State of New York
                   Supreme Court, Appellate Division
                       Third Judicial Department
Decided and Entered: December 29, 2016                   523077
________________________________

In the Matter of UNITED
   HELPERS CANTON NURSING
   HOME, INC., Doing Business
   as MAPLEWOOD HEALTH CARE
   AND REHABILITATION CENTER,               MEMORANDUM AND ORDER

                    Respondent,
     v

HOWARD ZUCKER, as Commissioner
   of Health, et al.,
                    Appellants.
________________________________


Calendar Date:   November 16, 2016

Before:   Egan Jr., J.P., Lynch, Rose, Clark and Aarons, JJ.

                             __________


      Eric T. Schneiderman, Attorney General, Albany (Victor
Paladino of counsel), for appellants.

      Bond, Schoeneck & King, PLLC, Rochester (John F. Darling of
counsel), for respondent.

                             __________


Egan Jr., J.P.

      Appeal from a judgment of the Supreme Court (Demarest, J.),
entered July 31, 2015 in St. Lawrence County, which, among other
things, in a combined proceeding pursuant to CPLR article 78 and
action for declaratory judgment, enjoined respondents from
retrospectively revising petitioner's 2013 Medicaid reimbursement
rate.
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      Petitioner is a nonprofit charitable corporation that
formerly operated a 160-bed residential health facility in the
Town of Canton, St. Lawrence County as an enrolled provider in
the state's Medicaid program. In 2006, petitioner applied to the
Department of Health (hereinafter the Department) for approval to
decertify certain of its skilled nursing facility beds and to
construct a new facility. Approval for construction was granted
in September 2008, and petitioner began occupying the new
facility (with 96 beds) in January 2010. At some point in 2011,
petitioner sold its former facility to the local Board of
Cooperative Educational Services for $1.65 million and reported
the sale to the Department – touching off a dispute as to the
Department's efforts to reduce the capital component of
petitioner's Medicaid reimbursement rate to offset the gain that
petitioner realized from the sale of its old building against the
interest expense it incurred on its new building.

      In December 2014, the Department issued a determination
imposing the contested offset, thereby retrospectively lowering
petitioner's 2013 Medicaid rate, which, in turn, resulted in an
overpayment that the Department sought to recoup. Petitioner
objected to the revised rate and impending recoupment and
requested, among other things, the opportunity for what the
parties denominated as a second-stage rate appeal. Rather than
pursuing such an appeal, however, petitioner commenced this
combined CPLR article 78 proceeding and action for declaratory
judgment seeking, among other things, to preliminarily enjoin
respondents from revising petitioner's 2013 Medicaid rate and
recouping the alleged overpayment pending further administrative
proceedings. Respondents moved to dismiss, contending that
petitioner had failed to exhaust its administrative remedies.
Supreme Court rejected respondents' exhaustion defense and
enjoined respondents from revising petitioner's 2013 Medicaid
rate and recouping any alleged overpayment until such time as
petitioner was "afforded its rights to notice and an opportunity
to be heard" under certain departmental regulations. This appeal
by respondents ensued.

      Although the parties initially debated (and briefed) which
administrative review process applied to the offset dispute,
i.e., the "rate appeal process" set forth in 10 NYCRR 86-2.13 and
                                -3-                   523077

86-2.14 or the "audit process" set forth in 18 NYCRR parts 517,
518 and 519, this dispute has been rendered academic by the
parties' subsequent and mutual concession – as reflected in their
respective briefs and at oral argument – that petitioner's
challenge to the propriety of and manner in which the Department
imposed the offset is a challenge to the rate-setting methodology
itself. In this regard, the case law makes clear – and the
parties again readily acknowledge1 – that "a challenge to the
methodology is properly considered by way of CPLR article 78
review" (Matter of Amsterdam Nursing Home Corp. [1992] v Daines,
68 AD3d 1591, 1591-1592 [2009]; see generally Matter of New
Franklin Ctr. for Rehabilitation & Nursing v Novello, 64 AD3d
1132, 1134 [2009], lvs denied 13 NY3d 715, 716 [2010]). Stated
another way, a challenge to the methodology used by the
Department in computing Medicaid reimbursement rates is "not
subject to [an] administrative rate appeal[]" (Matter of St.
Ann's Home for the Aged v Daines, 67 AD3d 1326, 1327 [2009], lv
denied 14 NY3d 710 [2010]; see Matter of Pinegrove Manor II, LLC
v Daines, 60 AD3d 767, 768 [2009], lv denied 14 NY3d 713 [2010]).
Hence, the merits of petitioner's claim requires resolution by
Supreme Court in the first instance and, inasmuch as the parties
agreed at oral argument that further development of the record is
necessary before such a resolution may be reached, this matter is
remitted to Supreme Court for that purpose.

        Lynch, Rose, Clark and Aarons, JJ., concur.



    1
        Although the parties briefed the merits of their
competing arguments relative to the administrative rate appeal
and audit review processes, petitioner conceded in its brief
"that further appeal proceedings in either administrative venue
would be futile" and that remittal to Supreme Court "for a
decision on the merits of [petitioner's] challenge would be
appropriate." Similarly, respondents acknowledge that "Supreme
Court should have decided the merits of the offset claim in this
proceeding" and, further, that this matter must be remitted "for
further proceedings, including the opportunity for the parties to
submit affidavits and other materials specifically addressing the
rationality of the offset under the rate-setting regulations."
                              -4-                  523077

      ORDERED that the judgment is modified, on the law, without
costs, by reversing so much thereof as directed respondents to
provide petitioner with notice and an opportunity to be heard in
the context of further administrative proceedings; matter
remitted to the Supreme Court for further proceedings not
inconsistent with this Court's decision; and, as so modified,
affirmed.




                             ENTER:




                             Robert D. Mayberger
                             Clerk of the Court