### IN THE SUPREME COURT OF IOWA

No. 11

– 1145
Filed June 28 , 2013

SUNRISE RETIREMENT COMMUNITY, FRIENDSHIP HAVEN, PRESBYTERIAN VILLAGE, ROSE VISTA HOME, LONGVIEW HOME, UNITED PRESBYTERIAN HOME, RICEVILLE COMMUNITY REST HOME, HUBBARD CARE CENTER, and HAPPY SIESTA CARE CENTER , Appellants ,

vs.
IOWA DEPARTMENT OF HUMAN S ERVICES , Appellee

.
On review from the Iowa Court of Appeals.

Appeal from the Iowa District Court for Polk County, Arthur E. Gamble , Judge.

The Iowa Department of Human Services requested further review
of a decision of the c ourt of a ppeals reversing the agency’s disallowance
of certain expenses from cost reports submitted by nursing homes

. DECISION OF COURT OF APPEALS AFFIRMED; DISTRICT COURT
JUDGMENT REVERSED AND REMANDED WITH INSTRUCTIONS.

Patrick B. White of White Law Office, P.C., Des Moines , for appellants.

Thomas J. Miller, Attorney General, and Timothy L. Vavricek, Assistant Attorney General , for appellee.2

HECHT , Justice. Several nursing homes submitted annual reports disclosing their income and expenses to the Iowa Department of Human Services (DHS). The reports were used by DHS to calculate the Medicaid per diem
reimbursement rates for the nursing homes. Some of the nursing homes’
expens es were disallowed by DHS , which adjusted those reports and
reduced reimbursement rates acc ordingly . We must decide in this appeal whether DHS properly interpreted and applied its departmental rules in setting the rates. As we conclude the agency’s action was based on an incorrect interpretation of its rules, we reverse and remand.
I. Backgro und Facts and Proceedings. Sunrise Retirement Community, Friendship Haven, Presbyterian Village, Rose Vista Home, Longview Home, United Presbyterian Home, Riceville Community Rest Home, Hubbard Care Center, and Happy
Siesta Care Center are long

- term care f acilitie s licensed in Iowa and approved by DHS as Medicaid providers. Each of these facilities accepts patients with different payment sources

— e.g. , private payment, Medicare, and Medicaid. To participate in Medicaid, each facility must submit a “Financial and Statistical Report” annually to DHS . The report details the facility’s
overall operating costs and sources of revenue. The information submitted on the report is used by DHS to calculate a per diem
reimbursement rate for each participating facility

. The per diem rate is not designed to reimburse nursing facilities for their precise cost s incurred in caring for Medicaid patients

. Instead,
DHS calculates rates after determining a facility’s allowable costs, which
are derived from a facility

- specific reporting s ystem . In this system, each facility reports all costs incurred and revenue received from all sources in3

its annual f

inancial and s tatistical r eport

. An accounting firm employed by DHS then reviews the repo rts to determine which costs are allowable under the agency’s rules when calculating the appropriate Medicaid
per diem rate.
In submitting their cost reports for the fiscal year ending
December 31, 2008, the appellant care facilities included in their reports
costs incurred for services provided to residents whose primary source of payment was Medicare Part A. DHS deemed some of these costs
disallowed.
When a resident is admitted with Medica re Part A as a payor, a facility bears up front all c osts of treatment and care for the resident

. This is true even when the resident recei ves treatment or care outside the facility, such as when he or she is sent to a local provider for an x

- ray or lab work. In these case s , the outside provider bills the nurs ing facility directly for its services , including the three types of services at issue in
this case

— prescription drugs, x

- rays, and lab work. The outside provider may not bill the resident directly and may not bill Medicare. Instead, Medicare provide s a per diem payment to the nursing facility for
each resident intended to cover all care, treatment , an d services for that
resident. Medicaid, by contrast, pays the Medicaid patients’ outside providers of prescription drugs, x

- rays, and lab work directly

. In this case, most of the facilities included in their Medicaid cost reports costs incurred on behalf of Medicare patients for x

- rays, lab work, and prescription drugs. DHS contends that including the se categories of costs in reports used to calculate t he Medicaid per diem reimbursement rate would result in “double

- counting.” The facilities maintain that DHS regulations allow, if not require, the inclusion of
these costs.4
In 2008, DHS determined these costs were not allowable and
therefore excluded them from the cost reports

. This marked a depa rture from prior practice. Until the 2008 adjustments, DHS had allowed the facilities to include in the cost reports the costs paid to third parties for
lab services, x
- ray s, and prescription drugs provided to Me dicare patients

. 1 The facilities appealed the adjustments , and a contested case hearing was held . A proposed decision was issued by an administrative law judge who concluded the costs incurred by the facilities for x

- rays, lab work, and prescription drug s provided to Medicare patients were properly reported by the nursing homes. The ALJ elaborated: At the hearing, the Department opined that [Medicare] Part A costs should be excluded because the costs are covered/paid for by the Medicare per diem and if t he costs were included in the Medicaid per diem calculation, it would artificially inflate the Medicaid rate. This argument by the Department lacks merit however since the Medicare Part A revenue is also reported by the facility as a part of the cost repo rt and already part of the equation. Moreover, the Department conceded that it could perform an offset to account for the costs/revenue associated with costs for a Part A resident. As such, the Department has a methodology for dealing with this perceived “ enrichment ” without disallowing the costs on the Medicaid cost report. DHS requested intra

- agency review , and the director of h uman

s ervices issued a final decision which accepted the ALJ’s fact findings
but concluded the costs should be disallowed on the cost reports . The
facil ities sought judicial review, and the district court affirmed the director’s decision. The facilities appealed. The court of appeals reversed the district court, concluding the DHS rules did not support the agency’s

1 Although DHS had never objecte d to the reporting of prescription drug expenses incurred for Medicare patients prior to 2008 , it had apparently excluded those expenses from its Medicaid per diem calculations for prior years

.5

determinat ion that the costs in question were not allowable . DHS sought , and we granted, further review.
II. Standard of Review. Final agency action is reviewed for corrections of errors at law. Eyecare v. Dep’t of Human S erv s. , 770 N.W.2d 832, 8 35 (Iowa 2009). We apply the standards of chapter 17A of the Iowa Administrative Procedure
Act to agency action to determine if our conclusions are the same as the district court’s conclusions. Id. We are bound by the agency’s findings of facts if they are supported by substantial evidence. Id. W e will not , however, defer to DHS’s interpretation of its rules and regulations, as it has not been clearly vested with the authority to interpret them

. I d. at
836 ; see also Iowa Code § 17A.19(10)( c ) (2009)

. III. Discussion.
Iowa Code chapter 249A governs Iowa’s Medicaid program. Section 249A.4(1) instructs the director of DHS to make rules, establish policies, and prescribe procedures to

. . . [d]etermi ne the greatest amount, duration, and scope of assistance which may be provided, and the broadest range of eligible individuals to whom assistance may effectively be provided, under this chapter within the limitations of available funds. Iowa Code § 249A.4 (1). Section 249A .4(9) directs DHS to adopt rules for
determin ing the method and level of reimbursement for all medical and
health services specified in section 249A.2 after considering the following goals:

a. The promotion of efficient and cost

- effective delivery of medical and health services.
b. Compliance with federal law and regulations.

c. The level of state and federal appropriations for medical assistance.6 d. Reimbursement at a level as near as possible to actual costs and charges after priority is given to the considerations in paragraphs “ a ”, “ b ”, and “ c

”.
Id. § 249A.4(9).
Al l nursing facilities wishing to participate in and receive funds from the Medicaid program must submit an annual “Financial and
S tati stical Report” to facilitate DHS’s calculation of the Medicaid
per diem rate. See Iowa Admin. Code r. 441

— 81.6 (2009)

. The report
must detail both revenue s and costs associated with patient care according to the sub rules of rule 81.6. Id

. Subr ule 8 1.6(10) requires that facilities report all revenues , as recorded in their general books and records, associated with their provision of any routine daily services and any ancillary services to patients

. Id. r. 441

— 81.6(10)( a )

– ( b ). The costs portion of the report must be divided into categories of direct patient care costs and support care costs. 2 Id. r. 441

— 81.6. Subr ule 81.6(11)
further provides that certain costs “not normally incurred in providing patient care shall be elimin ated or limited ” according to a long list of limitations, none of which make reference to di rect care or Medicare

related costs. 3 Id . r. 441

— 81.6(11).
DHS determines per diem reimbursement rates based on a multi

step calculation. Id. r. 441

— 81.6(16). Fi rst, DHS establishes per diem
direct care and non direct care component cost bases for the facilities based on the costs reported

. Id. DHS then adjusts those component bases for various purposes in subsequent steps having no bearing on the

2 The parties appear to agree that costs incurred for x

- rays, prescription drugs, and lab s constitute direct care costs.

3 The enumerated limitations include, but are not limited to, federal and state income taxes, fees paid to directors, bad debts, personal trav el and entertainment, loan acquisition fees, management fees, depreciation, and legal fees. Iowa Admin. Code r. 441

— 81.6(11).7

types of costs to be incorporated in establishing the bases

. See i d. To establish the component cost bases, sub r ule 81.6(16) provides that e ach facility’s “ per diem allowable cos t shall be arrived at by dividing total reported allowable costs by total inpatient days du ring the reporting period.” Id. r. 441

— 81.6(16)( a ). Rule 81.1 defines “ a llowable costs” as “the price a prudent, cost

- conscious buyer would pay a willing seller for goods or se rvices in an arm’s

- length transaction, not to exceed the
limitations set out i n rules.” Id. r. 441

— 81.1. As we have noted, sub r ule 81.6(11) identifies fifteen different “limit ations” of expenses

— expenses that must be limited or disallowed in some way

— but fails to mention Medicare expenses

. See i d. r. 441

— 81.6(11). I n fact , no provision anywhere in rule 81.6 makes any reference to Medicare in association
with the annual cost reports required of the nursing facilities

. 4 See i d. r. 441

— 81.6. Instead, rule 81.6 tersely and generally directs that “costs for patient care service s shall be reported.” Id

. In terpreting these rules in the final agency action below, the
d irector of DHS affirm ed the agency’s cost report adjustments disallowing

x
- ray, lab, and prescription drug expenses on two grounds. First, the
d irector conc luded th e list of allowable cost limitations in subrule 81.6(11) did not constitute “ an all

- inclusive list of expenses disallowed in the facility’s cost report .” T hus, the director concluded he could also

4 Subr ule 81.6(20) authorizes facilities’ claims “for Medicaid payment for Medicare

- covered nursing facility services rendered to a Medicare beneficiary who is also eligible for Medicaid.” See id. r. 441

— 81.6(20)( a ). This provision aims to insure that ( 1) claims are adequately reimbursed if the Medicaid

- allowable amounts for the claims exceed the actual Medicare payments made, and ( 2) claims for services fully reimbursed by Medicare receive no additional Medicaid reimbursement. See id. r. 441

— 81.6(20). The record does not reveal and the parties do not address what, if any, bearing this provision may have on the propriety of incorp orating costs for services provided to Medicare patients t hat are not fully covered by Medicare reimbursement in determining a facility’s Medicaid component cost bases under sub rule 81.6(16).8

disallow costs for x

- rays, labs, and drugs provided to Medicare patients because Medicaid pays third

- party vendors directly for those kinds of
services when they are provided to Medicaid patients . Second, the
d irector concluded that costs associated with x

- rays, labs, and prescription drugs for Medicare patients do not meet rule 81.1 ’s
definition of allowable costs because “they are not costs a prudent, cost

conscious buyer would pay a willing seller.” T he district court affirmed
the d irector’s decision, agreeing that x
- rays, labs, and drugs “are not properly included in the cost that a prudent, cost

- conscious buyer would pay for nursing care services at [appellants’] facilities in an arm’s

- length transaction.” Addressing first the d irector’s subrule 81.6(11) just ification, we take no position as to whether the expenses enumerated as excludable
under the rul e constitute an exhaustive list. Regardless, we cannot
conclude that a determination of whether the list is exhaustive is dispositive of the cost question here

. Instead, we not e that the language of the subrule expressly li mits the types of costs that shall be “eliminated or limited” in confining its reach to “[c]ertain expenses that are not normally incurred in providing patient care

. . . .” I d. r. 441

— 8 1. 6(11).
We think it straightforward to conclude , and the parties agreed both below and on appeal, that the lab, x

- ray, and drug expenses at issue here are normally incurred in providing patient care. Indeed, DHS’s accountant testified in the agency procee ding below that facilities do and must regularly provide these services , regardless of payor type, to meet DHS’s minimum requirements for provision of essential services to their patients

. Thus, regardless whether subrule 81.6(11) may contemplate
the elim ination of costs not normally incurred in providing patient care9

and not expressly enumerated, we cannot conclude the subrule has any bearing on the question of the regularly incurred costs here.
If the d irector’s co nclusion may be read to suggest implicit ly that subrule 81.6(11) requires elimination of all expenses not normally incurred in providing “Medicaid patient care,” as opposed to the broader category of “ patient care ” expressly set forth in the subrule, we fin d no support for that contention in the language of the subrule, the language
of rule 81.6 more general ly, or in the standard practices of DHS.
S ubrule 81.6(11) mentions Medicaid only in the context of allowing legal fees related to defending threatened Medicaid decertification and, as noted, makes no mention of Medicare

. 5 See id. r. 441

— 81.6(11). Further, given the specific references in rule 81.6 to Medicaid and Medicare where necessary to distinguish them as pay ment systems, we are not persuaded that the silence of subrule 81.6(11) envisages an unwritten Medicaid limitation. Instead, we think the structure of rule 81.6 compels the broader reading

— namely, that facilities report all revenues regardless of payor type, as conceded by the parties and contemplated by subrule 81. 6(10), and likewise facilities report all costs regardless of payor type as contemplated by the introductory paragraph
of rule 81.6 before certain limitations are applied in accordance with subrule 81.6(11). Finally, we note that DHS concedes it does not exclude from cost reports expenses incurred for other services provided to Medicare patients, including, for example, various therapy services. We thus cannot conclude, as the d irector did, that rule 81.6 supports

5 The subrule also never distinguishes between types of payors in establishing its various limitations. See, e.g. , id. r. 441

— 81.6(11)( f ) (allowing expenses for entertainment provided for “participation of all residents who are physically and mentally able to participate” and eliminating only expenses for entertainment for which patient is required to pay); id. r. 441

— 81.6(11)( h ) (allowing reasonable costs for services provided by immediate relatives and remaining silent regarding payor type).10

excluding the costs of the challenged ser vices provided to Medicare patients

. Turning to the d irector’s second ground for affirming the elimination of the costs in question here, we find no support for the
elimination in the defi nition of “allowable costs” in rule 81.1. Because the definition refers only to the “ price a prudent, cost

- conscious buyer would pay a willing seller for goods or services in an arm’s

- length transaction” and specifies that the price cannot “exceed the limitations set out in rules,” we cannot concl u de the definition has anything to say
about elimination of the entire categor y of Medicare patient

- related costs or, more importantly, a specific subset of that category of costs including

x
- ray, lab, and prescription drug costs. Id. r. 441

— 81.1 (emphasis added)

. The d irector supported his conclusion with the rationale

— and DHS has raised the argument again on a ppeal

— that because the x

- ray, lab, and drug costs are costs for Medicare patients, “they are not costs a prudent, cost

- conscious buyer wo uld pay a willing seller” for services to
Medicaid patients. This rationale, in our view, relies either on adding modifying language to the definition expressly set out in the rule, or on a general assumption that the definition applies only to costs of s ervices provided to Medicaid patients

. Given the structure of rule 81.6 and the Department’s concession that “allowable costs” in some instances
encompass non

- Medicaid costs, we are not persuaded the definition can be read to imply a general limitation of its appl icability to costs provided to Medicaid patients

. As for the possibility of implicit modifying language, we note two additional problems wit h the position advanced by
DHS.
First , the d efinition of “allowable cost ” makes no distinction
between Medicaid and Medicare services and no distinction between11

buyers and sellers of Medicaid and Medicare services. We find it
instructive that various other definitions in rule 81.1 make no such
distinction . For example, t he d efinitions of “case mix” and “case

- mix index,” integral to the per diem calculation in subrule 81.6(16), are silent regarding payor type s
. See id. r. 441

— 81.1. Moreover, as explained, rule 81.6 largely lumps all services together for reporting and per di em calculation purposes. We cannot discern any reason in the language or
structure of rules 81.1 or 81.6 to import the d irector’s “buyer of Medicaid services” limitation into the definition. Second, in adopting the ALJ’s conclusions of law, the d irector

c onceded both that ( 1) subrule 81.10(5)( c ) expressly provides that the Medicaid program will provide direct payment to facilities for the provision of some services required by Medicare ; and ( 2) subrule 81.10(2) expressly requires that a facility must, when applicable, first exhaust all Medicare benefits to remain eligible for any Medicaid payment. We cannot conclude, based on these rules, that the Medicaid program is to be treated as a buyer of strictly Medicare or strictly Medicaid services

— rather, we thi nk the rules explicitly envision that the program may
reimburse facilities for provision of both Medicare and Medicaid services and that any specific instance of a service for which a facility receives reimbursement may simultaneously constitute a “Medicar e” and “Medicaid” service. These propositions, taken together with the
concession that facilities must provide lab, x

- ray, and drug services regardless of payment type, compel our conclusion that the definition of “allowable costs” is silent regarding the inclusion or exclusion of a class of Medicare costs, and cannot be read to incorporate the Medicaid
limitation the d irector advanced

.12 We think it prudent to note that whether an expense is reported may not be dispositive of whether DHS incorporates tha t expense in its component base

- rate calculation. The ALJ noted the availability of an “offset” that could occur between facility cost reporting and DHS rate

setting. 6 As we conclude here, however, the d irector’s interpretation of
the rules as written cann ot support the agency’s decision to exclude the
Medicare costs at issue from the facilities’ cost reporting. We recognize the cost

- containment concerns driving the agency
action here. We also acknowledge the significant challenges underlying
the d irector’ s statutorily prescribed duty to “[ d ]etermine the greatest amount, duration, and scope of assistance which may be provided, and the broadest range of eligible individuals to whom assistance may effectively be provided” in administering the Medicaid program

. Iowa Code § 249A.4(1). The diff erence between the meaning the d irector has assigned to the rules and the meaning we are able to discern clearly engages these policy concerns and raises questions as to what costs should be considered in calculating Medi caid reimbursement rates. Nevertheless, our task in this case is to determine the meaning of the
rules at issue and decide whether the d irector has erred in interpreting them. Given the agency’s abrupt about

- face in its practice regarding
exclusion of ce rtain costs from reports , and the substantial disparity
between what the rules plainly say and what the d irector now suggests they mean , we think DHS’s new interpretation of rule 81.6’s cost reporting and per diem calculation procedures is akin to the crea tion of a new rule. The appropriate course of action here cannot involve assigning

6 The nursing homes concede that to the extent Medicare prescription drug, x

ray, and lab costs are properly reportable, the reports should also inclu de the corresponding Medicare revenue for those services.13

new meanings to rules not fairly evident from the language of the rules themselves. Instead, in our view, the appropriate course requires new rulemaking according to the p rocedures set forth in Iowa Code chapter 17A, which allows all relevant stakeholders adequate notice and meaningful opportunity to address and help resolve the important policy questions at stake

. IV. C onclusion
. The d irector’s conclusion affirming the ag ency’s exclusion of the facilities’ lab, x

- ray, and prescription drug costs from the nursing homes’ reports was erroneous. We affirm the decision of the court of appeals,
reverse the district court judgment, and remand to t he district court

. The district court shall enter judgment remanding this matter to DHS for further proceedings consistent with this opinion. DECISION OF COURT OF APPEALS AFFIRMED; DISTRICT
COURT JUDGMENT REVERSED AND REMANDED WITH
INSTRUCTIONS
.