment of a regulation imposing lowered Medicaid reimbursement rates (such as wasat issue in New York Health Facilities Ass'n) is more inevitable an act affecting Medicaid rates than the mailing of results ofan audit (which can be rescinded or withdrawn at any time prior to the issuance of implementing Medicaid rate sheets). Hamburger, Maxson, Y\ffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 12 Indeed, the mailing of the audit results here was not followed by the mailing of enforcing revised Medicaid rate sheets. Rather, their enforcement was held in abeyance by the State for upwards of seven years. Thus, the Second Department's reasoning not only conflicts with this Court's teachings in Matter ofEssex County, but it is nothing more than a re-assertion ofthe same argument accepted by the Third Department, butrejected by this Court in New York State Ass'n of Counties. In the end, there is simply no considered basis for carving out an exception to the bright line rate-sheet-rule established by this Court in New York State Ass'n of Counties, and we respectfully submit that the Second Department's act ofdoing so represents badjudicial policy. Indeed, the rate- sheet-rule: (a) is clear and unambiguous to the State and the regulated industry of nursing homes; (b) is consistent with several governing regulations requiring DOH to "periodically" and routinely adjust the Medicaid reimbursement rate Hamburger, Maxson, Yaffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 13 ofnursing homes based upon changes in their case mix from one assessment period to the next (see, e.g., 10 NYCRR § 86-2.10(c)(6); 10 NYCRR § 86- 2.11(a); 10 NYCRR §86-2.11(d)); (c) is consistent with the fact that the "injury" is inflicted upon the nursing home by the issuance of the rate sheet; (d) fosters pre-litigation discussion and cooperation between DOH and the nursing home industry to correct or clarify audit results, before imposing their financial impacts; and (e) removes the necessity ofnursing homes having to preserve their rights by initiating multiple and duplicative litigations each time an audit report is issued. With respect to this last point, if the "audit" exception were the rule as opposed to the rate-sheet-rule, then Meadow Park and New Surfside would have had to collectively initiate twenty-two (22) separate Article 78 proceedings.4 4Meadow Park would have had to initiate eleven (11) separate Article 78 proceedings challenging the audit reports issued for its May2000 PRI (A. 390-394), its November 2000 (continued...) Hamburger, Maxson, Yaffe, Knauer & McIMally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 14 Eliminating the bright line rule in the case ofaudits defeats these salutary benefits. Moreover, as illustrated by this case, the loss of the rule needlessly fosters further litigation disputes and consumes scarce judicial resources. Indeed, without the "audit" exception, there would have been no need for dissentingAppellate DivisionJustice Leonard B.Austin to reviewthe detailed course ofevents that followed the issuance of the audit reports until the date when the revised rate sheets were issued, seven years later, in order to determine whether it was reasonable for the Nursing Homes to wait for the issuance of the rate sheets before commencing this proceeding. See, Decision & Order, pp. 5-6. Moreover, there is no valid purpose served by punishing 4(...continued) PRI (A. 395-398), its May 2001 PRI (A. 399-403) its May 2002 PRI (A. 404-408), its Novem ber 2001 PRI (A. 409-416), its November 2002 PRI (A. 417-429), its May 2003 PRI (A. 443- 452), its November 2003 PRI (A. 453-464), its May 2004 PRI (A. 465-478), its November 2004 PRI (A. 479-487), and its May 2005 PRI (A. 488-484). Likewise, New Surfside would have had to initiate eleven (11) separate Article 78 proceedings challenging the audit reports issued for itsJuly 2000 PRI (A. 496-500), itsJanuary 2001 PRI (A. 501-507), itsJuly 2001 PRI (A. 508-514), its January 2002 PRI (A. 515-520), its January 2003 PRI (A. 521- 526), its July 2003 PRI (A. 527-534), itsJanuary 2004 PRI (A. 535-541), its July 2004 PRI (A. 542-549), its January 2005 PRI (A. 550-556), its July 2005 PRI (A. 557-563), and its January 2006 PRI (A. 564-570). Hamburger, Maxson, Y\ffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 15 parties who are communicating and attempting to work out a recognized problem without first initiating litigation, particularly when, at any time, the State could have simply terminated such discussions by issuing revised rate sheets. This is exactly what finally happened here, after the passage of seven years involving discussion amongst the parties (A. 735), evaluation of the program and State development of proposed curative operational and reimbursement regulations (A. 309-334, DOH Proposed Reimbursement Regulations;A. 337-47, DOH Proposed Operational Regulations). On March 30,2010 the State definitively ended itsconciliationand resolution effortsby issuing eight years of previously withheld revised Medicaid rate sheets to petitioners. See, A-495, A-571. It was at that moment in time that the facilities were financially impacted by the audits, and were thus for the first time presented with a final and binding determination for purposes ofArticle 78 review. This hybrid proceeding was timely commenced by Order to Show Hamburger, Maxson, Yaffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 16 Cause wellwithin four months of that determination, on April 23, 2010. See, A. 22. B. The Cases Cited By The Majority Panel Of The Second Department In Support Of Its Contrary Determination Are Irrelevant. The"implication" rationale referenced by the Second Department in support of its "audit" exception to the rate-sheet-rule, was based upon its citation to Matter of Alterra Healthcare Corp. v. Novello. 306 A.D.2d 787, 788, 761 N.Y.S.2d 707, 709 (3d Dept. 2003). See, Decision & Order, p. 3 ("the petitioners fully understood the implication of DOH's determination upon receipt of those audits"). The Alterra case did not involve a nursing home, did not involve a patient audit, and did not involve the issuance of revised Medicaid rate sheets. Accordingly, it did not implicate the rate-sheet- rule, nor did it anywhere address this Court's decision in New York Ass'n of Counties. Hamburger, Maxson, Y\ffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 17 Rather, Alterra turned upon the threat of a DOH enforcement proceedingbasedupon a determination that five of the petitioner adult home operator's uncertified facilities were required to be licensed as adult care facilities. The determination was set forth in a DOH letter notifying petitioner "that it was required to submit applications of licensure or [it would] face legal action." Alterra. 306 A.D.2d at 788, 761 N.Y.S.2d at 709. The operator failed to challenge that determination within four months, and then tried to argue that "it could not fully ascertain the consequences of DOH's ... letter [determination]." Id. The Third Department rejected this argument, noting that the "implication of DOH's determination" was "fully understood" by the petitioner, who had indeed "agreed to submitapplications for licensure." Id. It also rejected the petitioner's contention that DOH had created ambiguity regarding the finality of the determination during one of its meetings with petitioner, concluding that DOH "consistently and repeatedly reaffirmed its position that petitioner's facilities required licensure." Alterra. 306A.D.2dat Hamburger, Maxson, Yaffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 18 788-89,761 N.Y.S.2d at 709. In short, the circumstances presented in Alterra bear no correlation whatsoever to those presented in this case, and do not in any manner support a relaxation of the rate-sheet-rule for audits. The Second Department also cited two First Department cases which likewise did not hold that audit results trigger the statute of limitation and did not address this Court's ruling in New York State Ass'n of Counties, but rather turned upon dispositive procedural complications. In Terrace Healthcare Center. Inc. v. Novello. 54 A.D.3d 643,865 N.Y.S.2d 37 (1st Dept. 2008), Iv. denied, 12 N.Y.3d 713, 882 N.Y.S.2d 398 (2009), the petitioner nursing home sought to challenge the constitutionality of the entire Patient Review Instrument (PRI) review process under 10 NYCRR § 86-2.30 (which action would be subject to a six year statute of limitation). However, a majority of the First Department found that the State's audits of the petitioner's PRI's were not conducted pursuant to that PRI regulation, but rather were conducted pursuant to the parties' "Agreement to Accelerate PRI Processing," and that DOH did not breach that Hamburger, Maxson, Y\ffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 19 agreement. 54 A.D.3d at 643, 865 N.Y.S.2d at 38. It therefore concluded that the petitioner's challenges to the reviews of its PRI submissions "are barred by the four-month statute of limitations" applicable to Article 78 proceedings. Id. Nowhere did the majority of the court discuss let alone indicate disagreement or distinction of this Court's governing ruling in New York State Ass'n ofCounties and its progeny. To the contrary, the matter ofwhen the four month clock actually started ticking (i.e., issuance ofaudit results vs. enforcement of audit through issuance of revised Medicaid rate sheets), was not presented. It is not clear from the decision when and whether revised rate sheets were issued to the petitioner in relation to the commencement date of the action, but it is clear that neither party raised an argument that the proceeding was timely from an Article 78 perspective.5 ^o any extent that the Second Department purported to reply upon Justice Catterson's dicta statement in his dissenting opinion that, "there is no dispute that each notification following a DOH audit constituted a final administrative act which began the four-month statute of limitations" nTerrace Healthcare. 54 A.D.3d at 646, 865 N.Y.S.2d 37 [emphasis added]), such reliance was misplaced. Justice Catterson's dissenting statement is of no (continued...) Hamburger, Maxson, Y\ffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 20 The First Department's decision in Concourse Rehabilitation & Nursing Center. Inc. v. Novello. 45 A.D.3d 366, 846 N.Y.S.2d 25 (1st Dept. 2007), was likewise erroneously cited by the Second Department in support ofits determination. There, as in Terrace Healthcare, the petitioner brought a declaratory judgment action, instead of an Article 78 proceeding, to challenge the audit of its PRI from May 1995. In dismissing as untimely the plaintiffs claims related to an audit of its later May 1996 PRI, the First Department noted that the plaintiff had never challenged that audit either in its underlying declaratory judgment action related to the earlier May 1995 PRI, or in a separate Article 78 proceeding. Thus, the issue of the applicability of New York State Assn. of Counties and its progeny was not before the court. 5(...continued) precedential value and, in any event, only demonstrates that the parties in that case did not argue the point or advise the court of the contrary controlling decisions in NewYork State Ass'n of Counties and its progeny. Hamburger, Maxson, Yaffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 21 Finally, the fact that New Surfside took the precaution of commencing an Article 78 proceeding in 2003 that was marked off the calendar does not transform the State's audit reports into final and binding actions triggering the statute of limitations, as the Second Department implied. See, Decision&Order, p. 3. The resolution of the final and binding issue should not be determined by the cautious litigation practice of a potentiallyimpacted party; rather it isdetermined by"a pragmatic evaluation of whether the decisionmaker has arrived at a definitive position on the issue that inflicts an actual, concrete injury." Matter of Essex County. 91 N.Y.2d at 453, 672 N.Y.S.2d at 284 (emphasis added). Hamburger, Maxson, Y\ffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 22 POINT II AS A MATTER OF LAW. JUDICIAL ESTOPPEL BARS THE STATE'S CONTENTIONS REGARDING THE "FINALITY" OF THE AUDIT REPORTS. GIVEN IT'S SUCCESSFUL ASSERTION IN A COURT OF CLAIMS ACTION THAT MEADOW PARK'S CLAIMS HAD "NOT ACCRUED" BECAUSE IT HAD "NOT RECEIVED REVISED MEDICAID RATE SHEETS." Judicial estoppel bars DOH's contentions regarding finality. This is so because in a related Court of Claims action brought by Appellant Meadow Park to challenge the audits, the State successfully argued that Meadow Park's claims had "not accrued" because it had "not received revised Medicaid rate sheets." A. 926, State Affirmation In Support of Motion to Dismiss HI 8-9; A. 874-77; compare, A. 906 with A. 928; see also, Appellants' Brief, Point 11(C). The irony here is that the State itself relied upon the rate- sheet-receipt-rule when it was convenient to dismiss Meadow Park's Court of Claims complaint as premature, but in this litigation it argued that the rule never had any practical application. Hamburger Maxson, Y\ffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 23 In the briefs before the Second Department, the State struggled to avoid the application ofjudicial estoppel by maintaining that "there is no inconsistency in asserting that Meadow Park's cause of action under Article 78 accrued at an earlier time than its claim for money damages under the Court ofClaims Act," because a claim accrues when the extent ofdamage can be ascertained for Court of Claims purposes, while an Article 78 cause of action accrues when the challenged agency determination becomes final and binding (Respondents' Brief, pp. 25-26). To the contrary, as demonstrated in New York State Ass'n of Counties and its progeny, it is the State's issuanceof the revised Medicaid rate sheet that not only renders the agency determination final and binding, but that also enables the nursing home to ascertain the extent of its damage. In other words, the issuance of the revised Medicaid rate sheets constitutes the defining triggering act for both time limitations, which are inseparable from each other and accrue at the same instant. Hamburger, Maxson, Y\ffe, Knauer & McIMally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 24 Thus, it was inconsistent for the State to here argue that the issuance of revised Medicaid rate sheets was "inevitable" based upon the issuance of the earlier audit reports and, therefore, the audit reports triggered the accrual of Meadow Park's (and New Surfside's) claims, when it previously argued successfully to the Court of Claims that Meadow Park's claim had "not accrued," but was rather an "anticipatory claim ... based ... on the mere suggestion that they may accrue" because revised Medicaid rate sheets had not yet and only "may" be issued (see, A. 926,1111 8-9). The State also quibbled with the fact that the Court ofClaims did not issue a written ruling on the issue, but rather conducted a conference with the parties that resulted in Meadow Park's agreement to withdraw its name from the caption of the Court of Claims case (see, A. 876, 11 44). See, Respondents' Brief, p. 26. This is nothing more than semantics. The State presented a position on a motion to dismiss and succeeded in that position before the Court of Claims. It should not be permitted to change that position in this litigation involving the same party and the same issue. See, Hamburger, Maxson, Y\ffe, Knauer & McIMally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 25 Environmental Concern. Inc. v. Larchwood Construction Corp.. 101 A.D.2d 591, 593, 476 N.Y.S.2d 175, 177 (2d Dept. 1984) (emphasis added) ("where a party assumes a certain position in a legal proceeding, and succeeds in maintaining that position, he may not thereafter, simply because his interests have changed, assume a contrary position"). As the Second Department observed in Kimco of New York. Inc. v. Devon. 163 A.D.2d 573, 575, 558 N.Y.S.2d 630, 632 (2d Dept. 1990) (citations omitted), "The doctrine is invoked to estop parties from adopting such contrary positions because the judicial system cannot tolerate this playing fast and loose with the courts." Although the judicial estoppel issuewasraised in the proceedings at nisi prius (see, A. 874-77), and briefed to the Second Department (see, Appellants' Brief, Point II[C]; Appellants' Reply Brief, Point I[B]), neither court expressly addressed the issue. Hamburger, Maxson, Y\ffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 26 POINT HI THE STATE VIOLATED GOVERNING REGULATIONS IN CONTROVERTING REIMBURSEMENT AT THE "RESTORATIVE THERAPY" LEVEL FOR THE SUCCESSFUL COGNITIVE REHABILITATION SERVICES PROVIDED IN THE APPELLANTS' NEUROBIOLOGICAL PROGRAM UNITS. A. The Neurobiological Program. The neurobiological program, first initiated by appellant New Surfside in 1998 in coordination with representatives of DOH (and later expanded to appellant Meadow Park), was developed to provide a regimen of rehabilitative cognitive occupational therapy care for a select group of mentally-ill and brain injured patients that were specially admitted to the Nursing Homes for receipt of this care. A. 35-39; A. 45-50; A. 70-74; A. 168- 308 (the "Protocol for the Neurobiological Impaired" developed by and implemented at New Surfside and Meadow Park); A. 377-78. Hamburger, Maxson, Y\ffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 27 The neurobiological units and the patients treated in them were distinct from certified neurobehavioral units located in restrictive facilities, that serve "residents who are a danger to self or others and who display violent or aggressive behaviors" and are regulated under 10 NYCRR § 415.39(a)(2). In contrast, the patients in the neurobiological units were determined not to be a danger to themselves or others, but rather had cognition impairments from mental illness or brain injury that prevented them from functioning successfully in the community. Historically, the State opted to send such non-violent New YorkState Medicaid patients to facilities out of state, or treated them in psychiatric institutions operated by the State Office of Mental Health or in certified neurobehavioral units designed for violentmentally illpatients (A. 45,11112,3; A. 71,111133-34; A. 74,1148; A. 311; A. 335-36). The goal of the neurobiological units was to provide a different and vastly less-expensivetreatment option for qualifying non-violent patients, in which they were repatriated to New York from out-of-state facilities or Hamburger, Maxson, Y\ffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 28 released from confined institutional settings, and provided extensive cognitive therapies and treatments in a less restrictive nursing home environment. Those treatments were designed to restore them to a level of cognitive function sufficient to enable them to be discharged into lower level and less costly care facilities (such as a Community Residence, an Adult Home, a Group Home, or Adult Foster Care) or to be returned to their families. A. 71,11 34; A. 311-12. Under governing Medicaid Law and regulations, no mentally ill person may be placed into a nursing home setting absent State review and approval ofsuch placement through a Preadmission Screening and Resident Review ("PASRR") program. See, Nursing Home Reform Act, Omnibus Budget Reconciliation ActOBRA1987, asamended byOBRA1990,42 U.S.C. 1396r(e)(7); seealso, A. 73,111142-44; A. 744,11 15. This statute mandates that the State must, among other things, "review and determine . . . whether or not the resident, because of the resident's physical and mental condition, requires the level of services provided by a nursing facility or requires the Hamburger, Maxson, \affe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 29 level of services of an inpatient psychiatric hospital." 42 U.S.C. 1396r(e)(7)(B)(i)(I). Accordingly, mentally ill patients were not and could not be placed into Appellants' nursing homes for treatment absent PASRR review and approval by the State (A. 74,11 47). As the State confirmed in a September 12, 2002 email between DOH and Office of Mental Health officials referring to the Appellants' neurobiological program: There are at least three screening safeguards which must be cleared before any discharge to a nursing home can take place. Each screening reviews the appropriateness of an individual's placement in a nursing home: one determines the medical necessity of a nursing home placement and is completed by clinicianswho are certified to complete that screening by DOH; another screening compares appropriateness of nursing home placement versus home health care or other options; and the third is the evaluation ofmentally illnursing home applicants (and subsequent annual review of nursing home residents with a mental illness difficulty (sic) remaining stable in the community) which is completed by an independent agency (IPRO) under contract with DOH. A. 336. Hamburger, Maxson, Yaffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 30 Patients approved by the State who received the full regimen of care in the neurobiological units were categorized by the Nursing Homes as Heavy Rehabilitation (Restorative Therapy) patients for purposes of establishing each facility's Case Mix Index ("CMI") and Medicaid reimbursement rate under the RUG-II system. A. 84,11 85. B. The State Violated Governing Regulations In Controverting The Neurobiological Program Patients From The Heavy Rehabilitation (Restorative Therapy) Patient Designation. The centerpiece of the Nursing Homes' argument on the merits is that the occupational therapies they provided to the patients treated in their Neurobiological Program complied with the pertinent criteria for reimbursement at the Restorative Therapy level under existing State regulation, and that the State violated governing regulation in controverting the patients from the Restorative Therapy designation. Those regulations expressly confirm that a Restorative Therapy designation is warranted for a patient who; Hamburger, Maxson, Y\ffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 31 (a) "requires and is currently receiving physical and/or occupational therapy for four or more consecutive weeks" (A. 138, question 27, Level 3 [emphasis added]); (b) where such patient has a "positive potential for improved functional status within a short and predictable period of time" (A. 151, question 27, Restorative Therapy [emphasis added]); and (c) "is improving" (Id.). See, 10 NYCRR § 86-2.30(i), Patient Review Instrument Form, Question 27 and Instructions PRI Questions, Question 27, reproduced in the Record at A. 138and A. 151 (emphasis added); see also, Elcor Health Servs.. Inc. v. Novello. 100 N.Y.2d 273, 763 N.Y.S.2d 232 (2003). Thus, under governing regulation, providing a patient with occupational therapy (as distinct from physical therapy) that is designed to and does improve the patient's functional status within a short predictable time period, qualifies the patient for categorization as a Restorative Therapy patient. Moreover, under governing regulation, such occupational therapy may be properly focused upon improving the patient's mental and cognitive function (as distinct from her physical function), and nothing in Question 27 Hamburger, Maxson, Yaffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 32 (A. 138) or the Instructions for Question 27 (A. 151) requires or instructs otherwise. Indeed, 8 NYCRR § 76.7, entitled "Definition of occupational therapy practice," confirms that an occupational therapy treatment program properly consists of "therapeutic use of goal-directed activities, exercises, or techniques to maximize the client's physical and/or mentalfunctioning in life tasks," that"[r]elate to physical, perceptual, sensory, neuromuscular, sensory- integrative, cognitive or psychosocial skills." 8 NYCRR § 76.7(c)(1), (2) (emphasis added). "Occupational therapy" is defined in pertinent part as follows by the American Occupational Therapy Association, "Occupational therapy addresses the physical, cognitive, psychosocial, sensory-perceptual, and other aspects of performances in a variety ofcontexts and environments to support engagement in occupations that affect physical and mental health, well-being and quality of life." http://www.aota.org/Practitioners/Advocacy/State/Resources/PracticeAct/36437.aspx (emphasis added). "Occupational therapy" is defined in the Webster's New Hamburger Maxson, Yaffe, Knauer & McIMally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 33 World Medical Dictionary, 3d Ed. as "therapy based on engagement in meaningfulactivities ofdaily life (as self-care skills, education,work, or social interaction) especially to enable or encourage participation in such activities despite impairments or limitations in physical or mental function." In this litigation, the State proffered no genuine dispute about the fact that the Nursing Homes' patients met the applicable standards for reimbursement at the Restorative Therapy level, in that they received occupational therapy for well more than four weeks, had a positivepotential for improved functional status, and did, in fact, improve. Indeed, the record evidence confirms the State's own assessment that the Neurobiological Program had "a rehabilitative focus" (A. 335), that the patients in the program were receiving"intensivebehavioralrehabilitation" (A. 311), that the units "are a viable discharge option for individuals who required treatment higher in intensity and supervision that community residences, but lower than the level ofcare provided by an inpatient psychiatric hospital" (A. 335), that the program had "proven successful" in treating "over 800 residents over the Hamburger, Maxson, Y\ffe, Knauer & McTMally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 34 past decade," and that although it "cost more than the operation of a traditional [nursing home]," the units "presented] a substantially less costly alternative to the secure behavioral intervention unit" (A. 311-12). Therewasno contraryjudicial factual finding that the patients did not receive the treatment, did not improve, or did not otherwise meet the specific requirements of the governing regulations. The reality, buried by the State and the Second Department, was explained by DOH Principal Health Care Fiscal Analyst Nancy Dover, the "head of the PRI unit" (A, 92, 1 110). As Ms. Dover confirmed in sworn deposition testimony provided in another action (and part of the record here), the contractor PRI auditors controverted the patients from the Restorative Therapy RUG-II category because they did not know how to accurately measure and confirm the types of nonphysical cognitive improvements achieved for patients treated in the Neurobiological Program: Q. You don't know how an auditor would measure nonphysical improvement? A. / think that was the problem and the issue. A. 662 (emphasis added). Hamburger, Maxson, Y\ffe, Knauer & McIMally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 35 Asshe indicated in an email with a subject line entitled "OT - New Surfside," "On one hand, if there is progress in ADLs [Activities of Daily Living] then probably this is ok. The auditors, however, are used to seeing more physicalgoals than mental ones." A. 657. In other words, according to Ms. Dover, the State's auditors were purporting to evaluate and controvert virtually all Neurobiological Patients from the Restorative Therapy/Heavy Rehabilitation PRI level due to alleged lack of "improvement," without, in fact, having known how to measure the cognitive behavioral improvements achieved for such patients. In the end, it is not that the cognitive care provided to these patients was not authorized by the governing rules and regulations (indeed, it certainly was), it is that DOH's contract auditors were unfamiliar with the neurobiologically impaired population and did not know how to audit the reporting of their cognitive improvement. This difficulty, however, does not constitute a rational non-arbitrary basis for controverting appropriate Hamburger, Maxson, Yaffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 36 reimbursement at the restorative therapy rate. To the contrary, because the people assignedbythe State to measure improvement under the standard did not employ the standard, the controversion determination was not made in compliance and conformance with the criteria set forth in the governing regulations, and it must be vacated as arbitrary and capricious as a matter of law. Where an agency is authorized to act without holding an evidentiary hearing, "[t]he test ofjudicial review is to determine whether the action of the [agency] was arbitrary or capricious, i.e., without a reasonable basis." Fink v.Cole. 1 N.Y.2d 48, 53, 150 N.Y.S.2d 175, 179 (1956); 125 Bar Corp. v. State Liquor Auth.. 24 N.Y.2d 174, 178, 299 N.Y.S.2d 194, 198 (1969) ("the determination must have a reasonable or rational basis"). This Court has specified that in such circumstances, itsjudicial reviewisconducted for the purpose of"determiningwhether record evidence provides a rational basis for [the challenged determination]." National Fuel Gas Distribution Corp. v. Public Service Comm'n of the State ofN.Y.. 16 N.Y.3d 360, 368, 922 Hamburger, Maxson, Y\ffe, Knauer & McIMally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 37 N.Y.S.2d 224, 229 (2011). The application of the rational basis standard presents a question of law. See, Karger, Powers of the New York Court of Appeals (3d Ed.), § 13:5, at 461-63. It is well settled that, as a matter of law, an agency acts arbitrarily and capriciously by failing to complywith its own rules and regulations. See, e.g., Frickv. Bahou. 56 N.Y.2d 777, 778, 452 N.Y.S.2d 18, 19 (1982) (where this Court annulled the results of an oral civil service examination given by the Department of Civil Service because, "Respondents' grading of the examination was in contravention of the respondent commission's own rules and regulations," and "[t]he rules of an administrative agency, duly promulgated, are binding upon the agency as well as upon any other person who might be affected"); Church v.Wing. 229A.D.2d 1019,645 N.Y.S.2d356 (4th Dept. 1996) (where the Fourth Department annulled a determination of the Department of Social Services reducing petitioner's public benefits assistance based on petitioner's failure to work the required number ofhours in a Work Experience Program [WEP], because the Department failed to Hamburger, Maxson, Yaffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 38 comply with its own regulations requiring a specific prevailing rate of pay determination from the Department of Labor before making an assignment to WEP); Brooks v. Forsythe. 189 A.D.2d 26, 564 N.Y.S.2d 439 (3d Dept. 1993) (where the Third Department annulled a determination of the State Budget Director denying petitioner police officers' eligibility for "extreme emergency overtime" compensation related to their work stationed at roadblocks and detours associated with a raid conducted at the St. Regis Mohawk Indian Reservation. The court held that, "the record evidence supports petitioners' contention that the situation was volatile throughout the standoff' [189 A.D.2d at 32], that "the [Budget] Division's conclusion that the ... events were generally anticipated by the State Police and simply a 'peak workload' situation [was] completely without basis in the record" [189 A.D.2d at 30]), and that the "agency act[ed] arbitrarily and capriciously when it fail[ed] to conform to its own rules and regulations" [189 A.D.2d at 32]). The patient controversion determinations here should be annulled as irrational, arbitrary and capricious because where patient Hamburger, Maxson, Yaffe, Knauer &t McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 39 impairmentwas mental and cognitive, improvement had to be measured on a mental and cognitive scale, and the State had no lawful authority to controvert on the basis of lack of physical improvement. Accordingly, the State should be directed to issue Revised Medicaid Rate Sheets to the Nursing Homes for the years 2000 to 2009 that restore the original Restorative Therapy/Heavy Rehabilitation designations reported for patients treated in their Neurobiological Program. C. Even If. Arguendo. The Appellants' Provision Of Successful Cognitive Therapy To Patients In Their Neurobiological Program Did Not Qualify For Reimbursement At The "Restorative Therapy" Level. There Was No Lawful Basis For Controverting The Patients Down To The Lowest Reimbursement Care Category. The record demonstrates that the State's contract auditors did not just controvert the Heavy Rehabilitation (Restorative Therapy) designation for these mentally ill and brain injured patients, they also purported to re- categorize the vast majority of them into the lowest level care category Hamburger, Maxson, Y\ffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 40 (requiring the least amount of services of any care category, and reserved for patients with no physical or mental medical care needs) — Reduced Physical Functioning A.6 The "PA" category has a corresponding CMI of only 0.55 (i.e., the lowest possible CMI), compared to the 1.57 CMI applicable to the Heavy Rehabilitation A category (A. 154). As this Court has observed, "it is essential for each resident's condition and functional ability to be assessed accurately" because "[t]he 6This reduction is symbolized bya "PA" on the audit reports (A. 392, 397,401-02,406-07, 414-15,421-22,445-46,450-51,470-71,484-85,492-93,499,505-06,513,532-33,539-40, 546-47,554-55,561-62). The audit reports reveal that the contract auditors controverted the Heavy Rehabilitation (Restorative Therapy) designation for virtually all of Meadow Park's Neurobiological Program patients (these patients resided on the third floor of the facility starting in RoomNumber 301). Thus, the State'scontract auditors controverted the facility's answers to Question 27 on the PRI Form for most ofthese patients (and in several instances controverted the facility'sanswers to Questions 19, 20, 21, 22) (A. 392, 397,401- 02,406-07,414-15,421-22,445-46,450-51,470-71,484-85,492-93). Question 27 relates to whether the patient is receiving RestorativeTherapy and is improving (A. 138and 151- 52). Questions 19-22are the PRI Form questions relating to the patient'sActivities ofDaily Living (A. 137, 148-49). The PRI audit reports issued to New Surfside likewise showthat the contract auditors controverted the HeavyRehabilitation (Restorative Therapy) designa tion of virtually all of its Neurobiological Program patients (these patients resided on the fourth floor of the facility starting in Room Number 402). The audit reports show the controversion of the facility's answers to Question 27 on the PRI Form for most of these patients (and in several instances controverts the facility's answers to Questions 19, 20,21, 22, 26) (A. 499, 505-06, 513, 532-33, 539-40, 546-47, 554-55, 561-62). Hamburger, Maxson, Y\ffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 41 number of a nursing home's residents classified in the various RUG-II categories determines the facility's overall CMI and thus significantly influences its per diem Medicaid reimbursement rate." Blossom View. 4 N.Y.3d at 586, 797 N.Y.S.2d at 373. Nothing authorizes the State to default into the lowest care category patients deemed to have been erroneously categorizedbya nursing home. To the contrary, as this Court has instructed, "accura[cy]" is required. Therefore, in the event that the RestorativeTherapy designation for the subjectpatients was properly controverted (it was not), it was necessary for the State to place the patients into the correct RUG-II categories, rather than default them to the lowest category and level. Nothing in the record supports the placement of the subject patients into such category and level. To the contrary, the State's own documents, and the comments and testimony ofits officialswho evaluated the program and developed proposed reimbursement regulations for the type of patients and treatments accorded in the program, confirm the total Hamburger, Maxson, \Xffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 42 inappropriateness of treating them for rate setting purposes the same as frail elderly patients with no physical or mental medical care needs. In this regard, for demonstrative purposes, we refer the court to the proposed reimbursement regulations developed by DOH for the type of patient and treatments accorded to them in the neurobiological program.7 This document proposed to resolve the reimbursement issue related to patients treated in the program by increasing the CMI for each patient classification group "by an increment of 1.19" (A. 316), which was itselfbased upon an expectation that the floor RUG-II designation for the typical neurobiological patientwas "Severe Behavioral B"with a corresponding CMI score of 1.03. See, A. 695-96, and A. 724-27. 7Proposed operational regulations were also published by the State forpublic comment in 2008, with the comment period ending on October 6, 2008 (A. 337-47). These proposed regulations denominated the program as the Neurobehavioral Step Down Unit Program, as distinct from the existing high security Neurobehavioral Units caring for dangerous and violent mentally ill patients pursuant to 10 NYCRR § 415.39. A. 337. The program described in the proposed operational regulations wasconsistentwith the Neurobiological Program being operated by petitioners. Compare, A. 338-41 with A. 168-308 (Protocol for Neurobiological Program developed and implemented at New Surfside and Meadow Park [A. 71]). Hamburger, Maxson, ^affe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 43 DOH Principal Health Care Fiscal Analyst Noreen Ravish confirmed in deposition testimony that she worked on the "proposed regulationswith regard to reimbursement" (A. 680). Her testimonydisclosed that DOH expected that the average patient in the program would be placed into the "Severe Behavioral B" RUG-II reimbursement category (A. 695), which has a corresponding 1.03 CMI (A. 154), and that the 1.19 CMI add-on would be placed on top of that, in order to achieve appropriate reimbursement for the services provided in the program (A. 694-98). Therefore, the total anticipated CMI for each patient treated in the program would have been approximately 2.22 (i.e., 1.03 + 1.19). Former State DOH Director of the Bureau of Long Term Care Reimbursement Kathleen Gill, whose bureau oversaw reimbursement for nursing home services (A. 717-18), and developed the proposed 1.19 CMI add-on, confirmed that the 1.19 CMI enhancement was designed to provide Hamburger Maxson, Yaffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 44 an appropriate reimbursement rate for the servicesprovided to such a patient (A. 724-29).8 Although neither the operational nor the reimbursement regulations were ever enacted into law, they demonstrate that at minimum, the RUG-II floor for patients treated in the neurobiological program was the "Severe Behavioral B" care category with a corresponding CMI of 1.03. Notably, the State nowhere defended in the record the controversion of the patients to the lowest reimbursement level. Indeed, it cannot in the face of the comments and statements made by State officials. Accordingly, there wascertainly no rational basis in the record for thrusting the overwhelming majority of such residents into the lowest reimbursement level (Reduced Physical Functioning A). Allowing such a result to stand results in what is essentially a theft of the intensive services provided to hundreds of mentally ill patients successfully treated in the 8For sake ofcomparison, the codified regulations governing reimbursementfor treatment ofviolent, aggressive, or dangerous mentally ill residents in certified Neurobehavioral units provides a CMI add-on of 1.40 for such patients. See, 10 NYCRR § 86-2.10(w). Hamburcer, Maxson, Yaffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 45 petitioners' Neurobiological Programs over the course of eight years. At minimum, the patients should not have been placed into a reimbursement category lower than "Severe Behavioral B," with a CMI of 1.03. Although these arguments were presented in the Memoranda of Law submitted at nisi prius and in the briefs before the Second Department (see, Appellants' Brief, pp. 35-36; Appellants' Reply Brief, p. 24), they were not addressed by the Supreme Court or the Second Department. POINT IV THE COURTS BELOW ERRONEOUSLY DISMISSED THE PETITION BASED UPON STRAW MAN ARGUMENTS PRESENTED BY THE STATE. In complete disregard of the provisions of the governing regulations, the State maintained that, "the claimed 'success' of petitioners' neurobiological unit is immaterial," and rather contended that the Nursing Homes were seeking "rate enhancements that do not exist under the Hamburger, Maxson, Y\ffe, Knauer &t McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 46 Department's regulatory scheme." Respondents' Brief, p. 31 (emphasis added). Instead of addressing DOH's failure to adhere to governing regulatory requirements, the Supreme Court and the Second Department allowed themselves to be diverted by the State's erroneous and factually false "rate enhancements" argument. See, Decision and Order, p. 3 (in which the majority concluded that Appellants were seeking "Medicaid reimbursement ... in violation ofapplicable regulations," and that the Department of Health "appl[ied] existing regulations in conducting the audits" [emphasis added]); see, A. 17, Supreme Court Memorandum Decision (in which the Supreme Court held, "Petitioners' decision to admit mentally disabled patients to their facilities who allegedly required elevated care did not entitle them to rate enhancements that do not exist under the DOH's regulatory scheme, even if such care was provided"). To the contrary, the record demonstrates that the Appellantswere at all times only seeking reimbursement under the existing "restorative Hamburger, Maxson, Yaffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 47 therapy" code requirements described above, the level at which they had consistently classified the patients since inception. Indeed, the Order to Show Cause bringing on this hybrid proceeding expressly sought judgment, inter alia, "directing the State to issue new Revised Medicaid Rate Sheets to petitioners based upon the original Restorative Therapy/Heavy Rehabilitation designations provided for patients treated in the Neurobiological Program." A. 23, Order to Show Cause, If d (emphasis added); see also, A. 104, Verified Petition, Wherefore Clause, Ud (emphasis added).9 9It istrue that theVerified Petition and supporting papers, aswell as the briefs before the Second Department, contained a detailed discussionofall the proceedings and interactions between the Nursing Homes and the State withrespect to the neurobiological program and DOH's preparation and transmittal ofproposed operational and enhanced reimbursement regulations to govern the program (at a reimbursement levelsignificantly higher than that provided for Restorative Therapy patients). See, e.g., A. 309-334, DOH Proposed Reim bursement Regulations; A. 337-47, DOH Proposed Operational Regulations; A. 95-98; Appellants' Brief, pp. 24-27, 35-36. However, the Nursing Homes never in this litigation sought to enforce this higher reimbursement rate that was never enacted. Rather, this information was presented to highlight the ambiguity created by the State and the arbi trariness of the State's controversion of the subject patients from the Restorative Therapy reimbursement level (a level already substantially below that found to be proper by the DOH officialswho analyzed the program) to the lowest existing reimbursement rate for self-sufficient patients with no special care needs. Hamburger, Maxson, Y\ffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 48 The lower courts demonstrated their misunderstanding by citing to Application of A.R.E.B.A. Casriel. Inc. v. Novello. 298 A.D.2d 134, 748 N.Y.S.2d 547 (1st Dept. 2002) and Cornerstone of Med. Arts Ctr. Hosp.. Inc. v. Novello. 304 N.Y.S.2d445, 758 N.Y.S.2d 627 (1st Dept. 2003), and holding that, "[a] facility is not entitled to Medicaid reimbursements sought in violation of applicable regulations, even where the services were properly rendered." Decision & Order, p. 3; see also, A. 17, Memorandum Decision. These cases involve irrelevant circumstances where facilities had provided alcoholism rehabilitation services to more patients than they were certified to treat, in the face ofa regulation governing "the proper procedure for seeking to increase the number of eligible beds for any particular service." A.R.E.B.A.. 298 A.D.2d at 135,748 N.Y.S.2d at 548; accord, Cornerstone. 304 A.D.2dat 447,758 N.Y.S.2dat 628 ("the inquiry iswhether the[ services] were provided without the certification necessary to seek reimbursement from the Medicaid system and which operates as a condition precedent to reimbursement for the medical provider"). Hamburger, Maxson, Yaffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 49 This case does not involve any assertion that the Nursing Homes were required to be certified in order to provide cognitive occupational therapy services or that theywere improperly utilizing or employing too many facility beds for this purpose. Certainly, had prior certificationbeen required or too many beds been employed, the State would not have authorized the placement of these patients for treatment in the facilities to begin with, nor would it have simply controverted the patients to a lower reimbursement level. Instead, it would have provided no reimbursement whatsoever. POINT V THIS CASE DOES NOT TURN UPON OR INVOLVE JUDICIAL REVIEW OF THE EXERCISE OF AGENCY EXPERTISE OR FACT FINDING. AND IT THEREFORE DOES NOT TRIGGER THE AGENCY DEFERENCE RULE. We recognize the principle that where the matter before the court concerns an agency factual determination employing expertise, or where specialized knowledge is required to evaluate an agency's interpretation of a Hamburger Maxson, Yaffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 50 statute or regulation, it is appropriate to accord deference to the determination, unless the determination is irrational or unreasonable. See, e.g., Gaines v. NewYork State Div. Of Housing and Community Renewal. 90 N.Y.2d 545, 548-49, 664 N.Y.S.2d 249, 250 (1997). Here, however, the deference rule does not apply precisely because the contract auditors made no factual determination one way or the other as to whether the subject patients improved, and the State made no affirmative interpretive determination that successfulcognitive occupational therapy does not qualify for a Heavy Rehabilitation (Restorative Therapy) designation under the governing regulation. In viewofthe plain language ofthese regulations, there is no basis for interpreting them to exclude a restorative therapy designation for patients receiving and improving from cognitive occupational therapy, and nowhere in the record did the State proffer such an interpretation. Although, in passing, the Second Department cited to the administrative deference rule (see, Decision & Order, p. 2), nowhere did it identify an interpretation made Hamburger, Maxson, Yaffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 51 by the State towhich it was accordingdeference. In fact there was none, and deference is certainly not properly accorded in a circumstance such as here, where an agencyhas ignored the plain language requirements ofa regulation, and no specialized agency knowledge and understanding is implicated. See, e.g., Roberts v. Tishman Speyer Properties. L.P.. 13 N.Y.3d 270, 285, 890 N.Y.S.2d 388, 393-94 (2009). POINT VI THE DISSENTING OPINION ISSUED BY JUSTICE AUSTIN ILLUSTRATES THE IMPORTANCE OF A BRIGHT LINE RULE. Dissenting Appellate DivisionJustice Leonard B. Austin plainly recognized all of the keyfacts and circumstances exemplifying the unfairness and impropriety of the patient controversions, which caused the State itself to withhold enforcement of the audits for upwards ofseven years and instead work on promulgating curative regulations. He interpreted this situation as Hamburger, Maxson, Yaffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 52 having created an ambiguity with respect to the final and binding nature of the audit reports, observing: Not only did the DOH abstain from enforcing the subject audits, the earliest ofwhich was performed in 2003, until 2010, but, throughout that time, the DOH continued to reimburse the petitioners based upon their pre-audit rate schedules from 2000. The DOH evidently did so acknowledging that the audits were predicated upon outmoded regulations which were not designed to address the needs of neurobiological patients.10 During this extended period of time, the DOH ignored several ofits own regulations requiring it to periodically adjust the Medicaid reimbursement rates (see e.g. 10 NYCRR § 86-2.1 l[a],[d] [mandating periodic rate adjustment "to reflect changes in the case mix of facilities" and the "number of patients in each patient classification group"]). Such a substantial delay in enforcement lent itself to the petitioners' reasonable view that the audit results were nonbinding and created uncertainty as to their actual impact when taken in conjunction with repeated assurances from various DOH officials proffering operational and reimbursement cures to the admitted 10Although not referenced byJustice Austin, the record also demonstrated that, shortly following the issuance of the first subject audit report, several DOH officials met with an attorney representing the petitioner Nursing Homes to discuss the issues, and DOH made a commitment to "review the staffing requirements for these [Neurobiological Program] residents and put forward reimbursement regulations for a new discrete rate category." A. 40,1121; A. 735. Hamburger, Maxson, Yaffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 53 adequacies inherent in the existing regulations in addressing neurobiological patients. Decision & Order, p. 5. It is important to recognize that this lengthy evaluation and exposition highlights the necessity of a bright line rule, which renders the judicial discussion unnecessary. Such rule lets the parties know that they can attempt to work toward discussing issues and resolving differences with the State without prejudice to their legal rights until revised rate sheets are issued. At such point, the aggrieved party can, if it chooses, commence proceedings to review the rationality of DOH determinations that do not follow its own regulations. Although we agree with the conclusion reached byJustice Austin, resolving the difference he had with the majority regarding ambiguity is not the reason this Court should normal course the appeal. We recognize that such a fully briefed appeal would arguably involve mixed questions oflawand fact or affirmed findings of fact. By the same token, the dissent is not a Hamburger, Maxson, \affe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 54 reason for not "normal coursing" the appeal, where, as here, the appeal presents issues of statewide importance that are preserved and reviewable. CONCLUSION The majority below created an "audit" exception contrary to this Court's bright line Medicaid-rate-sheet-receipt-rule established in NewYork State Ass'n of Counties, and there is no valid justification for allowing that exception to stand. See, Point I. In any event, the State's own conduct effects a classic judicial estoppel against its "audit" exception argument, because it successfully advanced the exact opposite position in an earlier case involving Meadow Park. See, Point II. The State is obliged to comply with its own standards and criteria. According to those standards and criteria, the efficacyofmental and cognitive occupational therapy provided to the mentally ill and brain injured patient population at issue must be measured by mental and cognitive, not physical, Hamburger, Maxson, Yaffe, Knauer & McNally, llp Attorneys at Law Andrew W. Klein, Chief Clerk September 19, 2013 Page 55 improvement. It was therefore arbitrary and capricious to controvert their restorative therapy classification based upon a lack ofphysical improvement. See, Point III. None of the other arguments that the State advanced below change this analysis. See, Points IV, V and VI. Important issues of law are here preserved and are reviewableby this Court. The appeal should proceed in normal course pursuant to Court Rule section 500.12. /lc Enclosure 4£*Davi(TN.'Yaff^ Via first-class mail: Mark Shawan, Assistant Solicitor General Via e-mail: New Surfside Nursing Home, LLC Meadow Park Rehabilitation and Health Care Center, LLC NewSurfsideNursingHomevDaines-app-NewSurfside-ssmltrbrf.wpd CORPORATE DISCLOSURE STATEMENT Pursuant to Court ofAppeals Rule 500.1(f), petitioners-appellants New Surfside Nursing Home, LLC and Meadow Park Rehabilitation and Health Care Center, LLC hereby disclose that they do not have any corporate parents, subsidiaries or affiliates.