COMMONWEALTH OF KENTUCKY, CABINET FOR HEALTH AND FAMILY SERVICES V. EPI CORPORATION
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NOT TO BE PUBLISHED OPINION
THIS OPINION IS DESIGNATED "NOT TO BE PUBLISHED ."
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RENDERED : DECEMBER 18, 2008
NOT TO BE PUBLISHED
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2006-SC-000348-DG
COMMONWEALTH OF KENTUCKY,
CABINET FOR HEALTH AND FAMILY
SERVICES
APPELLANT
ON REVIEW FROM COURT OF APPEALS
CASE NO 2005-CA-000274-MR
ANDERSON CIRCUIT COURT NO. 04-CI-00101
EPI CORPORATION
APPELLEE
OPINION OF THE COURT BY JUSTICE SCHRODER
AFFIRMING
The sole issue in this appeal is whether recoupment of overpaid Medicaid
benefits by the Cabinet for Health and Family Services ("Cabinet") from 19881995 is barred by 907 KAR 1 :110, Section 3 (21 months for recoupment to be
accomplished) or KRS 413 .120(2) (5-year statute of limitations for liability
created by statute when no time limit fixed by statute), or whether recoupment
is allowed under KRS 413.090(2) (15-year statute of limitations for actions
based on contract) . The Court of Appeals held that recoupment for that time
period was barred by the 21-month limit in 907 KAR 1 :110, Section 3. On
discretionary review before this Court, the Cabinet argues that the 15-year
statute of limitations for actions based on contract should apply to allow
recoupment, and that EPI should not have been allowed to raise the defense of
the 21-month time limit in 907 KAR 1 :110, Section 3 for the first time in the
Court of Appeals . Upon review of the case, we agree with the Court of Appeals
that the 21-month limitations period in 907 KAR 1 :110, Section 3 applied to
bar the Cabinet from recouping the overpaid benefits. Hence, we affirm .
Appellee, EFPI Corporation ("EPI"), operates nursing homes throughout
Kentucky and receives reimbursement from the Cabinet through the Medicaid
program . From 1988-1995, the (Cabinet used a prospective payment system to
reimburse Medicaid participant providers whereby it would periodically
advance funds to providers to cover their estimated costs based on the previous
year's cost reports . The Cabinet would subsequently make adjustments based
on the providers' reports of their actual costs . Recoupment, which is a set-off
against future payments to providers, was a means provided in the Cabinet's
administrative regulations for recovering overpayments of Medicaid benefits
from the providers . 907 KAR 1 :110, Section 3 .
For each cost reporting period, the Cabinet had the right to conduct
audits annually or at less frequent intervals . It is undisputed that EPI filed its
costs reports in a timely fashion "at the close of the facilities' fiscal year." Upon
auditing EPI's claims for 1988-1996, the Cabinet discovered $6,866,881 in
overpayments, and by letter dated February 5, 2002, informed EPI of the
amount and of the Cabinet's intent to recoup .
EPI pursued an administrative appeal under KRS Chapter 13B,
disputing the amount of the overpayment and claiming that, because the
amount was calculated by regulation, recoupment was barred by the five-year
statute of limitations in KRS 413 .120(2) for actions based on a statute where
the statute provides no limitations period . The administrative hearing officer
confirmed the amount of the overpayment and determined that the Cabinet's
recoupment rights originated in the provider agreement between EPI and the
Cabinet, which stated that EPI was required to refund any overpayments
resulting from inappropriate or inaccurate claims as calculated by federal and
state law, including Medicaid regulations. Thus, the hearing officer allowed the
recoupment, applying the 15-year statute of limitations in KRS 413 .090(2) for
actions based on contract. EPI appealed to the Anderson Circuit Court which
granted EPI's motion for partial summary judgment, determining that
recoupment was barred by the 5-year statute of limitations in KRS 413-120 .
The Cabinet next appealed to the Court of Appeals . There, EPI argued
for the first time that the proper statute of limitations for the years 1988-1995
was the 21-month limitations period for recoupments contained in 907 KAR
1 :110, Section 3 . In an opinion rendered on April 14, 2006, the Court of
Appeals held that recoupment for the period 1988-1995 was barred by the 21month limit in 907 KAR 1 :110, Section 3 . As to the recoupment claim for
1996, the Court of Appeals ruled that because the regulation had been
amended that year removing the 21-month time limit, the 5-year statute of
limitations in KRS 413 .120(2) applied for that year. The Court of Appeals
concluded that the 1996 recoupment claim was within the 5-year limitation
period because EPI was notified by the Cabinet of the proposed audit
adjustments within five years of EPI's submission of its cost report for 1996.
Hence, the Court of Appeals allowed recoupment for the 1996 cost year.
On review before this Court, the Cabinet argues that EPI should not have
been allowed to raise the issue of the 21-month limitations period in 907 KAR
1 :110, Section 3 for the first time in the Court of Appeals, and that the
recoupment for the cost years 1988-1995 was not time-barred because the
applicable limitations period was the 15-year statute of limitations in KRS
413.090(2) for actions based in contract.
As to the Cabinet's argument that EPI should not have been allowed to
raise the issue of the application of 907 KAR 1 :110, Section 3 for the first time
on appeal, the Cabinet maintains that by raising the regulation at the Court of
Appeals level, it was denied the chance to show how the regulation had been
construed by the Cabinet in the past. See White v. Check Holders, Inc,, 996
S.W .2d 496, 498 (Ky . 1999) (longstanding construction of regulation by agency
entitled to controlling weight) . However, the contemporaneous construction of
a regulation by an agency cannot be based on the agency's mere inaction or the
failure to follow the plain language of its own law. Popplew 11's Alligator Dock
No . 1, Inc. v. Revenue Cabinet, 133 S .W .3d 456, 463 (Ky . 2004) . Moreover, it
has been held that "applicable legal authority is not evidence and can be
resorted to at any stage of the proceedings whether cited by the litigants or
simply applied, sua sponte, by the adjudicator(s)." Burton v. Foster Wheeler
Corp ., 72 S .W.3d 925, 930 (Ky. 2002) . Accordingly, it was not error for the
Court of Appeals to allow EPI to raise the limitation period in KAR 1 :110,
Section 3 for the first time on appeal.
We next turn to the question of what limitations period controls in this
case. The administrative regulation at issue here, 907 KAR 1 :110, entitled
"Recoupment of overpayments", provided from 1988-1995 :
Section 1 . Scope . This administrative regulation
applies to all providers of medical assistance services
where payments are made from Medicaid Program
funds.
Section 2 . Recoupment of Overpayments . When it is
determined that a provider has been overpaid, a letter
shall be mailed to the provider requesting payment in
full within thirty (30) days. If a provider demonstrates
to the program within the thirty (30) day time limit
that full payment would create an undue hardship, a
payment plan not to exceed six (6) months from the
notification date shall be established . If the full
payment or payment plan request is not received
within thirty (30) days of notification, the amount due
shall be deducted from current payments until the full
amount is recouped . Once the payment plan has been
established and a payment is not received by the
agreed to date, the amount shall be deducted from
current payments .
Section 3. Exceptional Hardship Circumstances.
When it is determined that a recoupment of an
overpayment in accordance with Section 2 of this
administrative regulation would result in an
exceptional hardship for the provider and have the
direct or indirect effect of reducing the availability of
services to program recipients (e.g., by resulting in the
bankruptcy and subsequent dissolution of the provider
entity), the program may provide for a reasonable
extension of the time period for recoupment. The time
period for recoupment shall not exceed twelve (12)
months from the date the overpayment is established,
and shall be accomplished within twenty-one (21)
months from the end of the provider's cost reporting
period or the receipt by the program of the billing
invoice, request for payment or similar document for
providers not reimbursed on the basis of cost reports .
The determination of whether an action is time-barred under a statutory
or regulatory limitation period is a question of law and, thus, will be reviewed
de novo. See Lipsteuer v . CSX Transp ., Inc. , 37 S.W .3d 732, 737 (Ky. 2000) .
An agency's regulations have the force and effect of law, and the agency is
bound by the language of it own regulations . Hagan v. Farris , 807 S.W .2d 488,
490 (Ky. 1991) . Regulations are subject to the same rules that govern
statutory interpretation. Revenue Cabinet, Com v. Gaba, 885 S .W .2d 706, 708
(Ky.App. 1994) . If the literal language of a statute is clear and unambiguous, it
must be given effect as written. Bailey v. Commonwealth , 70 S .W.3d 414, 416
(Ky. 2002) .
From the plain reading of 907 KAR 1 :110, Section 3, we believe it was
intended as a time limit on the Cabinet's entitlement to collect the
overpayments through the use of its recoupment remedy. The Cabinet's right
of "recoupment", as a remedial offset process, is grounded in the regulatory
provisions of 907 KAR 1 :110 (under statutory authority of KRS 194 .050) and is
a remedy uniquely the Cabinet's, not the provider's . Section 2 provides for
payment by the provider of the overpaid amount or a "payment plan." It
provides that in the event the overpaid amount is not paid back by the
provider, the payment plan request is not received, or payment is not timely
made under the established payment plan, then recoupment of the amount is
allowed "from current payments ." Section 3 goes on to provide for a reasonable
extension of the time period for the "recoupment" under exceptional hardship
circumstances. Section 3 then sets the time period for recoupment to not
exceed twelve (12) month from the date the overpayment is established, and
plainly states that recoupment "shall be accomplished within twenty-one (21)
months from the end of the provider's cost reporting period."
The Cabinet argues that the 21-month limitation period in Section 3 is
only meant to apply to payments made under exceptional hardship
circumstances. However, 907 KAR 1 :110 applies to all recoupments by the
Cabinet, not just recoupments for exceptional hardship cases. And there is no
reason that the time limitation for recoupment in exceptional hardship cases
would be less gracious or shorter than for non-hardship cases. "A statute
should not be interpreted so as to bring about an absurd or unreasonable
result." Kentucky Industrial Utility Customers, Inc . v. Kentucky Utilities Co.,
983 S .W.2d 493, 500 (Ky. 1998) . Accordingly, we do not see that the 21-month
limitation period in 907 KAR 1 :110, Section 3 can be read as anything other
than a general limitation period for all recoupments of overpaid Medicaid
benefits by the Cabinet.
The Cabinet cites to a number of federal cases in support of its assertion
that the right of recoupment derives from the provider agreement between the
provider and the government, therefore, the statute of limitations for actions
based in contract should apply. However, none of these cases involve a specific
administrative regulation which contains its own statute of limitations, as we
have herein, 907 KAR 1 .110, which relates specifically to recoupment of
overpayments .
Although the result may seem extreme, we simply cannot ignore the
plain meaning of the language in the regulation . We note that our ruling
relates only to the Cabinet's remedy of recoupment, and we express no opinion
on the Cabinet's ability to collect the movies through some other legal avenue .'
For the reasons stated above, the judgment of the Court of Appeals is
affirmed .
Abramson, Cunningham, Noble, Scott, and Venters, JJ., sitting. All
concur. Minton, C .J., not sitting.
1 We note that the regulations were amended in 1996 to eliminate the 21-month time
limitation for recoupment. The current recoupment regulation, 907 KAR 1 :671,
contains no time frame within which recoupment must be accomplished .
COUNSEL FOR APPELLANT:
Alea Amber Arnett
Kerry Brent Harvey
Cabinet for Health and Family Services
Office of Legal Services
275 East Main Street 5W-B
Frankfort, KY 40621
COUNSEL FOR APPELLEE:
Frank F. Chuppe, Jr.
Stephen Richie Price
Virginia Hamilton Snell
Wyatt, Tarrant & Combs, LLP
500 West Jefferson Street, Suite 2800
Louisville, KY 40202
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