Ultimate Authority and the Transfer of Nursing Facilities that Receive UPL Payments Under Georgia Medicaid

One fallout of the COVID-19 pandemic is that some, already struggling skilled nursing facilities may now be becoming financially unviable. As a result, owners and operators of such facilities may be actively seeking to transfer facility operations to a separate entity as an alternative to closure. But when a Georgia hospital authority, for whatever reason, is transferring the operations of a facility that participates in the Medicaid upper-payment limit program, the transfer needs to be structured to comply with applicable program requirements, as well as Georgia hospital-authority law.

As in a number of other states, the Georgia Medicaid program offers supplemental payments to various provider types, including skilled nursing facilities, if they meet eligibility requirements. These payments, also known as upper payment limit (UPL) payments, represent a reasonable estimate of the difference between the Medicaid payment and the amount that Medicare would have paid for the same service.¹  Federal regulations recognize three categories of provider facilities that are eligible for UPL payments: (i) State government-owned or operated facilities, (ii) non-State government-owned or operated facilities, and (iii) privately owned and operated facilities.²  Under Georgia’s State Medicaid Plan, however, only State governmental facilities and non-State governmental facilities, and not privately owned and operated facilities, may receive UPL payments.

Georgia hospital authorities that own or operate nursing facilities fall under the category of non-State-owned or operated facilities. Georgia law defines hospital authorities as instrumentalities of local government,³  public bodies corporate and politic,⁴  and entities exercising public and essential government functions.⁵  Only counties, municipalities, or a combination of the two may form hospital authorities.⁶

Under Georgia law, hospital authorities may either directly operate facilities under their control or lease them for operation by another entity.⁷ If leasing the facility to another operator, however, the maximum permissible term of the lease is 40 years. Moreover, the hospital must retain a sufficient level of control in accordance with O.C.G.A § 31-7-75(7), which states the following in relevant part:

the authority shall have first determined that the lease will promote the public health needs in the community by making additional facilities available in the community or by lowering costs of health care in the community and . . . the authority shall retain sufficient control over any project so leased so as to ensure that the lessee will not in any event obtain more than a reasonable rate of return on its investment in the project, which reasonable rate of return, if and when realized by such lessee, shall not contravene in any way the mandate set forth in Code Section 31-7-77 specifying that no authority shall operate or construct any project for profit. . . . [Emphasis supplied.]

Unfortunately, various terms in this statute, such as “reasonable rate of return” and the “operate . . . for profit” prohibition are subject to interpretation and represent something of a gray area in terms of complying with this statute.

In the context of hospital transfers, Georgia courts have also held that a hospital authority cannot delegate its functions and responsibilities to a separate entity, whether for profit or otherwise. Kendal v. Griffin-Spalding Hosp. Auth., Ga. App. 821 (2000). Thus, under Georgia law, a hospital must retain ultimate responsibility for the operation of a hospital. It is reasonable to assume that a Georgia court would take a similar position with respect transfers of nursing facilities by hospital authorities.

The Centers for Medicare & Medicaid Services (CMS) has also questioned whether Georgia hospital authorities retain sufficient control over hospitals whose operations have been transferred to separate 501(c)(3) corporations.⁸  CMS accepted as evidence of such control minutes reflecting the authority’s active involvement in the day-to-day activities of the facility and retention of ultimate authority, commonality in board membership, and participation in important decision making, such as involvement in credentialing and review of utilization, financial information, staffing decisions, and strategic planning.⁹

Further insight into CMS’s view of requisite authority and control may come from the definition of a “non-state government provider” set forth in the agency’s proposed Medicaid Fiscal Accountability Regulations (MFAR).¹⁰  Although CMS ultimately rescinded this proposed rule in response to comments, it is instructive that the factors that would have determined whether an entity meets this definition, and thus qualifies for UPL payments, include the following:

• Whether the entity has the immediate authority to make operational decisions;
• Whether the entity bears legal responsibility for risk of losses from operations and the payment of taxes on provider revenue and property; and
• Whether the entity has authority on hiring and disposition of revenue.

From this, it is clear that CMS had something more in mind than token authority and control. If this reflects CMS’s current view, then hospital authorities may face a dilemma in leasing facilities and transferring their operations to separate entities. By maintaining ultimate authority and control over the facility in order to receive UPL payments, hospital authorities at the same time may be exposing themselves to liability arising from facility operations to a much greater extent than other non-operator, facility lessors are likely to face. Hospital authorities should carefully consider the potential consequences of this trade-off when deciding whether it makes sense to lease a nursing facility to a separate entity that will become the new licensed operator.

For more information, please contact Glenn P. Hendrix or Neil W. Hoffman.

[1] 42 C.F.R. §§ 447.272, 447.321.

[2] 42 C.F.R. § 447.272(a).

[3] Fulton-DeKalb Hospital Authority v. Gaither, 241 Ga. 572 (1978).

[4] O.C.G.A. § 31-7-72(a).

[5] O.C.G.A. § 31-7-75. See also Bradfield v. Hospital Auth., 226 Ga. 575 (1970).

[6] O.C.G.A. § 31-7-72(d).

[7] O.C.G.A. § 31-7-75(7) & (27).

[8] Georgia Department of Medical Assistance, Interoffice Memoranda by Neil B. Childers, General Counsel (Feb. 25, 2004).

[9] Id.

[10] 84 Fed. Reg. 63722 (Nov. 18, 2019).