SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-5654-16T2

HUDSON MANOR,

Petitioner-Appellant,

v.

DIVISION OF AGING 

SERVICES,

Respondent-Respondent.

________________________

Submitted January 28, 2019 – Decided 

Before Judges Haas and Sumners.

On appeal from the New Jersey Department of Human 

Services, Division of Aging Services.

Pashman Stein Walder Hayden, PC, attorneys for 

appellant (Andrew Bayer, on the brief).

Gurbir S. Grewal, Attorney General, attorney for 

respondent (Melissa H. Raska, Assistant Attorney 

General, of counsel; Nicholas Logothetis, Deputy 

Attorney General, on the brief).

PER CURIAM

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

This opinion shall not "constitute precedent or be binding upon any court." Although it is posted on the 

internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3.

February 7, 2019
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A-5654-16T2

The question presented in this appeal is whether appellant Hudson Manor 

Health Care Center is entitled to continue to be overpaid by the State at the 

Medicaid reimbursement rate for Class II government-owned or operated 

nursing facilities even though appellant has always been a Class I privatelyowned and operated facility that was never legally eligible to receive the higher 

Class II facility rate. Because we answer this question in the negative, we affirm 

the July 18, 2017 final decision of the Director of the Division of Aging that 

corrected the mistake that caused the overpayment.

By way of background, the Medicaid program is jointly funded by the 

federal and state governments. As a program participant, New Jersey is required 

to obtain federal approval for its "State Plan" which, among other things, 

describes the methodologies it will use to reimburse nursing facilities 1and other 

institutions for the reasonable cost of providing care to Medicaid patients. 42 

U.S.C. § 1396b; N.J.S.A. 30:4D-7. Federal approval of the State Plan enables 

states to receive matching federal funds for medical services provided. 42 

U.S.C. § 1396b. 

 

1

 "Nursing facilities" are institutions "certified by the New Jersey Department 

of Health and Senior Services for participation in [the Medicaid program] and 

primarily engaged in providing health-related care and services on a 24-hour 

basis to Medicaid beneficiaries[.]" N.J.A.C. 8:85-1.2.
3

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The New Jersey Department of Human Services, Division of Medical 

Assistance and Health Services, was originally responsible for managing the 

State's Medicaid nursing facility reimbursement program. 42 N.J.R. 1793(A). 

Pursuant to Executive Reorganization Plan No. 001-1996, this responsibility 

was transferred to the Department of Health and Senior Services. Ibid. 

Effective June 29, 2012, State oversight over the setting of Medicaid rates was 

transferred to the Department of Human Services, Division of Aging (Division). 

N.J.S.A. 30:1A-14. On the federal side, the Centers for Medicare & Medicaid 

Services (CMS) within the United States Department of Health and Human 

Services periodically audits New Jersey's Medicaid program to ensure that it is 

complying with federal and State law.

In New Jersey, there are two reimbursement "rate classes" for nursing 

facilities. N.J.A.C. 8:85-3.3(a). Privately-owned and operated facilities are paid 

at the Class I rate. N.J.A.C. 8:85-3.3(a)(1). "Governmental Nursing Facilities,"

meaning facilities that are government-owned or operated,

2

are paid the Class II 

rate. The Class II rate is higher than the Class I rate. A privately-owned and 

operated facility is not entitled to the higher, Class II rate.

 

2

 The term "Governmental Nursing Facility" includes facilities owned and 

operated by the State, a county, or a municipality. 42 C.F.R. § 447.272(a)(1).
4

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The State's nursing facility rate system and accompanying regulations 

were most recently revised in April 2011, and placed limits on how much a 

facility's reimbursement rate could fluctuate from year to year. N.J.A.C. 8:85-

3.16(a) and (b). For State Fiscal Year 2010-2011 (FY 2011), a nursing facility's 

Medicaid reimbursement rate could not vary more than $5 from the rate it 

received on June 30, 2010. N.J.A.C. 8:85-3.16(a). This limitation was also 

included in the Appropriations Act for that year. L. 2010, c. 35, p. 90. 

For FY 2011-2012 (FY 2012), the reimbursement rate could not vary more 

than $10 from the rate the facility received on June 30, 2010. N.J.A.C. 8:85-

3.16(b). This limitation was also included in the Appropriations Act. L. 2011, 

c. 85, p. 86. While the regulations did not place a limit on a facility's 

reimbursement rate for FY 2012-2013 (FY 2013), the Appropriations Act for 

that year stated that a facility's rate could not be less than what it had received 

on June 30, 2012. L. 2012, c. 18, p. 103.

Turning to the present case, appellant is a private company that owns and 

operates a nursing facility. It purchased the facility from the County of Hudson 

in 2002. When the County owned and operated the facility, it was reimbursed 

at the Class II rate. In the contract for sale, the County agreed it would use its 

"best efforts to cooperate with [appellant] so that [it] continues to receive the" 
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Class II rate. However, the contract stated that "[t]his is in no way to be 

construed to create any guarantee on behalf of the County . . . of same."

Even though appellant should have been paid at the lower, Class I rate 

after the 2002 sale, the Department of Health continued to pay appellant at the 

higher Class II rate.3 Thus, for the next ten years, appellant received thousands 

of dollars more in Medicaid reimbursement that it should have.

The Department set appellant's Medicaid reimbursement rate at $217.454

for FY 2011, and at $207.45 for FY 2012. Beginning July 1, 2012, appellant's 

rate continued to be set at $207.45.5

Shortly thereafter, CMS notified the Division that an audit had revealed 

that appellant was being paid at the Class II rate even though there was no 

evidence that it was a government-owned or operated nursing facility. Upon 

receipt of this information, the Division contacted appellant and asked if it could 

provide any evidence that it was owned and operated by a government entity. 

 

3

 As discussed below, the Administrative Law Judge (ALJ) found that the 

overpayment was the result of a "mistake."

4

 The Medicaid reimbursement rate is the amount paid per patient per day.

5

 As noted above, the Division assumed responsibility for nursing facility rate 

setting on July 1, 2012.
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Because it was privately owned and operated, appellant was unable to 

demonstrate its entitlement to the higher Class II rate.

As a result, the Division corrected the reimbursement error by properly 

classifying appellant as a Class I facility, and resetting its rate so that it was in 

line with the rate paid to other similarly-situated private facilities. On December 

6, 2012, the Division set appellant's new, correct rate at $194.38 effective June 

30, 2012, with that new rate then continuing into FY 2012 beginning on July 1, 

2012. Significantly, the Division did not seek reimbursement from appellant for

all of the Medicaid funds that had been overpaid to it over the ten-year period 

between 2002 and 2012.

Appellant filed an administrative appeal challenging the new rate. Even 

though it was a privately-owned and operated facility, appellant argued that it

should have continued to be paid the incorrect rate because the language in the 

Appropriations Acts required it be reimbursed at the same rate it received in the 

prior year, even though that rate had been incorrectly set. Appellant also 

asserted that the Division was barred by the doctrine of equitable estoppel from 

correcting the rate when the error was discovered by CMS.

After the Division denied appellant's Level I appeal, the matter was 

transmitted to the Office of Administrative Law (OAL) for hearing as a 
7

A-5654-16T2

contested case. N.J.A.C. 8:85-3.17(a)(1) and (2). Because there was no dispute 

as to any of the material facts, appellant and the Division filed cross-motions for 

summary decision.

On April 26, 2017, the ALJ rendered a comprehensive written Initial

Decision, rejecting appellant's arguments, and concluding that the Division had 

properly recalculated appellant's Medicaid reimbursement rate. In so ruling, the 

ALJ found that the Department of Health had never made a substantive decision 

that appellant should be paid at the Class II rate in 2002 and, instead, the rate 

had been paid by mistake. The ALJ explained:

At oral argument, [appellant] argued that the 

agency did not make a mistake in its prior classification 

as Class II. Instead, it "changed its interpretation," such 

that [appellant] would not be considered to be a Class I 

facility. However, interestingly, [appellant] does not 

point to any language of statute or regulation that would 

appear to have ever authorized the agency to classify a 

privately owned facility as within Class II. And while 

the Certifications [submitted by appellant with its 

motion papers] make reference to a legal authorization, 

[appellant] does not offer any actual legal opinion by 

the Attorney General to this effect. As such, it appears 

that the facility was accorded a status for ten years that 

was not authorized by statute or regulation. Why 

exactly it was that the rate setting agency allowed this 

to occur is uncertain, although [appellant] argues it was 

in order to facilitate the desire of Hudson County to 

protect the "safety-net" in the context of the transfer to 

private hands. Contrary to [appellant's] argument, I 

FIND that the continuing classification as a "Class II" 
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A-5654-16T2

facility was not in accord with the governing statute or 

regulation and was a "mistake." There was no 

"reinterpretation" of any statute or regulation involved.

The ALJ next found that the Appropriations Acts did not bar the Division 

from correcting this mistake in order to ensure that appellant received the proper 

reimbursement rate. The ALJ stated that appellant's "reliance on the language 

of the Appropriations Act seems a weak branch to support its position. Surely, 

the intent of the language was not to freeze in place erroneous classifications 

and reimbursement rates calculated based upon such mistakes or 

misunderstandings." 

In addition, the ALJ noted that the Division put appellant on notice on 

July 18, 2012 that its rates for that year were in doubt because it was not 

government-owned or operated and, in any event, appellant knew "from the very 

time of its negotiation of the Purchase Agreement that it was seeking treatment 

in a classification in which it did not fit and which the very Purchase Agreement 

recognized was not guaranteed."

Under these circumstances, ALJ found no basis to conclude that the 

Division should be equitably estopped from properly applying the governing law 

to set appellant's reimbursement rates at the proper level. Therefore, the ALJ 
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granted the Division's cross-motion for summary decision, and ruled that the 

$194.38 reimbursement rate was entirely appropriate.

Appellant filed exceptions to the ALJ's decision.6 In her July 18, 2017 

decision, the Division Director upheld the ALJ's determination that appellant 

should be paid at the proper Medicaid reimbursement rate as a Class I facility 

effective July 1, 2012. Like the ALJ, the Director rejected appellant's argument 

that the correction was barred by the Appropriations Acts. The Director stated:

[Appellant] relies upon the Appropriations Acts 

to perpetuate reimbursement as a Class II facility, 

which it is not. The purpose of the Appropriations Act 

is to provide a fiscally responsible annual budget 

process. Burgos v. State, 222 N.J. 174, 183 (2015). 

The Appropriations Act is not intended to protect the 

improper classification of a nursing facility. 

Consequently, the Appropriations Act cannot be used 

to protect the reimbursement of a rate that is improperly 

based on an improper classification. . . . [The Division] 

adjusted only the rate for Fiscal Year 2012, not the 

actual reimbursement. For Fiscal Year 2013, 

[appellant] was not entitled to Class II status or the 

higher rate of reimbursement that resulted therefrom. 

For these reasons, I agree with the ALJ that the 

Appropriations Act would logically freeze only 

legitimate rates.

 

6

 The Division also filed exceptions, limited to the ALJ's ruling on an 

evidentiary issue relating to the admissibility of a certification submitted by 

appellant that was protected by the attorney-client privilege. However, the 

resolution of that issue is not material to the resolution of this appeal. 
10 A-5654-16T2

The Director also determined that appellant's equitable estoppel argument 

lacked merit. She found that appellant was on notice from the beginning of July 

2012 that its rate for that year was under review because it was not a 

government-owned or operated facility. In addition, appellant was aware when 

it purchased the facility in 2002 that it was not entitled to the Class II rate and 

that the County, which had no say in the setting of the rates in any event, made 

no guarantee that appellant would be paid at that rate. This appeal followed.

On appeal, appellant raises the same contentions it unsuccessfully pressed 

before the ALJ and the Director. It again asserts that the Director arbitrarily, 

capriciously, and unreasonably corrected its rate in violation of the 

Appropriations Act, and that it should have been equitably estopped from doing 

so. We disagree.

Our review of an agency decision is limited. In re Stallworth, 208 N.J. 

182, 194 (2011). "In order to reverse an agency's judgment, [we] must find the 

agency's decision to be 'arbitrary, capricious, or unreasonable, or [ ] not 

supported by substantial credible evidence in the record as a whole.'" Ibid. 

(second alteration in original) (quoting Henry v. Rahway State Prison, 81 N.J. 

571, 580 (1980)). In determining whether agency action is arbitrary, capricious, 

or unreasonable, our role is restricted to three inquiries: 
11 A-5654-16T2

(1) whether the agency action violates the enabling act's 

express or implied legislative policies; (2) whether 

there is substantial evidence in the record to support the 

findings upon which the agency based application of 

the legislative policies; and (3) whether, in applying the 

legislative policies to the facts, the agency clearly erred 

by reaching a conclusion that could not reasonably have 

been made upon a showing of the relevant factors.

 

[W.T. v. Div. Med. Assistance & Health Servs., 391 

N.J. Super. 25, 35-36 (App. Div. 2007) (quoting Pub. 

Serv. Elec. & Gas Co. v. N.J. Dep't of Envtl. Prot., 101 

N.J. 95, 103 (1985)).]

Thus, the burden of showing the agency acted in an arbitrary, capricious, 

or unreasonable manner rests on the party opposing the administrative action. 

E.S. v. Div. of Med. Assistance & Health Servs., 412 N.J. Super. 340, 349 (App. 

Div. 2010) (citing In re Arenas, 385 N.J. Super. 440, 443-44 (App. Div. 2006)). 

It is not the function of the reviewing court to substitute its independent 

judgment on the facts for that of an administrative agency. In re Grossman, 127 

N.J. Super. 13, 23 (App. Div. 1974). 

We must also "'defer to an agency's technical expertise, its superior 

knowledge of its subject matter area, and its fact-finding role,'" and therefore 

are "obliged to accept all factual findings that are supported by sufficient 

credible evidence." Futterman v. Bd. of Review, Dept. of Labor, 421 N.J. Super.

281, 287 (App. Div. 2011) (quoting Messick v. Bd. of Review, 420 N.J. Super.
12 A-5654-16T2

321, 325 (App. Div. 2011)). Although we are not bound by an agency's 

interpretation of law, we accord a degree of deference when the agency 

interprets a statute or a regulation that falls "within its implementing and 

enforcing responsibility[.]" Wnuck v. N.J. Div. of Motor Vehicles, 337 N.J. 

Super. 52, 56 (App. Div. 2001). Our authority to intervene is limited to "those 

rare circumstances in which an agency action is clearly inconsistent with the 

agency's statutory mission or with other State policy." Futterman, 421 N.J. 

Super. at 287.

Furthermore, "[i]t is settled that '[a]n administrative agency's 

interpretation of statutes and regulations within its implementing and enforcing 

responsibility is ordinarily entitled to our deference.'" E.S., 412 N.J. Super. at

355 (second alteration in original) (quoting Wnuck, 337 N.J. Super. at 56). 

"Nevertheless, 'we are not bound by the agency's legal opinions.'" A.B. v. Div. 

of Med. Assistance & Health Servs., 407 N.J. Super. 330, 340 (App. Div. (2009) 

(quoting Levine v. State Dep't of Transp., 338 N.J. Super. 28, 32 (App. Div. 

2001))). "Statutory and regulatory construction is a purely legal issue subject 

to our de novo review." Ibid. (citation omitted).

Applying these principles, we discern no basis for disturbing the Division 

Director's reasonable determination that appellant's Medicaid reimbursement 
13 A-5654-16T2

rate had to be corrected as soon as the mistake was discovered by CMS. We 

therefore affirm substantially for the reasons set forth in the Director's 

comprehensive written decision, and add the following comments.

We agree with the Director that the language in the Appropriations Acts 

placing limits on the amount a nursing facility's rate could vary from year to 

year only applied to rates that had been correctly established in accordance with 

law. It is well settled that "statutes are to be read sensibly rather than literally 

and the controlling legislative intent is to be presumed as 'consonant to reason 

and good direction.'" DeLisa v. Cnty. of Bergen, 165 N.J. 140, 147 (2000)

(quoting Schierstead v. City of Brigantine, 29 N.J. 220, 230 (1959)). Thus, 

[i]n reading and interpreting a statute, primary regard 

must be given to the fundamental purpose for which the 

legislation was enacted. Where a literal rendering will 

lead to a result not in accord with the essential purpose 

and design of the act, the spirit of the law will control 

the letter. This doctrine permeates our case law.

[N.J. Builders, Owners & Managers Ass'n, 60 N.J. 330, 

338 (1972).]

In short, "common sense should not be abandoned in interpreting a 

statute[.]" A.B., 407 N.J. Super. at 341. "[W]here a literal interpretation would 

create a manifestly absurd result, contrary to public policy, the spirit of the law 
14 A-5654-16T2

should control." Ibid. (quoting Turner v. First Union Nat'l Bank, 162 N.J. 75, 

84 (1999)).

Here, the overriding public purpose behind any Appropriations Act is to 

ensure that the State's limited funds are spent in a fiscally responsible manner. 

Burgos, 222 N.J. at 183. Yet, appellant would have us read the language in the 

Acts to mandate the continued payment of an incorrect Medicaid reimbursement 

rate that is higher than that permitted by law. To maintain appellant's Class II 

rate when it has always been a privately-owned Class I facility would contravene 

the regulatory scheme and be a fiscally irresponsible use of State and federal 

Medicaid funds. Because appellant's interpretation would lead to the absurd 

result of continuing reimbursement at an improper rate to which it was never 

entitled, we reject its contention on this point.

Appellant's equitable estoppel argument is equally unavailing. "Equitable 

estoppel is 'rarely invoked against a governmental entity[,]'" Middletown Twp. 

Policemen's Benevolent Ass'n Local No. 124 v. Twp. of Middletown, 162 N.J.

361, 367 (2000) (quoting Wood v. Borough of Wildwood Crest, 319 N.J. Super.

650, 656 (App. Div. 1999)), particularly when estoppel would interfere with 

"essential governmental functions[.]" Vogt v. Borough of Belmar, 14 N.J. 195, 

205 (1954). The doctrine of equitable estoppel requires proof of 
15 A-5654-16T2

a misrepresentation or concealment of material facts, 

known to the party allegedly estopped and unknown to 

the party claiming estoppel, done with the intention or 

expectation that it will be acted upon by the other party 

and on which the other party does in fact rely in such a 

manner as to change his [or her] position for the 

worse[.]

 

[Carlsen v. Masters, Mates & Pilots Pension Plan Tr., 

80 N.J. 334, 339 (1979).]

The reliance must be "reasonable and justifiable" and the burden of proof is on 

the party asserting the estoppel. Foley Mach. Co. v. Amland Contractors, Inc., 

209 N.J. Super. 70, 75-76 (App. Div. 1986).

Appellant cannot meet these requirements. The State was not a party to 

its contract with the County when it purchased its facility, and the State made 

no misrepresentations to appellant concerning its Medicaid reimbursement rates. 

Appellant obviously knew it was privately owned, and should have been paid at 

the Class I rate like all other similar facilities. When the mistake was discovered 

by the CMS, the Division properly corrected it to ensure that going forward, 

appellant received only the payments permitted by law.7 

 

7

 We again note that the Division has not sought to recover the payments that 

appellant incorrectly received during the ten-year period between 2002 and 

2012.
16 A-5654-16T2

Nothing in the circumstances of this case estopped the Division from 

taking that required, regulatory action, and its decision was clearly not arbitrary, 

capricious, or unreasonable. Therefore, we reject appellant's contention on this 

point.

Affirmed.