Argued September 14, 2006; decided October 24, 2006

Matter of Nazareth Home of Franciscan Sisters v Novello, 21 AD3d 1388, affirmed.

Read, J.

Petitioners in this CPLR article 78 proceeding are 62 nursing homes operating in western New York, which are reimbursed by the State of New York under its Medical Assistance Plan (Medicaid) for medical services provided to the indigent. On this appeal, petitioners claim [*2]that the Medicaid reimbursement that they have received since 2004 is nowhere near their legitimate actual costs to care for Medicaid-eligible residents, and that this{**7 NY3d at 542} massive shortfall threatens their financial viability and potentially compromises the quality of care. They blame their plight on the New York State Department of Health's (DOH) Medicaid rate-setting methodology, which they claim irrationally relies on outdated and unrepresentative 1983 costs, keys inflation to the Consumer Price Index (CPI) and ignores inflation entirely for 1996; violates Public Health Law § 2807 (3)'s mandate for "reasonable and adequate" rates; and confiscates their property and deprives them of equal protection of the laws in violation of the federal and state constitutions. Petitioners ask us to declare DOH's 2004 Medicaid rates and rate-setting methodology unlawful as applied to them; to direct the Commissioner of Health and the Director of the Division of the Budget to recalculate their 2004 Medicaid rates based on their legitimate actual 2003 or 2004 costs; and to take whatever action is necessary to eliminate or prevent post-2004 discrepancies between their justifiable costs and the Medicaid reimbursement that they receive.

Supreme Court dismissed the petition. The court noted that DOH's rate-setting methodology included adjustments to account for regional differences in wages and fringe benefits; and that the Legislature had on occasion outright appropriated additional funds to nursing homes to cover unusual costs, and had recently amended the Public Health Law to allow use of 2001 wages and fringe benefits to calculate reimbursement rates for rate periods after April 2004. Nor was Supreme Court prepared to say that the CPI was an inadequate yardstick for measuring inflation. The Appellate Division affirmed the judgment "for reasons stated in the decision at Supreme Court" (21 AD3d 1388, 1388 [4th Dept 2005]), and subsequently granted petitioners leave to appeal. We now affirm.

Medicaid, a joint federal-state program established pursuant to title XIX of the Social Security Act (42 USC § 1396 et seq.), pays for medical care for those otherwise unable to afford it, including nursing home care for older people with low incomes and limited assets. The federal government normally covers 50% of New York's Medicaid costs, while the state and local governments share responsibility for the rest. New York operates its own Medicaid program, setting its own guidelines for eligibility and services in conformity with federal statutes and rules.{**7 NY3d at 543}

Pursuant to article 28 of the Public Health Law, DOH establishes Medicaid reimbursement rates for nursing homes using a complex system called the Resource Utilization Group-II (RUG-II) case mix reimbursement methodology (see generally 10 NYCRR subpart 86-2; Matter of Blossom View Nursing Home v Novello, 4 NY3d 581 [2005]). Simply put, a [*3]nursing home's reimbursement rate—the daily rate at which a facility can bill Medicaid for every Medicaid-eligible resident—reflects its allowable costs in a base year^[FN1] as adjusted to reflect patient conditions and care needs and regional differences in wages and fringe benefits, and trended forward to account for inflation. In general, 1983 is the base year for calculating a nursing home's operating costs, which are the major constituent of its reimbursement rate (see 10 NYCRR 86-2.10 [b] [1]).

The Commissioner adopted this rate-setting methodology to encourage nursing homes to contain costs and operate efficiently and economically in line with their reimbursement rates. Specifically, rates are set in advance of the rate year, and are subject to a maximum (ceiling) and minimum (base) price derived from statewide averages (see generally Matter of Consolation Nursing Home v Commissioner of N.Y. State Dept. of Health, 85 NY2d 326 [1995]).

For rate years on and after April 1, 2000, the Legislature requires DOH to use the "U.S. Consumer Price Index for all urban consumers published . . . after June first of the rate year prior to the year for which rates are being developed" as the trend factor (see Public Health Law § 2807-c [10] [c] [2]; see also L 2005, ch 58, part B, §§ 1, 2 [extending section 2807-c's expiration date from July 1, 2005 until July 1, 2007]). The Legislature has also mandated that Medicaid reimbursement rates for nursing homes in effect on and after April 1, 1996 through March 31, 2007 shall not reflect trend factor projections or adjustments for the period April 1, 1996 through March 31, 1997 (i.e., state fiscal year 1996-1997) (see L 1996, ch 474, § 194, as amended by L 2006, ch 57, part A, § 78).

Finally, the Legislature recently enacted Public Health Law § 2808 (2-b), which provides for updating the base year for operating costs beginning as of January 1, 2007 (see L 2006, ch 109, part C, § 47). This new provision mandates full implementation{**7 NY3d at 544} in 2009, preceded by a two-year phase-in period, and calls for a 2002 base year. Further, section 2808 (2-b) (f) specifies updating thereafter no later than the 2012 rate period, using a base year no earlier than three years prior to the initial rate year, and for subsequent updating at least every six years, again using a three-year-old or more recent base year.

"Generally, rate-setting actions of the Commissioner, being quasi-legislative in nature, may not be annulled except upon a compelling showing that the calculations from which [they] derived were unreasonable" (Matter of Society of N.Y. Hosp. v Axelrod, 70 NY2d 467, 473 [1987] [internal quotation marks omitted]). DOH is entitled to a "high degree of judicial deference, especially when . . . act[ing] in the area of its particular expertise," and thus petitioners bear the "heavy burden of showing" that DOH's rate-setting methodology "is unreasonable and unsupported by any evidence" (Consolation Nursing Home, 85 NY2d at 331-332).

At one time, DOH retrospectively reimbursed nursing homes based on their actual costs, which saddled taxpayers with ever-increasing expenditures without creating any incentives for efficiency. This is why DOH switched in 1986 to RUG-II, a prospective system linked to a base year, a key cost containment device that encourages facilities to economize (see Blossom View Nursing Home, 4 NY3d at 585 n 2 ["A base year is used in a prospective system to control for cost growth in excess of inflation"]).

Further, DOH's rate-setting methodology does not, as petitioners argue, preserve costs for all time in the amber of 1983. For example, if a facility's case mix index increases, so does its reimbursement rate. In addition, DOH has adjusted its methodology to reflect actual wages paid by each facility more realistically (see Matter of Brothers of Mercy Nursing & Rehabilitation Ctr. v DeBuono, 292 AD2d 775 [4th Dept 2002], lv denied 99 NY2d 502 [2002]; Matter of Brothers of Mercy Nursing & Rehabilitation Ctr. v Commissioner of N.Y. State Dept. of Health, 192 AD2d 50 [3d Dept 1993], revd on other grounds 83 NY2d 997 [1994]). In fact, DOH uses wage data from 1983, 1987, 1993 or 2001 when calculating reimbursement rates, depending on which year's data most favors a facility (see 10 NYCRR 86-2.10 [m]; Public Health Law § 2808 [17]).

Although petitioners fault DOH for using the CPI as the trend factor and disregarding inflation during state fiscal year 1996{**7 NY3d at 545}-1997, these aspects of the rate-setting methodology are dictated by statute (see Public Health Law § 2807-c [10] [c] [2]; L 1996, ch 474, § 194, as amended by L 2006, ch 57, part A, § 78). The Legislature has also directed DOH to update the base year from 1983, but in 2009, after a two-year phase-in, not in 2004 as petitioners request.

In sum, we conclude that the Commissioner acted rationally in setting petitioners' 2004 Medicaid reimbursement rates. Within the parameters set by the Legislature, DOH has advanced ample explanation for setting rates prospectively based on 1983 costs, as adjusted in various ways and trended forward.

RUG-II was designed to produce rates complying with the federal Boren Amendment (42 USC former § 1396a [a] [13] [A]), which Congress repealed in 1997, and its New [*5]York analogue, section 2807 (3) of the Public Health Law. Section 2807 (3) tasks the Commissioner with determining that

"the proposed rate schedules for payments to hospitals^[FN2] for hospital and health-related services are reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities. In making such certification, the commissioner shall take into consideration the elements of cost, geographical differentials in the elements of cost considered, economic factors in the area in which the hospital is located, the rate of increase or decrease of the economy in the area in which the hospital is located, costs of hospitals of comparable size, and the need for incentives to improve services and institute economies" (emphasis added).

Petitioners contend that their Medicaid reimbursement for 2004 was roughly $1 million less per home than the actual cost to provide necessary care for Medicaid-eligible residents; or, stated another way, that their Medicaid reimbursement rates covered only about 76% of their actual 2002 Medicaid costs. Petitioners essentially point to this discrepancy (which the State disputes) as sufficient proof that DOH's reimbursement rates for 2004 were not reasonable and adequate as required by Public Health Law § 2807 (3).{**7 NY3d at 546}

As the Commissioner points out, however, section 2807 (3) does not require rates to cover every nursing home's actual costs, the remedy that petitioners effectively seek. Rates are "reasonable and adequate" so long as they reimburse the necessary costs (i.e., the "costs which must be incurred") of "efficiently and economically operated facilities" (EEOFs) (Public Health Law § 2807 [3]). In 1993, DOH conducted a study to determine whether its reimbursement rates satisfied this standard. DOH identified those facilities that were EEOFs; determined their necessary costs; and compared these costs to its reimbursement rates to assure that the rates were reasonable and adequate (see Pinnacle Nursing Home v Axelrod, 928 F2d 1306, 1314 [2d Cir 1991]). DOH subsequently used the findings from this study to confirm that its overall rates for rate years 1999 through 2003, the latest year for which data were available, complied with Public Health Law § 2807 (3). Thus, DOH had a rational basis for concluding that its 2004 reimbursement rates were reasonable and adequate. Moreover, DOH's rate-setting methodology takes each of the statutory factors in section 2807 (3) into account, and the Commissioner is [*6]entitled to great deference in her determination that the rates were reasonable under the statute.

Finally, we reject petitioners' arguments that DOH's rate-setting methodology violates the Takings Clause of the Fifth and Fourteenth amendments of the Federal Constitution, and the Equal Protection clauses of the Fourteenth Amendment of the Federal Constitution and article I, § 11 of the New York State Constitution. Specifically, petitioners contend that New York effectively requires them to provide care to the indigent and then fails to reimburse them for their actual costs, thus forcing them to use their own assets to meet this public responsibility. But "where a service provider voluntarily participates in a price-regulated program or activity, there is no legal compulsion to provide service and thus there can be no taking" (Garelick v Sullivan, 987 F2d 913, 916 [2d Cir 1993] [contrasting circumstances of a public utility which is "under a state statutory duty to serve the public"], cert denied sub nom. Garelick v Shalala, 510 US 821 [1993]). As for petitioners' claim that DOH's rate-setting methodology favors nursing homes in the New York City area, they have not shown any intentional action by DOH to discriminate against facilities in western New York (see Matter of Samaritan Hosp. v Axelrod, 107 AD2d 911, 913 [3d Dept 1985] ["To support an equal protection argument,{**7 NY3d at 547} petitioner must show that any discriminatory effect of the regulations was the result of respondents' ' "evil eye" ' toward discrimination against petitioner"], quoting Matter of 303 W. 42nd St. Corp. v Klein, 46 NY2d 686, 695 [1979] [equal protection "forbids a public authority from applying or enforcing an admittedly valid law with an evil eye and an unequal hand, so as practically to make unjust and illegal discriminations between persons in similar circumstances" (id. at 693; internal quotation marks omitted)]).

Accordingly, the order of the Appellate Division should be affirmed, with costs. The certified question should not be answered upon the ground that it is unnecessary.

Chief Judge Kaye and Judges Ciparick, Rosenblatt, Graffeo and R.S. Smith concur; Judge Pigott taking no part.

Order affirmed, etc.