Filed May 3, 2007–Opinion by Judge Lawrence F. Rodowsky.

This is a judicial review of an administrative decision involving the disallowance by Maryland Department of Health and Mental Hygiene (“DHMH”) of claims by two federally qualified health clinics (“FQHCs” or collectively, “Clinics”) for reimbursement of costs under the Maryland Medical Assistance Program (“Medicaid” or the “Program”). The disallowance was based upon DHMH’s application of its regulation establishing a monetary cap on a class of costs included in the Clinics’ requests for reimbursement. The Clinics contend that the Maryland regulation does not comply with governing federal law.
States that elect to participate in Medicaid are required to submit to the U.S. Department of Health and Human Services a plan detailing how the State will expend federal funds. Entitled “State plans for medical assistance,” 42 U.S.C. § 1396a (1994), provides in relevant part,

. . . for payment for services . . . under the plan 100 percent of costs which are reasonable and related to the cost of furnishing such services or based on such other tests of reasonableness, as the Secretary prescribes in regulations . . . or, in the case of services to which those regulations do not apply, on the same methodology used under section 13951(a)(e).”

Reasonable, and necessary and proper, costs were defined in 42 CFR § 413.9 (1996), as follows:

(1) Reasonable cost of any service must be determined in accordance with regulations establishing the method or methods to be used, and the items to be included. The regulations in this part take into account both direct and indirect costs of providers of services. The objective is that under the methods of determining costs, the costs with respect to individuals covered by the program will not be borne by individuals not so covered, and the costs with respect to individuals not so covered will not be borne by the program. These regulations also provide for the making of suitable retroactive adjustments after the provider has submitted fiscal and statistical reports. The retroactive adjustment will represent the difference between the amount received by the provider during the year for covered services from both Medicare and the beneficiaries and the amount determined in accordance with an accepted method of cost apportionment to be the actual cost of services furnished to beneficiaries during the year.

(2) Necessary and proper costs are costs that are appropriate and helpful in developing and maintaining the operation of patient care facilities and activities. They are usually costs that are common and accepted occurrences in the field of the provider’s activity.
As part of its program, Maryland adopted regulations for FQHCs, entitled “Reimbursement Principles for FQHC Services Rendered Before and Including June 30, 1999,” currently codified in COMAR As relevant to the issue, the regulation provides that “federally qualified health centers shall be paid 100 percent of their reasonable allowable costs, subject to the limitations contained in § C(4)-(7) of this regulation, that are related to the provisions of covered services.” Reimbursement of FQHCs is on a per visit basis. Reimbursement during a fiscal year is based on an interim per visit rate, with a final per visit rate determined for the entire year. The regulation further requires that an FQHC’s cost be divided into four categories, called “centers.” These are general service costs, primary care services cost, dental services costs and non-reimbursable costs. The instant matter concerns the general service cost center, for which the parties have adopted the term “administrative costs” as a shorthand reference.
The Administrative Law Judge (“ALJ”) made findings of fact in each case, placing considerable emphasis on the discussion of reasonable costs in the Medicare Provider Reimbursement Manual, Part I, specifically:

It is the intent of the program that providers will be reimbursed for the actual costs if providing high quality care, regardless of how widely they may vary from provider to provider except where a particular institution’s costs are found to be substantially out of line with other institutions in the same area which are similar in size, scope of services, utilization and other relevant factors.

Reasonable costs do not exceed what a prudent and cost-conscious buyer pays for a given item or service
Applying the above-quoted standards, the ALJ found that the Clinics had shown the costs were reasonable because the Clinics were subject to both internal and external checks on its fiscal practices, and there was no evidence of self-dealing or of any incentive to pay excessive salaries or rent.
DHMH excepted to the ALJ’s recommended order that the disputed claim for reimbursement be paid. The Secretary of DHMH rejected the ALJ’s conclusion , expressly adopting the findings of fact that the ALJ had made on the cross motions for summary decision but declining to adopt the ALJ’s reasoning and legal conclusions. With respect to the DHMH exception that assumed the ALJ had concluded the cap was not reasonable on its face, the Secretary ruled that there was ample evidence supporting the reasonableness of the cap, pointing as evidence to the public process in the adoption of the cap, federal approval of the program, and the utilization of relatively comparable caps in five other states. In addition, the Secretary pointed to a cap, utilized in the program, on the reimbursable costs of managed care organizations.
The Clinics appealed from the Secretary to the Board of Review of DHMH (the “Board”). After review and oral argument, the Board affirmed the Secretary without further explanation. The Board’s action constituted the final agency decision for purposes of judicial review under the Administrative Procedures Act. HG § 2-207(f)(2).
On petition for judicial review in the Circuit Court for Montgomery County, the Clinics advance the following arguments:

I. The circuit court erred in applying a substantial evidence test.

II. The Secretary erred in not accepting the ALJ’s conclusions of law after accepting the ALJ’s findings of fact.

III. DHMH never examined the limits at issue to determine whether they unlawfully curtailed the health centers’ reasonable costs.

Is the cap invalid under all circumstances? The Clinics contended that Maryland could not cap administrative expenses at a fixed percentage of total allowable costs unless it first had undertaken a study demonstrating that administrative costs above the chosen percentage are always unreasonable. The Court found that the cap was adopted in accordance with the Maryland Administrative Procedure Act and that it was approved by HCFA as complying with federal law. Consequently, the cap is presumed valid, and the burden rests with the Clinics to demonstrate its invalidity. In Maryland, the test for determining the validity of the adoption of a regulation is whether it contradicts the language or purpose of the statute authorizing the regulation. The Court held that the federal requirement for state reimbursement of 100% of an FQHC’s reasonable cost is satisfied by the state system that affords the FQHC the opportunity to demonstrate that its costs, albeit in excess of a cap, are reasonable. To answer the Clinics’ second question, whether the cap was validly applied in the instant matter, the Court found that the Secretary was not restrained by the recommended conclusion drawn by the ALJ; rather, the Secretary was free to make the determinative inference that the excess costs were unreasonable if that inference was supported by substantial evidence.

In addressing the Clinics’ first argument, the Court relied on the issue of whether the Secretary’s decision was supported by substantial evidence. Consequently, Argument 1 missed the mark. The Secretary did not act arbitrarily or capriciously in declining to draw the inference that the Clinics’ costs were reasonable. Nor did the Secretary act arbitrarily in concluding that the Clinics’ primary evidence, due to the absence of specific comparisons to administrative costs of other FQHCs, did not persuade him that the Clinics’ administrative costs, in excess of the cap, were reasonable.
Based on the foregoing reasoning, the Court found it unnecessary to decide if the cap is a valid conclusive presumption.
Judgment was affirmed.

The full opinion is available in PDF