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Administrative – Medicaid – Federal Waiver – Unpromulgated Rule – Home Care – Reimbursement

McCrann v. N.C. Department of Health & Human Services. (Lawyers Weekly No. 11-07-0066, 22 pp.) (Robert N. Hunter Jr., J.) Appealed from Wake County Superior Court. (Donald W. Stephens, J.) N.C. App. Click here for the full text of the opinion.

Holding: The respondent-agency’s interpretation of changes to a Medicaid program was a rule. Since the rule was not promulgated as required by the N.C. Administrative Procedures Act, the rule lacked the force of law.

We affirm the superior court’s adoption of the administrative law judge’s ruling that the agency incorrectly denied services to the petitioner-program participant. However, we reverse the superior court’s denial of reimbursement to petitioners. We remand for a determination of the proper amount of reimbursement.


Petitioner Jonathan McCrann has multiple disabilities including mental retardation, autism, cerebral palsy and legal blindness. He participates in a Medicaid-funded program called the Community Alternatives Program for Persons with Mental Retardation and Other Developmental Disabilities (CAP Program).

Without a personal caregiver, Jonathan would have significant difficulty with the most basic of daily activities such as using the bathroom, moving about safely, communicating with others and learning. For most of his life, Jonathan has received these services under the CAP Program while living at home with his parents.

In 2003, in an effort to help Jonathan become more independent, his parents moved him into a group home and continued to provide him care through a personal caregiver. Absent this intensive therapy Jonathan would require institutionalization.

For more than 10 years, Edna McNeill has been the primary provider of these services for Jonathan. McNeill began caring for Jonathan in petitioners’ home and has continued in her role as Jonathan’s primary caregiver since his admission to the Pinetree Group Home (Pinetree). The two have developed a trusting bond that has facilitated Jonathan’s progress from a classification of “profoundly mentally retarded” to “moderately mentally retarded.”

Unsurprisingly, Jonathan’s plan of care, which was developed by a team of professionals, his family and himself, designates McNeill as the person best suited to provide the “home support” component of the plan.

Pursuant to a 2005 waiver approved by the Centers for Medicare and Medicaid Services, revisions to the CAP Program included the following, “Individuals who live in licensed residential settings or unlicensed alternative family living arrangements may only receive the community component of this service. The community component of Home and Community supports does not replace the Residential Support provider’s responsibility to provide support to individuals in their homes and the community, but is intended to support those who choose to engage in community activities that are not provided through a licensed day program.”

Respondent interpreted this language to exclude third-party providers from providing services to benefit recipients in a group home setting. Thus, respondent concluded that while a prior waiver (the 2001 waiver) permitted McNeill to provide services to Jonathan in his group home, the 2005 waiver precluded coverage for McNeill’s services under Jonathan’s plan of care – despite having approved the same services under the same waiver (the 2005 waiver) the previous year.

Jonathan could receive McNeill’s services if he lived at home or Pinetree employees could provide comparable services for which the state could be reimbursed through Medicaid.


We conclude that the waiver provision at issue is a “rule” within the meaning of the N.C. Administrative Procedures Act (APA) and, absent promulgation in accordance with the APA, does not carry the force of law.

The waiver provision interprets Medicaid eligibility by defining those services Jonathan is eligible to receive under the CAP Program. Thus, we conclude the trial court was correct in finding that the waiver provision is a rule pursuant to the APA.

Additionally, as respondent concedes, the waiver was not promulgated in accordance with either the N.C. APA or the federal APA. Consequently, we conclude the trial court did not err in finding the waiver is neither state nor federal law. Nor did the trial court err in concluding respondent’s reliance upon the waiver to deny services to petitioner was an error of law. 

This case is distinguishable from Arrowood v. North Carolina Department of Health & Human Services, 353 N.C. 351, 543 S.E.2d 481 (2001), in that the waiver provision upon which respondent relied in order to deny petitioners’ benefits in this case lacks any meaningful clarity. Mere knowledge of the potential for denial of services is quite distinct from an agreement to be bound by terms explicitly set forth in a written contract like the one in Arrowood.

We conclude Arrowood is an exception to the general principle that an administrative rule is not valid unless adopted in accordance with the provisions of Article 2A of the Administrative Procedure Act, and its holding is limited to the unique facts of that case. Therefore, because the provision of the waiver at issue here was a rule that was not promulgated in accordance with the APA, and the circumstances presented do not fit within the Arrowood exception, the provision is not legally binding and could not properly serve as the legal basis for respondent’s denial of Jonathan’s benefits.

We conclude that the superior court properly found the waiver does not carry the force of law. Therefore, the superior court did not err in its de novo review and its order reversing respondent’s denial as arbitrary and capricious is affirmed.

Federal regulation of state Medicaid programs requires the state agency to “promptly make corrective payments, retroactive to the date an incorrect action was taken” if it is ultimately determined that the agency incorrectly denied coverage. 42 C.F.R. § 431.246.

The “vendor payment principle,” however, generally requires payment for Medicaid services to be made only to the provider of services. 42 U.S.C. §  396a(a)(32); 42 C.F.R. § 447.10(d). This requirement encourages provider participation in Medicaid by ensuring that providers will be paid for their services absent fear of nonpayment.

Following this rationale, there is a logical exception to the vendor payment principal in the context of corrective action payments where the provider has already been paid for her services, and only the recipient requires reimbursement.

We conclude that respondent incorrectly denied McNeill’s services under Jonathan’s plan of care.

Petitioners have paid McNeill for her services throughout this appeal; therefore it is only the petitioners who require reimbursement. The vendor payment principle does not preclude respondent from making corrective action payments directly to petitioners.

Therefore, respondent must make corrective payments retroactive to the date on which these services were improperly denied.

Where there is insufficient evidence to determine the basis for the amount of payments or the value of the services provided by McNeill, this matter must be remanded to the superior court for an evidentiary hearing to determine the proper amount of reimbursement.

Affirmed in part, reversed in part and remanded.

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