Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD

Civil Remedies Division

In the Case of: )
)
JFK Hartwyck at Oak Tree ) Date: May 13, 2008

(CCN: 31-5251), )
)
Petitioner, )
)

-Vv.- ) Docket No. C-06-167

) Decision No. CR1788
Centers for Medicare & Medicaid )
Services. )
)

DECISION

For the reasons set forth below, I uphold the Centers for Medicare & Medicaid Services’
(CMS’s) initial determination that JFK Hartwyck at Oak Tree failed to substantially
comply with participation requirements governing nursing home facilities. CMS
presented evidence which established prima facie that Petitioner was not in substantial
compliance with 42 C.F.R. §§ 483.25, 483.25(h)(2), and 483.70(c)(2), and Petitioner was
not able to rebut CMS’s claim by a preponderance of the evidence.

I. Background

JFK Hartwyck at Oak Tree (Petitioner or facility), is a long-term care facility, located in
Edison, New Jersey. Petitioner is authorized to participate in the federal Medicare
program as a skilled nursing facility (SNF). On March 21, 2005, in response to the
facility’s reporting an incident, the New Jersey State Department of Health and Senior
Services (state agency) conducted an investigation of the facility. The state agency
determined, as reported in the CMS Form 2567 Statement of Deficiencies (SOD), that
from March 4 through March 22, 2005, Petitioner was not in substantial compliance with
federal Medicare participation requirements and for one day its deficiencies posed
immediate jeopardy to residents. As a result, on August 16, 2005, CMS notified
Petitioner that it was imposing a Civil Money Penalty (CMP) of $4000: $3100 for past
noncompliance at an immediate jeopardy level on March 4, 2005, and $50 per day for 18
2

days (March 5 through March 22, 2005) of substantial noncompliance that did not amount
to immediate jeopardy. CMS Exhibit (Ex.) 9, at 1-3. Before CMS sent its notification,
Petitioner participated in Informal Dispute Resolution (IDR), after which the state agency
recommended deleting the F698 Tag (42 C.F.R. § 483.25, past noncompliance).
However, CMS did not agree with the results of IDR, and on November 15, 2005,
informed Petitioner that all of the remedies in the August 16, 2005 letter remained in
effect. P. Ex. 18.

On December 19, 2005, Petitioner requested a hearing. On May 9, 2006, Petitioner
moved for summary judgment, and on June 9, 2006, CMS opposed Petitioner’s motion
and filed a cross motion for summary judgment. I denied both requests for summary
judgment and set a schedule for briefing and a hearing. The parties filed pretrial
memoranda (CMS Memo and P. Memo). On July 16-17, 2007, I conducted a hearing in
this matter. CMS introduced 23 exhibits (CMS Exs. 1-23) and Petitioner introduced 25
exhibits (P. Exs. 1-25). I admitted the exhibits into the record. On November 16 and 19
2007, the parties filed post-hearing briefs (CMS Cl. Br. and P. Cl. Br.), and on December
5, 2007, they filed reply briefs (CMS Reply and P. Reply).

II. Issues

The issues before me are: (1) whether Petitioner was in compliance with applicable
regulations, specifically 42 C.F.R. §§ 483.70(c)(2), 483.25(h)(2), and 483.25, from March
4 through March 22, 2005; (2) if the facility was out of substantial compliance, whether
the deficiencies amounted to immediate jeopardy on March 4, 2005; and (3) if the facility
was out of compliance, whether the proposed CMP is reasonable.

Ill. Applicable Law

The Social Security Act (Act) sets forth the requirements for nursing facility participation
in the Medicare program and authorizes the Secretary of Health and Human Services
(Secretary) to promulgate regulations implementing the statutory provisions. Act

§§ 1819, 1919. The Secretary’s regulations governing nursing facility participation in the
Medicare program are found at 42 C.F.R. Part 483.

The Secretary contracts with state survey agencies to conduct periodic surveys to
determine whether skilled nursing facilities are in substantial compliance with program
participation requirements. Act § 1864(a); 42 C.F.R. § 488.20. The regulations require
that each facility be surveyed once every twelve months, and more often, if necessary, to
ensure that identified deficiencies are corrected. Act § 1819(g)(2)(A); 42 C.F.R.

§§ 488.20(a), 488.308.
3

To participate in the Medicare program, a nursing facility must maintain substantial
compliance with program requirements. To be in substantial compliance, a facility’s
deficiencies may “pose no greater risk to resident health or safety than the potential for
causing minimal harm.” 42 C.F.R. § 488.301.

If a facility is not in substantial compliance with program requirements, CMS has the
authority to impose one or more of the enforcement remedies listed in 42 C.F.R.

§ 488.406, including the imposition of a CMP. See Act § 1819(h). CMPs that are
imposed against a facility fall into two broad penalty ranges. 42 C.F.R. §§ 488.408,
488.438. The upper range of CMPs, from $3050 per day to $10,000 per day, is reserved
for deficiencies that constitute “immediate jeopardy” to a facility’s residents, and in some
circumstances, for repeated deficiencies. 42 C.F.R. § 488.438(a)(1), (d)(2). The lower
range of CMPs, from $50 per day to $3000 per day, is reserved for deficiencies that do
not constitute “immediate jeopardy,” but either cause actual harm to residents, or cause no
actual harm, but have the potential for causing more than minimal harm. 42 C.F.R.

§ 488.438(a)(1). “Immediate jeopardy” is defined to mean “a situation in which the
provider’s noncompliance with one or more requirements of participation has caused, or
is likely to cause, serious injury, harm, impairment, or death to a resident.” 42 C.F.R.

§ 488.301.

IV. Burden of Proof

When a penalty is imposed and appealed, CMS must establish a prima facie case that the
facility was not in substantial compliance with federal participation requirements. The
facility must overcome CMS’s showing by a preponderance of evidence to prevail.
Emerald Oaks, DAB No. 1800, at 4 (2001); Cross Creek Health Care Center, DAB No.
1665 (1998), applying Hillman Rehabilitation Center, DAB No. 1611 (1997), aff'd,
Hillman Rehabilitation Center v. HHS, No. 98-3789 (GEB), slip op., at 25 (D.N.J. May
13, 1999). The burden is set forth in the Departmental Appeals Board (Board) decision in
the Hillman case, and is discussed in detail in the Batavia Nursing and Convalescent
Center and Batavia Nursing and Convalescent Inn cases. See Batavia Nursing and
Convalescent Center, DAB No. 1904 (2004); Batavia Nursing and Convalescent Inn,
DAB No. 1911 (2004).

V. Findings of Fact, Conclusions of Law and Discussion

I make findings of fact and conclusions of law (Findings) to support my decision in this
case. I set forth each Finding below as a separate heading. I discuss each Finding in
detail.
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A, From March 4 through March 22, 2005, the facility was not in compliance
with 42 C.F.R. §§ 483.25, 483.25(h)(2), and 483.70(c)(2).

Under the “quality of care” requirement, each resident must receive and a facility must
provide the necessary care and services to attain or maintain the highest practicable
physical, mental, and psychosocial well-being, in accordance with the resident’s
comprehensive assessment and plan of care. 42 C.F.R. § 483.25 (Tag F698). A
subsection of that regulation requires facilities to ensure that “each resident receives
adequate supervision and assistance devices to prevent accidents.” 42 C.F.R.

§ 483.25(h)(2) (Tag F324). The regulations also require facilities to maintain all essential
mechanical, electrical, and patient care equipment in safe operating condition. 42 C.F.R.
§ 483.70(c)(2) (Tag F456).

This case involves Petitioner’s maintenance of personal alarms on residents’ beds and
chairs, the supervision and assistance devices Petitioner provided for its residents, and
Petitioner’s response to an emergency. Resident | (R1) was admitted to the facility on
February 7, 2005. CMS Ex 1, at 7. He had a history that included Parkinson’s Disease,
Depression with Hallucinations and Major Depression with Psychosis. CMS Ex. 1, at 1.
R1 also had a history of falls, including several at the facility. CMS Exs. 15; 16; 18. He
spoke Russian and little or no English, so the facility had one of its staff members who
spoke Russian visit Rl when possible and create a communications book for him. Tr.
44:2-4; CMS Ex. 3, at 1-2. The facility’s social services progress notes show that R1
was having trouble adjusting to the facility and that he was restless. CMS Ex. 6, at 1. On
several occasions he attempted to get out of his bed or wheel chair without assistance. He
was able to tip his wheelchair forward to get out. CMS Ex. 18, at 14-15. The facility
addressed these problems with various interventions, including providing R1 with a low
ed with side rails and an adjacent mat, providing him with an alarm on his bed and on

is wheelchair, adding an anti-tip device to his wheelchair, recommending a “merry
walker,” using restraints, and recommending close supervision. On at least one occasion
at night Rl was given Ambien. CMS Ex. 15, at 1-3; CMS Ex. 16, at 1; CMS Ex. 18, at
22; Tr. 143:5-15. One of the restraints the facility used was a rear-closing seatbelt on
R1’s wheelchair.

On March 1, 2005, R1 was restless and agitated. Tr. 54:4-11. At 10:45 p.m. he got out of
ed without assistance, so a staff member put him in his wheelchair with the rear-closing
seatbelt and took him to the day room. CMS Ex. 5, at 6-7. CNA Vergie Staggs was
folding linens near the day room at that time. Jd. She went down the hall to take
residents’ temperatures, which she estimates took five or six minutes. Jd. at 8.

5

When CNA Staggs returned, R1 was on the floor with the rear-closing seatbelt, which
was still attached to the wheelchair, around his neck. CMS Ex. 5, at 6-7. In an interview,
CNA Staggs said, “I panicked.” Jd. at 8. She tried to loosen the seatbelt for what the
interviewer recorded as a “couple of minutes.” CNA Staggs reported that she told LPN
Elsie Fouchard that she needed help, but LPN Fouchard said she never heard her. Jd. at 7;
Tr. 28:8-9. CNA Staggs said that she went down the hall to tell another CNA, Linda
Rudy. When questioned about that decision, CNA Staggs said she did not know why she
did it. Jd. at 8. She reported feeling afraid, frightened, and not being able to “yell.” Jd.
She also said R1 looked like he would “be OK.” Jd.

CNA Staggs said that she told CNA Rudy that the seatbelt was around R1’s neck.
However, CNA Rudy did not recall CNA Staggs telling her anything about a belt around
R1’s neck, only that R1 was on the floor and needed her help. CMS Ex. 5, at 9, 15. On
their way to the day room, the two CNAs stopped to put a thermometer in its case before
attending to R1. Jd. at 14. When they got to the day room, CNA Rudy immediately
called out for LPN Fouchard. Jd. at 9, 14. When LPN Fouchard arrived she found R1
sitting on the floor in front of his wheelchair with the rear-closing seatbelt around his
neck. He was unresponsive, not breathing, and did not have a pulse. LPN Fouchard got
scissors and cut the seatbelt. /d. at 9. Staff initiated CPR, intubated R1, and called 911.
R1 regained his pulse and was transferred to the hospital. CMS Ex. 4, at 1; CMS Ex. 5, at
1, 14. He died several days later at the hospital. Tr. 13:15-22.

1. The facility did not maintain all essential mechanical, electrical, and
patient care equipment, specifically residents’ personal alarms, in safe
operating condition as required by 42 C.F.R. § 483.70(c)(2) (Tag F456).

I consider first whether this incident establishes that the facility was not in substantial
compliance with 42 C.F.R. § 483.70(c)(2), which requires facilities to maintain all
essential mechanical, electrical, and patient care equipment in safe operating condition.
Petitioner focuses much attention on explaining why R1’s chair alarm did not sound —
because his head was on the sensor pad. This argument does not adequately address the
cited deficiency. First, it does not address the fact that the volume was turned down on
the particular chair in question. If pressure were released from the sensor pad, the alarm
would have sounded at the nurses station, but it would not have sounded at the chair
itself. If the volume was turned down on the chair itself, it would not be unreasonable to
assume that the alarm was not in safe operating condition. An alarm on a chair would
alert staff within hearing distance, who would almost certainly be able to respond sooner
than staff at the nurses station to the problem of a resident getting out of his seat. Second,
even assuming that R1’s particular chair was in safe operating condition, that does not
address the broader problem of other equipment failures in the facility. The surveyor
investigated other patient equipment in the facility and found that many alarms were not
in safe operating condition.
6

When tested, Resident 2’s bed alarm did not sound in the resident’s room or at the nurses
station. CMS Ex. 23, at 1. The alarm on Resident 3’s wheelchair had a cut wire, so when
he stood up, the alarm did not sound. /d. at 2. Resident 4 was supposed to have a alarm
on her bed and chair. The alarm was not in place, and the pad sensor and cord on the bed
were not connected to anything. The alarm’s sensor box was found in Resident 4’s
wheelchair, which was in the hall. Jd. at 3. Resident 5 was supposed to have a alarm on
his bed and on his wheelchair. The alarm on Resident 5’s bed was not connected to
anything, and when the facility’s maintenance man shook the sensor box, he said that it
sounded as if it had broken parts in it. When staff assisted Resident 5 to his wheelchair,
no alarm was placed on the wheelchair. CMS Ex. 1, at 4. Resident 6’s bed alarm did not
sound when tested. /d. Resident 7’s bed alarm did not sound when tested. Jd.

I need not find that R1’s chair was not in safe working condition to determine that the
facility was not in substantial compliance with this requirement.’ I find that the facility
did not maintain all essential mechanical, electrical, and patient care equipment in safe
operating condition. Moreover, the alarms that were not working properly would not
have constituted adequate assistance devices as required by 42 C.F.R. § 483.25(h)(2).

2. The facility did not provide an adequate level of supervision or
assistance devices to prevent accidents as required by 42 C.F.R.
§ 483.25(h)(2).

A facility must take reasonable steps to ensure that “[e]ach resident receives adequate
supervision and assistance devices to prevent accidents.” 42 C.F.R. § 483.25(h)(2);
Windsor Health Care Center, DAB No. 1902, at 5 (2003); Asbury Center at Johnson
City, DAB No. 1815, at 12 (2002); Koester Pavilion, DAB No. 1750, at 24 (2000);
Woodstock Care Center, DAB No. 1726, at 25 (2000). The facility must anticipate
potential accidents and take steps to prevent them (increased supervision or the use of
assistance devices); Guardian Health Care Center, DAB No. 1943, at 18 (2004). A
facility is allowed flexibility in choosing the methods it uses to prevent accidents, but the
chosen methods must constitute an “adequate” level of supervision. Windsor, DAB No.
1902, at 5; see also Windsor, DAB No. 1902, at 16-17; Woodstock, DAB No. 1726, at 25-
30 (section 483.25(h)(2) imposes on facilities an affirmative duty designed to achieve
favorable outcomes “to the highest practicable degree.”).

' Facility documents indicate that Petitioner had been experiencing problems with
the alarms. On February 12, 2005, R1 fell. His alarm was in place, but it was not
working at the time of the incident and the alarm did not sound. That alarm was replaced.
CMS Ex. 18, at 10-11.
7

Here, the facility did not anticipate the potential for accidents and take reasonable steps to
ensure that each resident received adequate assistance devices and supervision to prevent
accidents as required by 42 C.F.R. § 483.25(h)(2).

While no previous incident involved identical circumstances, R1 had attempted on several
occasions before March 1, 2005, to escape his wheelchair and bed and had injured
himself doing so. CMS Ex. 5, at 2; CMS Ex. 6; CMS Ex. 18, at 14-15, 16, 18-19, 20-21.
On February 17, 2005, R1 got out of the rear-closing seatbelt on the floor. CMS Ex. 18,
at 16, 20. On February 18, 2005, R1 was found on the floor with his wheelchair on top of
him and with the rear-closing seatbelt still on.2 CMS Ex. 2, at 5; CMS Ex. 18, at 20; Tr.
78-79. As surveyor Ann Yates, R.N., testified, it is not uncommon for residents to slip
down in their wheelchairs.’ It is uncommon for residents to be strangled by their
restraints, but that does not make it unforeseeable. Tr. 81:2-18. The nurses notes show
that R1 often tried to get out of his wheelchair, and Petitioner intended the restraint in
question to address R1’s history of falls. CMS Ex. 2, at 5.

The facility was aware of R1’s restlessness and it was trying to address the problem. Tr.
22:1-6. It should have anticipated and planned for his attempts to get out of his
wheelchair with the restraint in place, especially after the incidents on February 17 and
18, 2005. The facility could have used different assistance devices, or it could have
planned for R1 to have a higher level of supervision when he was awake at night.

However, I need not find that the supervision of R1 or the assistance devices provided to
him were inadequate to find that the facility was not in substantial compliance with this
requirement: as I have pointed out above, several other assistance devices provided by
the facility were not adequate simply because they were non-functional or not installed.
As discussed above, several of the residents in the facility had personal alarms on their
beds or chairs that did not function properly. An alarm that does not sound is not an
adequate assistance device. See Lake Shore Inn Nursing Home, Inc., DAB CR1361, at 6
(2005); Heritage Park Nursing Center, DAB CR1051, at 29 (2003).

? This incident occurred after the facility had added the anti-tip device to the
wheelchair. A facility investigation report says the device was ineffective and that it
“bent under pressure and also allows chair to tip too far before stopping.” CMS Ex. 18, at
21.

* During the hearing, Ann Yates, R.N, testified that it is not unusual for residents
to slip under seatbelts in wheelchairs. She said, “residents frequently slip out of their
chairs .. . they’re either restless, and they wiggle, and they get down under a seat belt, or
some other device, or they — you know, if you’ve had a stroke or something like that, and
you don’t have good control of your body, it’s possible that you could slip down under a
seat belt or some other device.” Tr. 81:10-18.
8

While a facility’s duty of care owed to its residents is not one of strict liability, the facility
must provide adequate supervision and assistance devices to prevent accidents.

Crestview Manor, CR1350 (2005); Windsor, DAB No. 1902, at 5. Neither were present
here. For the reasons discussed above, I find that the facility did not provide an adequate
level of supervision to prevent accidents, as required by 42 C.F.R. § 483.25(h)(2) (Tag
F324).

3. Facility staff left R1 unattended for a prolonged period of time after
finding him on the floor with a seatbelt around his neck still attached to
his wheelchair, violating the quality of care regulation 42 C.F.R. § 483.25
(Tag F698).

Under the Act and the “quality of care” regulation, each resident must receive and the
facility must provide the necessary care and services to attain or maintain the highest
practicable physical, mental and psychosocial well-being, in accordance with the
comprehensive assessment and plan of care. Act § 1819(b); 42 C.F.R. § 483.25.

This deficiency was based on CMS’s determination that facility staff left R1 unattended
for a prolonged period of time after he was found on the floor being strangled by the rear-
closing seatbelt which was still attached to his wheelchair. CMS Ex. 1, at 6-7. CMS
established its prima facie case on this point. Petitioner contends that CMS cannot prove
how much time elapsed between the CNA discovering R1 and the seatbelt being cut. P.
Cl. Br. at 15. Although the evidence does not show precisely how much time elapsed
between the CNA finding R1 on the floor and a nurse arriving to cut the seatbelt, if CNA
Staggs had immediately shouted for help when she found R1, the time would have been
close to zero. This is a close case, but because the burden is on Petitioner to rebut CMS’s
prima facie case, and Petitioner has not been able to do so by a preponderance of the
evidence, I find that Petitioner was not in substantial compliance with this requirement.

The CNA did not respond properly to the incident. Petitioner argues that the CNA’s
response was appropriate because she did not recognize the situation as an emergency,
but appears to concede that if she had recognized the event as an emergency, then her
response would have been wrong. P. Cl. Br. at 19. I do not find this to be a credible
argument, especially considering that when the CNA found R1 he was being strangled by
his restraint and she reported that she panicked.’ See CMS Ex. 5, at 8. Even if I were to

+ As Ann Yates, RN. testified, “I think [CNA Staggs] recognized that it was an
emergency based, on the fact that she tried to get the seat belt from around his neck. ...
[Y]ou wouldn’t need to be a certified nursing assistant or a nurse to know that’s a very
dangerous situation.” Tr. 89:18-23. Petitioner casts the CNA’s subsequent actions as an

(continued...)
9

find this argument to be credible, it does not help Petitioner’s case. If the facility’s
actions, or inactions, caused or were likely to cause serious harm to R1, immediate
jeopardy existed. If the CNA could not be expected to recognize an emergency situation,
the facility should have hired other professionals who could recognize emergency
situations to supervise the residents.

To rebut CMS’s determination that R1 was left for a prolonged period of time, Petitioner
offered the testimony ofa nurse, Elsie Fouchard, R.N. However, R.N. Fouchard is only
able to testify as to her own observations of R1, which covered a period of 10 to 15
minutes. Tr. 181:2-182:1. When someone is not able to breathe, even one or two minutes
is a prolonged and inherently perilous period of time to be left alone.

Petitioner also argues that CMS should adopt the state agency’s Informal Dispute
Resolution (IDR) decision, in which the state agency recommended deleting the
immediate jeopardy finding. However, as the Board has observed, “the Act clearly
provides that a state’s role in the enforcement process is merely to recommend the
imposition of remedies . . . the Secretary is the ultimate decision-maker.” Bergen
Regional Medical Center, DAB No. 1832 (2002); see Act §§ 1819(h)(1) and (2); 42
C.F.R. § 488.11(a). CMS is not bound to accept the IDR resolution in reaching its
determinations to cite Petitioner, and I am not bound by those IDR resolutions here.

Based on my review of all of the evidence before me on this issue, I find that the facility
did not provide the necessary care and services to attain or maintain the highest
practicable physical, mental and psychosocial well-being, in accordance with the
comprehensive assessment and plan of care as required by 42 C.F.R. § 483.25 (Tag
F698). This deficiency posed a “greater risk to resident health or safety than the potential
for causing minimal harm.” 42 C.F.R. § 488.301. CMS established a prima facie case
and Petitioner did not successfully rebut it by a preponderance of the evidence.

B. CMS’s determination that for one day the facility’s deficiencies posed
immediate jeopardy to resident health and safety was not clearly erroneous.

I next consider whether CMS’s immediate jeopardy finding was “clearly erroneous.”
CMS’s determination as to the level of a facility’s noncompliance, including a finding of
immediate jeopardy, must be upheld unless it is “clearly erroneous.” 42 C.F.R.

§ 498.60(c). The Board has observed that the “clearly erroneous” standard imposes a
“heavy burden” on facilities to show that no immediate jeopardy exists, and has sustained

4(...continued)
indication that she did not view the situation as an emergency, but this characterization of
the facts is not enough to rebut CMS’s prima facie case.
10

determinations of immediate jeopardy where CMS presented evidence “from which
“‘[oJne could reasonably conclude’ that immediate jeopardy exists.” Barbourville Nursing
Home, DAB No. 1962, at 11 (2005) (citing Florence Park Care Center, DAB No. 1931,
at 27-28 (2004) (citing Koester Pavilion, DAB No. 1750 (2000)); see also 42 C.F.R.

§ 498.3(d)(10).

Petitioner offers evidence to show that it properly responded to R1, but it has not met its
heavy burden to show that CMS’s determination — that the facility’s noncompliance
“caused, or [was] likely to cause, serious injury, harm, impairment or death to a
resident”— was clearly erroneous. See 42 C.F.R. § 488.301.

Petitioner argues that CMS is not able to prove how long R1 was left unsupervised after
CNA Staggs found him. However, the burden is on Petitioner to rebut CMS’s prima
facie case, and it has only presented evidence showing that its response was appropriate
after the LPN arrived. CMS based the deficiency on the CNA’s actions, not the LPN’s
actions. See CMS Ex. 1, at 6-7 (deficiency cited because R1 left unattended for a
prolonged period of time after staff found him). As discussed above, I found that the
facility was not able to rebut CMS’s prima facie case that R1 was left unsupervised for a
prolonged period of time.

I therefore find and conclude that CMS’s finding — that for one day the deficiency posed
immediate jeopardy to resident health and safety — was not “clearly erroneous.”

C. The proposed CMP of $3100 per day on March 4, 2005, and a per-day CMP of $50
from March 5 through March 22, 2005, is reasonable.

In determining the amount of the CMP, the following factors, specified at 42 C.F.R.

§ 488.438(f), must be considered: (1) the facility’s history of noncompliance, including
repeated deficiencies; (2) the facility’s financial condition; (3) the factors specified at 42
C.F.R. § 488.404; and (4) the facility’s degree of culpability, which includes neglect,
indifference, or disregard for resident care, comfort, or safety. However, the absence of
culpability is not a mitigating factor.

Petitioner argues that there was no immediate jeopardy, and therefore, the CMP is
unreasonable. However, I have found that immediate jeopardy existed for one day. By
law, the minimum per-day penalty for periods of immediate jeopardy is $3050, and the
minimum per-day penalty for periods of noncompliance that do not amount to immediate
jeopardy is $50. If CMS had imposed the lowest CMP permitted by the regulations for
the period of immediate jeopardy, it would be presumptively reasonable. See Century
Care of Crystal Coast, DAB No. 2076, at 25-26 (2007); Wisteria Care Center, 1892, at
11 (2003); Hermina Traeye Memorial Nursing Home, DAB No. 1810 (2002); Woodstock,
DAB No. 1726, at 43 (2000) (finding that a $3050 per-day CMP based on a finding of
11

immediate jeopardy was reasonable because CMS imposed the lowest per-day CMP
possible under the regulations). Here, the per-day CMP for immediate jeopardy is only
$50 higher than the statutory minimum, and I find that to be reasonable. Because CMS
imposed the lowest per-day CMP for the remaining days of noncompliance, I am without
the discretion to set aside or reduce it. 42 C.F.R. § 488.438(a) and (e)(1); see also Alden
Town Manor Rehabilitation & HCC, DAB No. 2054, at 30-31 (2006) (“[t]he ALJ (and
here the Board) is prohibited from setting or reducing a CMP amount to zero, which
effectively means that the minimal CMP amount permissible where . . . a basis has been
found for imposing a remedy and CMS has selected a CMP, is $50 per day.”).

VI. Conclusion

For the reasons discussed above, I affirm CMS’s determination to impose a per-day CMP
in the amount of $3100 for March 4, 2005, and a per-day CMP of $50 from March 5
through March 22, 2005.

/s/
Richard J. Smith
Administrative Law Judge


Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD

Civil Remedies Division

In the Case of: )
)
Dr. Randy Barnett, ) Date: May 8, 2008
)
Petitioner, )
)
-Vv.- ) Docket No. C-08-210

) Decision No. CR1786
Centers for Medicare & Medicaid )
Services. )
)

DECISION

I sustain the determination of the Centers for Medicare & Medicaid Services (CMS) to
revoke the Medicare billing privileges of Petitioner, Randy Barnett, D.O.

I. Background

In January 2005, Petitioner, a doctor, was convicted of a felony for selling non-controlled
prescription drug samples. In April 2006, Petitioner submitted an application for
enrollment in the Medicare program, disclosing his 2005 conviction, and in May 2006
was approved. Petitioner then applied to participate in the Medicaid program, and the
Medicaid state agency made an inquiry to the Medicare carrier about Petitioner’s
Medicare status in light of his conviction. On August 9, 2007, based on the January 2005
conviction, CMS revoked Petitioner’s Medicare billing privileges. Petitioner appealed
CMS’s determination to the Medicare hearing officer, who issued a reconsideration
decision upholding the revocation. Petitioner then appealed the reconsideration and the
case was assigned to me for a hearing and a decision.
2

I held a pre-hearing conference by telephone and issued a pre-hearing order in which I
directed the parties to file written exchanges including proposed exhibits and briefs. I
advised the parties that they had the option to request an in-person hearing. I told them
that I would grant a request for an in-person hearing based on a proffer of relevant
testimony that did not duplicate an exhibit.

CMS and Petitioner both filed briefs (CMS Br. and P. Br.). CMS has submitted exhibits
marked CMS Exs. 1-8, and Petitioner has submitted one exhibit marked P. Ex. 1. Neither
Petitioner nor CMS requested that I convene an in-person hearing. I receive into the
record CMS Ex. 1-8 and P. Ex. 1.

Section 1866(j)(2) of the Social Security Act (Act) creates appeal rights for providers and
suppliers where enrollment has been denied, including the revocation of billing
privileges, using the procedures that apply under section 1866(h)(1) of the Act. These
procedures provide for review by an Administrative Law Judge (ALJ) and the right to
appeal the ALJ’s decision to the Departmental Appeals Board (Board). 42 C.F.R. Part
498, et seq.

II. Discussion
A. Issue

The issue in this case is whether CMS is authorized to revoke Petitioner’s provider
enrollment.

B. Findings of fact and conclusions of law

I make findings of fact and conclusions of law to support my decision in this case. I set
forth each Finding below as a separate heading.

1. CMS has discretion to deny provider enrollment or revalidation to any
provider or supplier who was convicted, within 10 years preceding the
date of application for enrollment or revalidation, of a felony offense that
CMS determines to be detrimental to the best interests of Medicare and its
beneficiaries. I have no authority to question CMS’s exercise of
discretion in such a case.

Sections 1842(h)(8) and 1866(b)(2)(D) of the Social Security Act (Act) authorize the
Secretary of the United States Department of Health and Human Services (Secretary) to
deny enrollment or re-enrollment to any provider who has been convicted of a felony
offense which the Secretary determines is detrimental to the best interest of the program
3

or to that of program beneficiaries. The Secretary has published regulations that
implement the statutory intent. Regulations governing provider enrollment or
revalidation grant CMS discretion to deny enrollment or revalidation to any provider who
has been convicted of a felony offense within the 10 years preceding the date of the
application for enrollment or revalidation where CMS determines the offense to be
“detrimental to the best interests of the program and its beneficiaries.” 42 C.F.R.

§ 424.535(a)(3). A subsection of this regulation specifically provides that billing
privileges may be revoked for offenses involving “financial crimes.” 42 C.F.R.

§ 424.535(a)(3)(i)(B). Another subsection provides that billing privileges may be
revoked for any conviction that mandates an exclusion pursuant to section 1128(a) of the
Act. 42 C.F.R. § 424.535(a)(3)(i)(D)

As a general rule, and as appellate panels of the Departmental Appeals Board have
repeatedly held, I have no authority to review CMS’s exercise of discretion where
discretion is explicitly granted to CMS by regulation. Wayne E. Imber, M.D., DAB No.
1740 (2000); Brier Oak Terrace Care Ctr., DAB No. 1798 (2001). Nor do I have
authority to compel CMS to exercise discretion to take an action that CMS has
discretionary authority not to take. Puget Sound Behavioral Health, DAB No. 1944
(2004), at 15-16 (where regulation uses permissive rather than mandatory language ALJ
had no authority to compel CMS to exercise its discretion).

The regulations governing denial and revocation of provider enrollment give CMS the
discretion to determine which convictions will be the basis for denying enrollment or
revalidation. I have no authority to look behind CMS’s exercise of discretion and to
substitute my judgment for that of CMS. I cannot, on my own, decide whether an offense
is detrimental to the best interest of Medicare and its beneficiaries. Therefore, if I
conclude that Petitioner was convicted of a felony within the 10 years preceding the date
of his application and that CMS exercised its discretion, based on that conviction, to deny
revalidation to Petitioner, I must sustain CMS’s determination. Michael J. Rosen, M.D.,
DAB No. 2096 (2007), at 14 (citing Michael J. Rosen, M.D., DAB CR1566, at 11
(2007)).
4

2. Petitioner was convicted of a felony within 10 years of the date of his
application for provider enrollment.

The parties agree that in October of 2004 Petitioner entered a guilty plea agreement, and
that in January of 2005 he was convicted, of a felony for selling unlawfully thousands of
prescription drug samples.’ CMS Exs. 2, 3.

3. CMS has discretion to deny enrollment to Petitioner inasmuch as he
was convicted of a felony within the 10 years preceding the date of his
application for enrollment.

Petitioner’s conviction of a felony within 10 years of the date of his application for
enrollment is sufficient to sustain CMS’s determination to revoke his billing privileges. I
ave no authority to look behind that determination in order to decide whether CMS
reasonably exercised its discretion.

For that reason I make no decision in this case that Petitioner’s conviction was of the type
of felony for which the regulations specifically direct revocation of billing privileges
ecause it is unnecessary that I do so. It is sufficient, for purposes of my decision, to find
that Petitioner was convicted of a felony within the past 10 years and that CMS
determined that the conviction was detrimental to the best interests of the Medicare
program and its beneficiaries.

However, and although it is unnecessary that I make findings concerning the
reasonableness of CMS’s determination, there are similarities between Petitioner’s
conviction and the categories of felonies for which revocation is directed by the
regulations and such similarities certainly would support the reasonableness of CMS’s
determination were reasonableness at issue. See 42 C.F.R. §§ 424.535(a)(3)(i)(B),
424.535(a)(3)(i)(D).

First, Petitioner’s conviction is of a felony that is at least similar in character to those for
exclusion is mandated by section 1128(a)(4) of the Act and for which revocation of
billing privileges is directed by 42 C.F.R. § 424.535(a)(3)(i)(D). I make no finding here
that Petitioner was convicted of such a felony inasmuch that the drugs he sold unlawfully

' The drug samples were approaching their expiration dates or were not to be
dispensed by him to a pharmacist, and Petitioner received approximately $10,000 for the
samples between January 2000 and April 2001. CMS Ex. 2, at 1.
5

were not controlled substances. However, the similar character of his conviction to the
type of conviction that mandates exclusion under section 1128(a)(4) (both involve the
unlawful sale of prescription medications) certainly supports CMS’s rationale for finding
the conviction to be detrimental to the best interests of Medicare and its beneficiaries.

Additionally, Petitioner’s conviction is of a felony that is similar in character to the
financial crimes for which revocation is directed by § 424.535(a)(3)(i)(B). It is similar to
embezzlement or insurance fraud in that it was illegal and deceptive. It is also similar to
tax evasion because Petitioner received income that he could not legally declare for tax
purposes. I agree with CMS’s characterization of Petitioner’s crime.’ Although it is
unnecessary to categorize Petitioner’s crime as a “financial crime” because CMS has the
discretion pursuant to 42 C.F.R. § 424.535(a)(3) to determine whether any felony is
detrimental to the best interest of the Medicare program or its beneficiaries, the similarity
between Petitioner’s crimes and those financial crimes for which revocation is directed by
regulation certainly provides support for the reasonableness of CMS’s determination.

Petitioner argues that the revocation is tantamount to an exclusion from the Medicare
program, and that Congress has expressly legislated mandatory and permissive
exclusions, none of which concern the crime he committed. But, Congress gave the
Secretary discretion to terminate a Medicare agreement when a physician or supplier has
been convicted of a felony which the Secretary determines is detrimental to the best
interests of the program or its beneficiaries even where an offense does not fit exactly into
a category of crimes for which exclusion is mandated or permitted by section 1128 of the
Act. The Secretary also has the discretion to determine what offenses are detrimental to
the best interests of the program or its beneficiaries.

Petitioner also argues that CMS necessarily determined that Petitioner’s crime was not
detrimental to the Medicare program when it approved his application for enrollment
which was accompanied by a disclosure of his 2005 conviction. Moreover, according to
Petitioner, CMS knew that he had been convicted of a felony when it originally agreed to
enroll him as a provider and now, has unfairly changed its position by determining to
revoke that which it had previously granted. The argument is essentially that CMS’s
prior determination estops it from making a new determination. This argument fails for
two reasons. First, it is beyond my authority to look behind CMS’s discretionary

> In the preamble to the Part 424 regulations, the drafters emphasized their belief
that “it is reasonable for the Medicare program to question the honesty and integrity of
the individual or entity with such a history [of financial crimes] in providing services and
claiming payment under the Medicare program.” 71 Fed. Reg. at 20,760 (April 21,
2006).
6

decision. Second, as a general rule, estoppel does not apply to the federal government or
its agencies. See Oak Lawn Endoscopy, DAB CR1187 (2004). Moreover, CMS may
conduct revalidation reviews “off cycle.” 42 C.F.R. § 424.515(d)(1). Here, following
inquiries by the state Medicaid agency, CMS conducted a review and determined that
Petitioner’s conviction warranted revocation. CMS Ex. 8.°

/s/
Steven T. Kessel
Administrative Law Judge

* An appellate panel of the Departmental Appeals Board rejected similar
arguments, albeit in a different context, concerning alleged retroactive application of a
regulation. Nandrenda M. Patel, M.D., DAB 1736 (2000) (agency’s application of
current law at time of action not retroactive application of the regulation.).


Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD

Civil Remedies Division

In the Case of: )
)
Salem Gastroenterology Associates, P.A.,) Date: May 7, 2008

Pinehurst Medical Clinic, Inc., )
)

Petitioners, ) Docket No. C-06-519

) Decision No. CR1785
-V.- )
)
Centers for Medicare & Medicaid )
Services. )
)

DECISION

Petitioners, Salem Gastroenterology Associates, P.A. (Salem Gastroenterology or
Petitioner) and Pinehurst Medical Clinic, Inc. (Pinehurst or Petitioner) appeal the
decisions of a Medicare Part B Hearing Officer who found that they do not qualify for
Medicare provider numbers as Ambulatory Surgical Centers (ASCs). For the reasons
discussed below, I affirm the Hearing Officer’s decisions.

I. Background

Medicare Part B Hearing Officer Virginia Gwaltney reopened the prior hearing decisions
of February 24, 2006 issued to Salem Gastroenterology and Pinehurst by another hearing
officer. Hearing Officer Gwaltney issued new decisions on the reopened cases which
reversed the first Hearing Officer’s determinations, finding that Petitioners were not
eligible to participate as ASCs. Hearing Officer’s Gwaltney’s new determinations were
contained in revised hearing decisions dated April 21, 2006 (for Salem Gastroenterology)
and April 24, 2006 (for Pinehurst).'

' Petitioner Salem Gastroenterology applied for a Medicare provider number as an
ASC in March 2003. Petitioner Pinehurst applied for a Medicare provider number as an
ASC in December 2004. Both were approved for enrollment in the Medicare program as
ASCs and issued Medicare provider numbers. Subsequently, both Pinehurst and Salem
Gastroenterology received letters from the Medicare contractor dated June 30, 2005, and
2

Salem Gastroenterology and Pinehurst are represented by the same legal counsel. Both
Salem Gastroenterology and Pinehurst requested hearings on June 12, 2006. On July 11,
2006, I convened a prehearing telephone conference, the substance of which is
memorialized in my Order dated July 14, 2006. During the conference, I granted
Petitioners’ motion to consolidate these two cases. The parties disagreed as to whether an
in-person hearing was necessary. | directed the parties to file briefs so that they could
fully argue their positions as to whether or not an in-person hearing was necessary. I
advised them that, after reviewing their submissions, I would convene another telephone
conference to issue an oral ruling.

On November 22, 2006, I convened another telephone conference with the parties. I
ruled that I would not hold an in-person hearing because it appeared that the only issues
to be decided are legal issues. I advised the parties that this case would proceed on the
merits via written submissions, and | set a briefing schedule. I advised the parties further
that I was not foreclosing the need for in-person testimony should the briefing identify a
genuine material issue of fact in controversy that would warrant a hearing.

CMS filed a brief, accompanied by two exhibits, CMS Exs. | - 2. Petitioners filed a
response brief, accompanied by P. Exs. A - G. CMS filed a reply, and Petitioners filed a
surreply. No objections have been filed to any of the parties’ exhibits, and I have
admitted them into evidence in this case.

July 22, 2005, respectively, advising them that their Medicare provider numbers were
revoked. The stated reason for the revocation of Petitioners’ provider numbers was that
an internal review of all Medicare-enrolled ASCs revealed that Petitioners were not
licensed as ASCs by the State of North Carolina as required by CMS.

Both Petitioners requested a Hearing Officer hearing. A Medicare Hearing Officer
conducted the hearings concurrently on September 15, 2005, with the same participants,
witnesses, and authorized representative. The appeals concerned the same issue, and the
arguments presented in the appeals were identical.

Following the hearings, the Hearing Officer issued a fully favorable decision to each
Petitioner dated February 24, 2006, finding that the Medicare contractor had improperly
revoked Petitioners’ ASC provider numbers.
II. Discussion
A. Applicable Law

Section 1866(j)(1)(A) of the Act directs the Secretary to establish regulations for the
enrollment in the Medicare program of providers of services and suppliers. Section
1866(j)(2) of the Act gives providers and suppliers appeal rights, for certain
determinations involving enrollment, using the procedures that apply under section
1866(h)(1)(A) of the Act. Those procedures are set out at 42 C.F.R. Part 498, et seg. and
provide for hearings by Administrative Law Judges (ALJs) and review by the
Departmental Appeals Board (Board).

In provider appeals under 42 C.F.R. Part 498, the Board has determined that CMS must
make a prima facie case that an entity has failed to comply substantially with federal
requirements. See MediSource Corporation, DAB No. 2011 (2006). “Prima facie”
means that the evidence is “[s]ufficient to establish a fact or raise a presumption unless
disproved or rebutted.” Black’s Law Dictionary 1228 (8" ed. 2004); see also Hillman
Rehabilitation Center, DAB No. 1611, at 8 (1997), aff'd, Hillman Rehabilitation Center
v. U.S. Dept. of Health and Human Services, No. 98-3789 (GEB) (D.N.J. May 13, 1999).
To prevail, the entity must overcome CMS’s showing by a preponderance of the
evidence. Batavia Nursing and Convalescent Center, DAB No. 1904 (2004); Batavia
Nursing and Convalescent Inn, DAB No. 1911 (2004); Emerald Oaks, DAB No. 1800
(2001); Cross Creek Health Care Center, DAB No. 1665 (1998); Hillman Rehabilitation
Center, DAB No. 1611 (1997), aff'd, Hillman Rehabilitation Center v. U.S. Dept. of
Health and Human Services, No. 98-3789 (GEB) (D.N.J. May 13, 1999).

B. Issue

The only issue in this case is whether Hearing Officer Gwaltney’s revised decisions of
April 21, 2006, and April 24, 2006, which concluded that Petitioners were not qualified to
enroll in Medicare as ASCs, should be affirmed.

C. Analysis

Before I examine the parties’ respective arguments, it is instructive to first examine the
rationale provided in Hearing Officer Gwaltney’s revised decisions dated April 21, 2006
and April 24, 2006. Because the decisions contain the same rationale, I will not
distinguish between them. Instead, I shall use the phrase “revised decision” to
collectively refer to both of Hearing Officer Gwaltney’s revised decisions.
4

In her revised decision, Hearing Officer Gwaltney focused on the requirement that an
ASC must comply with state licensure requirements as a condition for coverage, as set
forth at 42 C.F.R. § 416.40. Hearing Officer Gwaltney, moreover, pointed out the
existence of N.C. Gen. Stat. § 131E-147, which explicitly prohibits a person from
operating an ambulatory surgical facility without a license obtained from the [North
Carolina] Department [of Health and Human Services]. Hearing Officer Gwaltney stated
that the previously issued hearing decisions issued by the first Hearing Officer dated
February 24, 2006, were not correct and failed to address and rule on the licensing issue.

Hearing Officer Gwaltney noted that, according to the records in the file, both Petitioners
have admitted that they are not licensed as ASCs by the State of North Carolina. The
Hearing Officer stated that the essence of their arguments is that the State of North
Carolina does not require them to be licensed as ASCs in order to perform office
endoscopies and therefore, they are compliant with North Carolina licensure laws and
eligible for Medicare approval as an ASC. Hearing Officer’s revised decision.

Hearing Officer Gwaltney found Petitioners’ argument to be misguided and incorrect.
She distinguished between performing endoscopies in physicians’ offices, which does not
require state licensure, and performing endoscopies as part of the operation of an ASC,
which does require state licensure. She noted that Petitioners had applied for enrollment
not as a physician’s office with an endoscopy procedure room, but as ASCs performing
endoscopies. As such, to operate as ASCs and bill Medicare the fees for the endoscopies,
Petitioners were required to comply with the State licensure requirement contained in 42
C.F.R. § 416.40. Because the State of North Carolina requires a license to operate as an
ASC (N.C. Gen. Stat. § 131E-147), Petitioners were required to be in compliance with
this state licensing requirement. The Hearing Officer concluded that as long as
Petitioners lacked state licenses as ASCs, they were not qualified to enroll in Medicare as
ASCs.

Hearing Officer Gwaltney next addressed Petitioners’ argument that their accreditation by
a national accrediting agency was sufficient for Medicare certification in North Carolina.
She also found this argument to be without merit.

Hearing Officer Gwaltney noted that Petitioner Pinehurst was granted accreditation in the
Medicare deemed status program by the Accreditation Association for Ambulatory Health
Care, Inc. (AAAHC), effective September 23, 2004. She noted that the AAAHC website
“acknowledges that being deemed to meet the Medicare conditions of coverage for ASCs
through accreditation” by the AAAHC gives an ASC an option to a state agency review,
ut also notes that there may be other state licensing obligations that need to be fulfilled

y ASCs. CMS Ex. 1, at 9; CMS Ex. 2, at 8.

5

Hearing Officer Gwaltney also pointed out that the AAAHC website, in the section titled
“Questions and Answers Regarding Medicare Deemed Status,” stated that “‘organizations
currently AAAHC-accredited do not automatically qualify for Medicare certification. An
organization needs to apply specifically for the Accreditation Association Medicare
survey and Medicare-related standards will be applied during the requested survey.’”
CMS Ex. 1, at 9; CMS Ex. 2, at 8.

In examining the previous hearing decision issued on February 24, 2006, Hearing Officer
Gwaltney states that the previous Hearing Officer erred in her analysis of the relevant
regulation found at 42 C.F.R. § 416.26. Hearing Officer Gwaltney states that the
previous Hearing Officer applied only 42 C.F.R. § 416.26(a)(1) to arrive at the incorrect
conclusion that deemed compliance through AAAHC accreditation qualified Pinehurst
and Salem Gastroenterology for Medicare enrollment. Hearing Officer Gwaltney points
out that the previous Hearing Officer failed to apply 42 C.F.R. § 416.26(a)(2), which
must be read in conjunction with subsection (a)(1) of the regulation, and that, under 42
C.F.R. § 416.26(a)(2), ASCs, even with deemed status through accreditation, must
comply with state licensure requirements. CMS Ex. 1, at 11; CMS Ex. 2, at 10.

Hearing Officer Gwaltney applied the identical rationale for Salem Gastroenterology.
She did note that Salem Gastroenterology was accredited by AAAHC on August 14,
2001, and that this was a general accreditation and did not provide Medicare certification.
She states that Salem Gastroenterology underwent an AAAHC/Medicare deemed status
survey effective June 2, 2004, which meant that, on January 27, 2004, when Salem
Gastroenterology was initially approved for enrollment as an ASC, it not only lacked a
state license but had not yet been deemed Medicare compliant by the accrediting
association. CMS Ex. 1, at 9.

CMS’s position

CMS argues that Petitioners have not met the definition of an ASC set forth at 42 C.F.R.
§ 416.2. Under the regulatory definition, an ASC must be a “distinct entity that operates
exclusively for the purpose of providing surgical services to patients not requiring
hospitalization, has an agreement with CMS to participate in Medicare as an ASC, and
meets the conditions set forth in subparts B and C of this part.” CMS contends that
Petitioners are not “distinct entities” separate from the physician practices. Further, CMS
argues that neither Petitioner operates “exclusively” for the purpose of providing surgery
because Petitioners also provide physician services. CMS Br. at 1-2.
6

In CMS’s view, the regulatory definition of ASC requires Petitioners to create separate
legal entities to perform ASC services, and that Petitioners’ alleged ASCs are not separate
corporations or separate partnerships, nor do they possess separate tax identification
numbers. CMS asserts that Petitioners are physician practices that have been subdivided,
and they are improperly seeking to operate an ASC doing endoscopies as part of the
physician practices. Moreover, CMS argues that while an ASC must also be physically
separated from its physician’s practice, this requirement is subordinate to the requirement
that the ASC must first be a distinct legal entity.

In addressing the Hearing Officer decisions of April 21 and 24, 2006, CMS notes that the
Hearing Officer’s rationale was “correct,” but “also needlessly complex.” CMS Br. at 8.
CMS asserts that it agrees that Petitioners “did not meet required state law licensure
requirements,” but contends that “there is no need to reach that issue because they clearly
do not, in any event, meet [42 C.F.R.] § 416.2.” Id.

Petitioner’s position

In response, Petitioners assert that CMS has “presented a new reason for rejecting” their
applications, in its claim that they “are not separate legal entities from the physicians’
practices which operate the [ASCs].” P. Response at 1-2. Petitioners protest CMS’s new
argument, contending that this issue had never been raised in the several years of
litigation, and that no one from the State of North Carolina, the Medicare contractor, or
CMS had ever stated or suggested that the phrase “distinct entity” contained in the
regulatory definition of ASC should be interpreted as meaning a separate legal entity.

Petitioners assert that the definition of ASC at 42 C.F.R. § 416.2 requires only a “distinct
entity,” not a “distinct legal entity.” Petitioners contend that the ASCs which they operate
“are distinct entities from the physicians’ practices by which they are owned.” According
to Petitioners, an entity called the Salem Endoscopy Center is owned and operated by
Salem Gastroenterology (a physicians’ practice) and is a free-standing endoscopy center
that has its own waiting room, reception area, furniture, office equipment, personnel, and
maintains patient information separately from the physicians’ practice. Petitioners also
state that an entity called the Pinehurst Medical Clinic Endoscopy Center is owned and
operated by Pinehurst (a physicians’ practice), and, though housed in the same building,
is a physically separate and distinct operation adjacent to Pinehurst. The Pinehurst
Endoscopy Center and the physicians’ practice have their own waiting areas, separated
from the other by a dividing wall. The Pinehurst Endoscopy Center has separate staff,
and maintains separate patient information from the physicians’ practice. According to
Petitioners, physicians with Pinehurst have designated days in the practice and designated
days in the endoscopy center, with no overlapping duties on a single day. Petitioners do
not deny that their endoscopy centers are not separate legal entities from the physicians’
practices with which they are affiliated.
7

Petitioners contend that there are no documents issued by CMS that suggest that an
applicant to be an ASC must be a separate legal entity from the physicians’ practice.
Petitioners point to Appendix L of the CMS State Operations Manual, and contend that
the manual’s interpretive guidelines for 42 C.F.R. § 416.2 state only that there must be
physical separation of space, separate recordkeeping, dedicated staff, and the ASC must
use its space for ambulatory surgery exclusively. Petitioners assert that they have met
these requirements. They assert further that the interpretive guidelines say nothing about
a requirement that an ASC and its affiliated physicians’ practice must be separate legal
entities.

With respect to the state licensing issue, Petitioners continue to emphatically maintain
that they do not need to be licensed by North Carolina. As support for its position,
Petitioners cite to the State Operations Manual (SOM)’s interpretive guidelines for 42
C.F.R. § 416.40, which state the following: “Where a State has no applicable licensure
requirements, or where ambulatory surgical services may be provided without licensure, a
facility will be eligible if it meets the definition of § 416.2 and all other applicable
Medicare requirements.” P. Br. at 20 (emphasis in brief) (quoting from P. Ex. D, at 3
(SOM, Appendix L — Guidance to Surveyors: Ambulatory Surgical Services)).

Petitioners also contend that they are accredited by AAAHC, and that “if North Carolina
does not require a license, such accreditation is sufficient to qualify them for Medicare,”
pursuant to 42 C.F.R. § 416.26(a)(1). P. Br. at 20. Petitioners also note that the director
of the Division of Facility Services (DFS) of the North Carolina Department of Health
and Human Services has stated under oath that Salem does not have to be licensed.

Furthermore, Petitioners insist they are covered by the exception contained at the end of
N.C. Gen. Stat. § 131E-146(1), which states that “the performance of incidental, limited
ambulatory surgical procedures which do not constitute an ambulatory surgical program .
. .and which are performed in a physician or dentist’s office does not make that office an
ambulatory surgical facility.” According to Petitioners, whether or not it is consistent
with CMS’s reading of the statute, DFS has long applied this quoted language in such a
manner as to allow Petitioners, and other physicians’ practices in North Carolina, to
operate endoscopy centers without state licenses as ambulatory surgical facilities. P.
Response Br. at 21; see CMS Ex. | at 47.

Discussion

The regulations define an ASC to mean “any distinct entity that operates exclusively for
the purpose of providing surgical services to patients not requiring hospitalization, has an
agreement with CMS to participate in Medicare as an ASC, and meets the conditions set
forth in subparts B and C of this part.” 42 C.F.R. § 416.2.
Petitioners applied for Medicare provider numbers as ASCs. Petitioners do not dispute
that they do not possess licenses from the State of North Carolina to operate as ASCs.
Petitioners maintain, however, that they qualify for Medicare certification based on their
accreditation by AAAHC. In Petitioners’ view, “[g]iven the confusing state of North
Carolina law on licensing,” CMS should allow them to qualify for Medicare based on
their accreditation.” P. Surreply at 5.

Before I discuss Petitioners’ claims, I note that, in its brief, CMS asserted that Petitioners
were not separate legal entities from the physicians’ practices, and therefore, did not
satisfy the “distinct entity” requirement contained in the definition of ASC under 42
C.F.R. § 416.2. CMS argued that Petitioners thus cannot be enrolled in Medicare as
ASCs because, at the outset, they fail to even meet the definition of an ASC. In its
response, Petitioners asserted that the only basis cited in the Hearing Officer’s decisions
for the revocation of their Medicare provider status had been their failure to have state
licenses as ASCs. Petitioner alleged that CMS was introducing the “distinct entity”
argument in litigation for the first time and attempting to justify revocation based on this
new reason.

l agree with Petitioner that Hearing Officer Gwaltney addressed primarily the state
licensure issue in her decisions and did not consider whether or not Petitioners met the
“distinct entity” requirement of the regulatory definition. Hearing Officer Gwaltney
acknowledged that the “essence” of Petitioners’ argument was their claim that North
Carolina did not require them to be licensed as ASCs and therefore, they were in
compliance with state law and eligible for Medicare approval as ASCs. See CMS Ex. 1,
at 6; CMS Ex. 2, at 5. She thus focused her analysis on the licensing issue and the related
accreditation issue. Inasmuch as I agree with the issues as they were framed in Hearing
Officer Gwaltney’s decisions and Petitioners’ hearing requests, it is unnecessary for me to
address CMS’s allegation that Petitioners do not meet the regulatory definition of an
ASC.

As stated above, the only issue before me is whether Hearing Officer Gwaltney’s revised
decisions concluding that Petitioners were not licensed as ASCs by North Carolina, and
therefore were not qualified to enroll in Medicare as ASCs, are correct and should be
affirmed. I find the arguments advanced by Petitioners to be unavailing. Nothing in this
record convinces me that Hearing Officer Gwaltney was incorrect in her analysis, and I
affirm her decisions.
9

Pursuant to 42 C.F.R. § 416.40, an ASC must comply with State licensure requirements
as a condition for coverage. The State of North Carolina has licensure requirements
specific to an ASC. The language of N.C. Gen. Stat. § 131E-147 is plain: “No person
shall operate an ambulatory surgical facility without a license obtained from the
Department [of Health and Human Services.]” Thus, in order for a facility in North
Carolina to enroll as an ASC with the Medicare program, it must demonstrate that it
complies with the North Carolina state licensing requirements.

n their brief, Petitioners state that their endoscopy centers “are separate and distinct
ASCs], not just endoscopy rooms within a physician’s office.” P. Response at 16.
However, Petitioners then make the contradictory argument that it is the physicians’
practices that are performing the endoscopies, and therefore, the practices fall under the
state law exception which permits a physician’s office that performs “incidental, limited
ambulatory surgical procedures which do not constitute an ambulatory surgical program”
to remain unlicensed. N.C. Gen. Stat. § 131E-146; see P. Response at 21.’

In its reply brief, CMS argues that Petitioners are “trying to have it both ways.” CMS
Reply at 10. CMS asserts that it is impossible for a facility to be both a “distinct entity
that operates exclusively for the purposes of providing surgical services” and to be
performing surgery as “incidental” to a physician’s practice, in a physician’s office. CMS
Reply at 11. Lagree with CMS. Petitioners cannot have it both ways.

Petitioners applied for enrollment not as physician’s offices with endoscopy procedure
rooms, but as ASCs performing endoscopies. See CMS Ex. 1, at 7, CMS Ex. 2, at 6. As
such, Petitioners do not satisfy the exemption from licensing articulated by N.C. Gen.
Stat. § 131E-146. Ifthey wish to be enrolled in Medicare, Petitioners are required to
demonstrate compliance with the North Carolina licensing requirements applicable to
ASCs.

Petitioners argue that “CMS has not come forward with any authority to support its view
of North Carolina law that the Salem and Pinehurst endoscopy centers must have state
licenses to continue to perform endoscopies.” P. Surreply at 4. Petitioners’ continued
and stubborn persistence in arguing that North Carolina law does not require them to be
licensed flies against the plain meaning of the law and regulations. I reiterate the text of

> In a letter dated November 6, 2003 to a CIGNA representative, Petitioners’
counsel wrote, inter alia, “Salem Gastroenterology is seeking Medicare certification as an
[ASC] so it will qualify for a facilities fee. Salem Gastroenterology is operated as an
endoscopy procedure room in a physician’s practice, and it has been accredited by the
Accreditation Association for Ambulatory Health Care. It is not licensed by North
Carolina.” CMS Ex. 1, at 56.
10

N.C. Gen. Stat. § 131E-147: “No person shall operate an ambulatory surgical facility
without a license obtained from the Department [of Health and Human Services.]”
Contrary to what Petitioners claim, CMS is not “conjecturing” as to the meaning of North
Carolina’s licensing law because no “conjecture” is necessary. P. Surreply at 4.
Moreover, in pointing to the SOM’s Interpretive Guidelines as support for its position,
Petitioners conveniently ignored the first sentence of the guidelines for 42 C.F.R.

§ 416.40: “In States where licensure is required for a facility providing ambulatory
surgical services, ask to see the facility’s current license.” P. Ex. D, at 3 (SOM.,
Appendix L — Guidance to Surveyors: Ambulatory Surgical Services).

The requirement for a license is stated in absolutely clear and unambiguous terms in the
North Carolina statute. The SOM emphasizes that ASCs must have a current license in
States where a license is required. No amount of interpretative contortions by Petitioners
can change the plain meaning of the statute or regulations.

In her decisions issued to Salem Gastroenterology and Pinehurst, Hearing Officer
Gwaltney stated as follows:

... your Provider Enrollment application is not for enrollment as a
physician’s office, it is for enrollment as an Ambulatory Surgical Facility.
To enroll as a North Carolina [ASC], and bill Medicare both the physicians’
fees and the facility fees for your endoscopies, you must be licensed by the
North Carolina Department of Health and Human Services, Division of
Facility Services, Licensure and Certification Section, as specified above in
42 C.F.R. § 416.40 and G.S. § 131E-147(a).

CMS Ex. 1, at 7, CMS Ex. 2, at 6. Hearing Officer Gwaltney concluded that as long as
Petitioners lacked North Carolina state licenses as ASCs, they were not qualified to enroll
in Medicare as ASCs. I find Hearing Officer Gwaltney’s reasoning to be correct under
the law and regulations.

Petitioners’ accreditation argument is also without merit and demonstrates a further,
misguided understanding of the regulations. In Petitioners’ view, not only are they not
required to be licensed under North Carolina law, but they qualify for Medicare
certification based on their AAAHC accreditation.

In addressing this issue in her decision, Hearing Officer Gwaltney referred to 42 C.F.R.
§ 416.26, and noted that subsection (a)(2) states, “[i]n the case of deemed status through
accreditation by a national accrediting body, where State law requires licensure, the ASC
complies with State licensure requirements.” Hearing Officer Gwaltney reasoned that,
under subsection (a)(2), “CMS requires that, even with deemed status through
accreditation, ASCs must comply with state licensure requirements.” CMS Ex. 1, at 11.

11

Thus, contrary to what Petitioners believe, a facility’s deemed status through
accreditation may not, in and of itself, be sufficient for enrollment in Medicare as ASCs.
The text of 42 C.F.R. § 416.26(a)(2) explicitly indicates that, where State law requires
licensure, the ASC must also comply with the requirement, in addition to having its
accreditation. Again, there is no doubt that, in North Carolina, an ASC must have a state
license. Petitioners have AAAHC accreditations, but failed to satisfy the state licensing
requirement. Accordingly, they cannot qualify for Medicare certification on the basis of
their AAAHC accreditations alone, pursuant to 42 C.F.R. § 416.26(a)(2).

Finally, regardless of what the law actually requires, Petitioners assert that CMS should
take note of “actual North Carolina licensing practice.” P. Surreply at 4. In Petitioners’
view, the fact that North Carolina has apparently allowed Petitioners and other
physicians’ practices to operate endoscopy centers for years without licenses is
“evidence” that they do not need to be licensed and also indicates the “confusing state of
North Carolina law on licensing.” P. Surreply at 4, 5; P. Response at 20. Petitioners’
arguments are irrelevant to the issue before me. Even if they were relevant, I am without
authority to consider such claims.

Ill. Conclusion

Petitioners have failed to comply with North Carolina’s state licensing requirement for
ASCs. Thus, under the regulations, they do not qualify for Medicare provider numbers as
ASCs and therefore, cannot be enrolled as ASCs in the Medicare program. | affirm
Hearing Officer Gwaltney’s revised decisions of April 21, 2006, and April 24, 2006.

/s/
Alfonso J. Montano
Administrative Law Judge