Opinion ID: 1244103
Heading Depth: 1
Heading Rank: 6

Heading: necessary and proper requirements

Text: The remaining assignments of error present the issue of whether the district court erred in finding that, under Department regulations, Sunrise was entitled to medicare reimbursement for interest on a loan which was used to pay off the equity interest of an owner. This requires that we initially determine which regulations are properly before the court. Generally, the appellate courts of this state will not take judicial notice of administrative rules or regulations. See Donahoo v. Nebraska Liquor Control Comm., 229 Neb. 197, 426 N.W.2d 250 (1988). It is incumbent upon the party relying on an administrative rule or regulation to prove both its existence and its language. Id. At the beginning of the administrative hearing, both parties entered into evidence various versions of the regulations at issue. One set of selected state administrative regulations was entered into evidence by each party. All regulations have printed headings identifying the source as either Nebraska DPW Program Manual or Nebraska Department of Social Services Manual. All have printed revision dates in the headings, and some have handwritten notations by an unknown scrivener identifying the inclusive dates for which the particular regulations were in effect. The two sets of state administrative regulations, although organized differently in the parties' exhibits, appear to be substantially the same. Two versions of the medicaid regulations were also entered into evidence. The version entered by Sunrise as exhibits 8D, 8E, and 8F is hand-labeled HIM. The bottom of each page contains the printed words Medicare and Medicaid Guide, but the ultimate source of these regulations is unknown. Although the content of the regulations appears to be related to the issues in this case, neither the testimony nor the briefs refer to any of the regulations by the section numbers contained in those exhibits. The regulations entered into evidence by the Department as exhibit 52 are also hand-labeled HIM. The source of exhibit 52 is likewise undisclosed. Exhibit 52 appears to contain regulations similar to those in exhibits 8D, 8E, and 8F, but the exhibits are by no means identical, and the regulations in exhibit 52 have a different numbering system than the ones in exhibits 8D, 8E, and 8F. The testimony and the briefs refer to the regulation numbers contained in exhibit 52. Because the origins of exhibits 8D, 8E, 8F, and 52 are undisclosed, the parties have failed to prove the existence of those particular regulations. However, cases are heard in the state appellate courts on the theory upon which they were tried in the lower courts. See Donahoo, supra (stating that the Supreme Court would proceed on the basis that the regulation in question paralleled a state statute, even though the regulation was not a part of the record, because both parties had proceeded on that assumption). Because the parties both apparently relied on exhibit 52 by citing to regulation numbers contained therein, and apparently agree that exhibit 52 contains selected medicaid regulations, we will consider exhibit 52 to be the applicable medicaid regulations for purposes of our analysis. We will disregard the purported medicaid regulations contained in exhibits 8D, 8E, and 8F. We now turn to the content of the applicable regulations. Allowable costs for reimbursement of Nebraska nursing care facilities for all of the time periods in question are governed by 471 Neb.Admin.Code, ch. 12, § 011.04 (rev. July 24, 1990; July 15, 1987; Dec. 1, 1984; Jan. 1, 1984; and Nov. 24, 1982). Costs which are specifically unallowable are enumerated in 471 Neb.Admin.Code, ch. 12, § 011.05 (rev. July 24, 1990; July 15, 1987; Dec. 1, 1984; Jan. 1, 1984; and Nov. 24, 1982). Return on equity was first listed as an unallowable cost in the January 1, 1984, revision of § 011.05(12). Additionally, the principles of reimbursement for provider's cost and the related policies under which the medicare extended-care facility functions, contained in medicare's  Provider Reimbursement Manual (HIM-15), are used to determine the cost for Nebraska nursing care facilities, with certain exceptions, and are incorporated by reference in 471 Neb.Admin.Code, ch. 12, § 011.03 (rev. July 24, 1990; July 15, 1987; Dec. 1, 1984; Jan. 1, 1984; and Nov. 24, 1982). Reimbursement of interest expense is specifically provided for in the HIM regulations. Section 202.1 states in part: To be allowable under the Medicare program, interest must be: (1) supported by evidence of an agreement that funds were borrowed and that payment of interest and repayment of the funds are required; (2) identifiable in the provider's accounting records; (3) related to the reporting period in which the costs are incurred; and (4) necessary and proper for the operation, maintenance, or acquisition of the provider's facilities. The Department does not challenge whether the replacement loan meets the first three requirements for payment of interest cost under § 202.1. Rather, the Department claims that Sunrise has not shown either the original loan from Meriel Stauffer or the replacement loan to be necessary and proper, the fourth requirement of § 202.1. The HIM regulations define necessary and proper. Necessary means that the interest be incurred on a loan made to satisfy a financial need of the provider and for a purpose reasonably related to patient care. HIM § 202.2. Proper means that the interest be incurred at a rate not in excess of what a prudent borrower would have had to pay in an arm's-length transaction in the money market when the loan was made. In addition, the interest must be paid to a lender not related to the provider through common ownership or control. HIM § 202.3. The parties disagree as to whether the replacement loan was necessary. As to whether the replacement loan was proper, it is undisputed that the loan was an arm's-length transaction between unrelated entities. The dispute is simply whether interest on a replacement loan which otherwise meets the requirements of § 202.1 is reimbursable if interest on the original loan was not reimbursable. The record fails to reflect a regulation that explicitly states that interest on a replacement loan such as the one at issue in this case is either allowable or unallowable. Under the facts of this case, whether interest expense is allowable pursuant to HIM § 202.1 poses questions of both fact and law. Whether interest on the replacement loan is necessary presents a question of fact. Whether interest on the replacement loan is proper, on the other hand, presents a question of law. We first inquire whether the district court's decision conforms to the law, that is, whether the replacement loan is proper. Ordinarily, deference is accorded to an agency's interpretation of its own regulations unless plainly erroneous or inconsistent. In re Application of Jantzen, 245 Neb. 81, 511 N.W.2d 504 (1994). However, agency regulations, properly adopted and filed with the Secretary of State of Nebraska, have the effect of statutory law. Lynch v. Nebraska Dept. of Corr. Servs., 245 Neb. 603, 514 N.W.2d 310 (1994); Nucor Steel v. Leuenberger, 233 Neb. 863, 448 N.W.2d 909 (1989). The meaning of a statute is a question of law, and a reviewing court is obligated to reach its conclusions independent of the determination made by the administrative agency. Central Platte NRD v. State of Wyoming, 245 Neb. 439, 513 N.W.2d 847 (1994). This court is obligated to reach an independent conclusion as to whether the Department's interpretation of its regulations was plainly erroneous or inconsistent, as was the district court. For the sake of simplicity, we have referred to Meriel Stauffer's financial relationship with Sunrise as a loan. However, it is clear that reimbursement of payments to Meriel Stauffer, whether characterized as interest on a loan or as return on equity, would have been prohibited by Department regulations during the years in question, 1984-90. If the payments were considered to be return on equity, they were an unallowable cost under 471 Neb.Admin.Code, ch. 12, § 011.05(12). If the payments were interest on a loan, they were unallowable under HIM §§ 202.1 and 202.3, because the lender, Meriel Stauffer, and the borrower, Sunrise, were related parties, and thus the interest was not proper. However, it does not necessarily follow that interest on a replacement loan is likewise an unallowable cost in the absence of a regulation specifically disallowing reimbursement for such costs. The Court of Appeals of Maryland considered a similar situation in Liberty Nursing v. Department, 330 Md. 433, 624 A.2d 941 (1993). In that case, a grandson inherited a majority share in a nursing home business from his grandmother. The land and buildings used by the nursing home were owned by the grandmother's estate and were leased to the nursing home. Because there were insufficient liquid assets in the estate to pay the estate taxes, it became necessary to sell the facilities. The grandson bought the facilities himself rather than sell them to a third party. The purchase was financed through a bank at 11 percent interest in an arm's-length transaction and was secured by a mortgage on the facilities. The grandson had no ownership in, or control of, the bank. The interest on the loan was disallowed under the Maryland Medical Assistance Program on the ground that the nursing home, the grandson, and the grandmother's estate were related organizations. The grandson appealed to the Nursing Home Appeal Board, the circuit court for Baltimore City, and the Court of Special Appeals, all of which affirmed the disallowance of the interest cost. The Maryland Court of Appeals reversed the lower tribunals' rulings, stating that for purposes of the relatedness test, the relevant transaction is the loan transaction, not the transaction giving rise to it. Therefore, the critical relationship is that of lender to borrower, not seller to purchaser.... (Emphasis supplied.) 330 Md. at 447, 624 A.2d at 948. The Maryland court pointed out that this is consistent with the purpose of the regulation, i.e., to `assure that loans are legitimate and are needed, and that the interest rate is reasonable.' Id. We agree with the reasoning of the Maryland Court of Appeals. Moreover, because the regulations in question have the effect of statutory law, we must give effect to the plain language contained therein. See Association of Commonwealth Claimants v. Moylan, 246 Neb. 88, 517 N.W.2d 94 (1994). According to the plain language of HIM § 202.1, interest paid to Bank by Sunrise is a reimbursable expense and is proper. Therefore, we hold that for purposes of determining whether interest on a loan is proper for purposes of medicaid reimbursement the inquiry must be whether the lender and the borrower of the loan in question are related entities, in the absence of a regulation to the contrary. There being no dispute that the loan was one between Sunrise and the Bank, unrelated parties, we hold that the loan is proper as defined by HIM § 202.3. We next determine whether there was competent evidence from which the district court could conclude that the loan from the Bank to Sunrise was necessary. The Department contends that Sunrise has never shown that either loan was necessary. Sunrise argues that the Department originally denied the interest expense on the basis that it was not proper, and that the Department's claim that the interest expense was also unnecessary represents a deviation from its original position. Sunrise bases this upon its auditor's workpapers at the time the interest expense was first disallowed. The auditor had written that [p]er HIM-15 218.1, interest cost paid by the facility to a stockholder is not an allowable cost. Since the Farmers and Merchants Bank loan merely replaces the original note, the interest is not allowed. The auditor's workpapers were dated 7-19-88. On September 20, 1988, the Department notified Sunrise by mail of cost adjustments for 1988, as well as for the previous 3 years. Adjustments to the interest expense for each of the 4 years were explained as follows: To remove the interest on unnecessary borrowing. The loan was used to pay off a note payable to the stockholder. (Emphasis supplied.) Thus, it is clear that the Department not only considered the interest expense unnecessary from the beginning, but also notified Sunrise of that fact. Sunrise also argues that, because the Department had reimbursed Sunrise for return on equity up until that item was made an unallowable expense, the Department must have considered the expense necessary, and therefore the replacement loan was also necessary. We agree with the Department that Sunrise has failed to present evidence that either loan was necessary. There is no testimony as to the purpose of Meriel Stauffer's original loan to Sunrise or as to what the money was actually used for. There is likewise no testimony that the replacement loan was actually used to meet patient care needs. Sunrise's accountant testified that a nursing home such as Sunrise, which has a high mix of medicaid patients, needed to have sufficient funds on hand to cover unreimbursed costs and that [i]t could very well be that the nursing home might need to get funds from an outside source to help with patient care. However, such a statement amounts to no more than speculation. The accountant at no time testified that either the loan from Meriel Stauffer or the loan from the Bank was actually used to cover unreimbursed costs of patient care. Aside from a conclusory statement by Sunrise's accountant that the Department fully believed [the return on equity] was related to patient care or they would not have paid it prior to the time such expense was disallowed, there is no competent evidence in the record from which it could be determined whether either loan was related to patient care in any way. Therefore, the district court's decision is in error and must be reversed.