March 15, 2007, Orbovich & Gartner Chartered

PRESS RELEASE

Minnesota Supreme Court Reverses Rule 50 Payback.

In a 6-1 decision, the Minnesota Supreme Court ruled in favor of Benedictine Health Center of Duluth and reversed a significant Department of Human Services Rule 50 field audit disallowance. The DHS field audit adjustment disallowed the majority of the costs paid by Benedictine to participate in Benedictine Health System's self-insured group health program. The DHS field audit adjustment impacted over a decade's worth of Medical Assistance rates and would have imposed a rate payback exceeding well over $1 million. On March 15th, the Minnesota Supreme Court reversed DHS's adjustment and remanded to the Commissioner for further rate-setting proceedings consistent with the Minnesota Supreme Court's order.

The Minnesota Supreme Court held that a 1992 internal DHS memorandum, which instructed Rule 50 auditors how to adjust self-insured group health insurance costs, constituted an unpromulgated rule that violated the Minnesota Administrative Procedures Act. That 1992 Memorandum inappropriately converted Rule 50 into what the court referred to as a "not-to-exceed-claims-paid" reimbursement system for group health self-insurance. DHS 1992 internal directive likely caused widespread adjustments affecting many providers' self-insurance group health programs, regardless whether their plans were established under ERISA or, as in Benedictine's case, under the federal "Church Plan" exception to ERISA.

Speaking for the majority, Minnesota Supreme Court Justice Sam Hanson explained that DHS's 1992 Memorandum was inconsistent with Rule 50's related organization rule. Because the Benedictine facility and Benedictine Health Systems were undeniably "related parties," under the 1992 unpromulgated Memorandum, DHS argued the facility's payments into Benedictine Health System's plan were unallowable related party transactions.

The Majority Opinion rejected DHS's analysis and held that, although the plan was in its related affiliate's name, Benedictine received its services from an unrelated organization who administered the plan- the CC Systems Corporation ("CCS")- and from two independent actuaries who recommended what amounts should be deposited into the plan account. On the record before it on appeal, the Court found sufficient evidence to support Benedictine's claim that the Plan, and Plan Account, were controlled and administered by an unrelated party, CCS. The Court also explained that Benedictine's payments were "liabilities" which met Rule 50's requirement that only expenses that are actually "incurred" qualify as recognizable costs.

Justice Paul Anderson dissented. His dissent noted that Benedictine's plan was not governed by ERISA, that the plan assets were not held in an irrevocable trust, and therefore, in his view, Benedictine retained sufficient legal control to render the payments related party transactions. Interestingly, the majority and the dissent, both rejected DHS's fundamental contention that even payments into ERISA governed plans could be disallowed under its unpromulgated 1992 Memorandum.

This decision demonstrates that provider persistence can exact change. DHS refused to amend its adjustment in its Appeal Determination, and Benedictine lost before the Administrative Law Judge, the Commissioner and the Court of Appeals. But Benedictine's steadfast determination resulted in the first Rule 50 case entertained by the Minnesota Supreme Court since 1989, when the Supreme Court reversed DHS's Rule 50 adjustments in St. Otto's Home v. DHS.

This precedent has three important lessons for Minnesota providers. First, self-insured nursing facilities who self-disallowed group health insurance costs because they followed DHS's 1992 Memorandum, and their cost report preparers should review this Supreme Court decision before submitting new cost reports to DHS.

Second, the decision demonstrates that, for the past 15 years, DHS took unwarranted latitude as it applied and construed the related party rule. That rule governs virtually all transactions in cost-based reimbursement, and as we approach the next rate payment system facilities should carefully critique any decision by DHS that characterizes a transaction as a related party expense.

Third, and arguably most important, this decision breathes new life into a concept first established in the 1982 White Bear Lake Care Center Supreme Court case: DHS may not amend laws or rules by adopting unpromulgated interpretations. In other Rule 50 contested cases adjudicated by the Office of Administrative Hearings, and as demonstrated by the Court of Appeals Benedictine decision below, before the Supreme Court ruled, this fundamental concept of Minnesota Administrative Law had fallen out of favor with Administrative Law Judges, the Commissioner's office and the judiciary.

Benedictine Health Center was represented by Tom Skorczeski and Sam Orbovich of Orbovich & Gartner Chartered. A copy of the full decision is available by clicking here.

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