Federal rule on community-based settings is “arbitrary and capricious”: “Legal Vulnerabilities” Part 3

A legal analysis, dated 1/17/17, of the 2014 federal rule on Home and Community-Based settings for people with disabilities describes in detail how the rule may be vulnerable to a legal challenge. See also “Legal Vulnerabilities” Part 1 & Part 2. The rule was promulgated by the Centers for Medicare and Medicaid Services (CMS), the federal agency that regulates Medicare and Medicaid. For more information, see HCBS Advocacy.

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Before the 2014 HCBS settings rule was made final, there were proposals to exclude disability-specific housing as an acceptable setting for receiving Medicaid-funded Home and Community-Based Services (HCBS). There was significant opposition to this proposal on the basis that it eliminated choice for Medicaid waiver recipients. [In Michigan, the Medicaid Waiver for DD is called the Habilitation Supports Waiver (HSW)]. Commenters said that individuals with disabilities should be able to choose disability-specific housing if it meets their needs and that eliminating this option would exacerbate a housing market already in crisis. Furthermore, the disability-specific settings being considered are not funded as institutions under Medicaid law.

According the 1/17/17 legal analysis, “CMS responded to these numerous comments by stating that it was removing the categorical treatment of ‘disability-specific housing’ and instead providing that ‘any other setting that has the effect of isolating individuals receiving Medicaid HCBS from the broader community of individuals not receiving Medicaid HCBS’ and requiring an isolating setting to undergo ‘heightened scrutiny’ to determine if it has the ‘qualities of an institution.’..”

The way this was to be implemented by CMS, however, effectively made it extremely difficult to receive approval for disability-specific housing by the state and the U.S. Department of Health and Human Services for settings that were considered to be too “institutional”.

Excerpts from the MEMO:

“Even if Congress Delegated Authority to Define Settings in Regulation, the Treatment of Disability-Specific Housing is Arbitrary and Capricious"

[Note: post-regulatory and sub-regulatory guidance refers to clarifications issued by CMS after the settings rule was finalized in 2014.]

…”In post-regulatory guidance, CMS announced that settings designed for people with disabilities, as well as gated or secure communities, are to be considered a ‘setting that has the effect of isolating individuals’ and therefore automatically subject to heightened scrutiny, regardless of the specific characteristics of the setting. Specifically, CMS stated that settings ‘designed specifically for people with disabilities,’ and settings where the residents 'are primarily or exclusively people with disabilities and on-site staff provides many services to them,’ are ‘isolating.'"

…”Although technically a 'setting that isolates' may still survive 'heightened scrutiny,' CMS’s process for such review makes it very unlikely that states will be willing to make the application. Once heightened scrutiny is triggered, the rules place a tremendous burden on state regulators to petition CMS to permit continued reimbursement for services provided to individuals in the disability-specific housing, including by collecting and submitting voluminous documentation, conducting a site visit, soliciting client surveys, obtaining photographs, establishing public transportation routes, etc. Not surprisingly, the path of least resistance for many states will be to prohibit reimbursement for disability-specific settings, even if they would have been a preferred choice for many waiver recipients, and even if the settings exhibit the qualities of home- and community-based settings and not institutions. Further, CMS has effectively ensured that no further disability-specific housing complexes will receive financing to be built in the future, because of its guidance expressing skepticism that individuals living in such a complex will qualify for waiver services.” [Emphasis added]

…”Even if CMS has the authority to regulate settings, we believe its actions effectively eliminating disability-specific housing as a choice for individuals desiring Medicaid-funded services are arbitrary and capricious.”

• CMS’s Treatment of Disability-Specific Housing is Inconsistent with the Text of the Regulation

…”While an agency is generally entitled to substantial deference in interpreting its own ambiguous regulations, deference is unwarranted when 'the agency’s interpretation ‘does not reflect the agency’s fair and considered judgment on the matter in question.’“

“...there was significant opposition to CMS’s regulatory proposal to categorically deny funding for services to individuals living in disability-specific settings…After careful consideration of these comments in the rulemaking process, CMS eliminated the categorical treatment of disability-specific settings. In the months that followed, however, CMS effectively reversed that decision through sub-regulatory guidance, without any indication that it carefully considered facts relating to disability-specific housing or the implications of denying Section 1915(c) services to individuals who live in that type of housing. For example, in the sub-regulatory guidance, CMS did not cite any facts on which it bases its conclusion that disability-specific housing has 'the effect of isolating.'"

“...CMS’s position is inconsistent with the regulations’ instructions that heightened scrutiny shall apply only to settings that actually 'have the effect of isolating.' Rather than having state regulators review whether a particular setting actually has such an effect on a case-by-case basis, CMS’s post-regulatory guidance sweeps broadly, targeting particular types of residential settings that CMS believes 'often,' 'typically,' 'may,' and 'generally' may have such an effect. Even disability-specific settings that do not have the 'typical' and 'general' characteristics that CMS has identified as a concern are subject to the heavy burdens of heightened scrutiny."

“By applying the regulation to broad residential categories based on characteristics that CMS believes (without citing any evidence) 'typically' and 'often' isolate, CMS recreates the categorical approach to disability-specific housing that the final rule expressly rejected in response to public opposition. If CMS had intended for disability-specific housing to be presumed to be isolating – as the post-regulatory guidance indicates – it would have included them in the list of settings that are presumed to have 'qualities of an institution.'"

"…CMS’s position is inconsistent with the regulation’s treatment of 'integration' and 'isolation.' CMS’s regulation does not say that heightened scrutiny is triggered when an individual with a disability is not 'integrated into the broader community,' but rather when a setting isolates 'individuals receiving Medicaid HCBS from the broader community of individuals not receiving Medicaid HCBS.' In other words,CMS’s regulation focuses not on the disability only, but on the payor for services (Medicaid). The post-regulatory guidance appears to assume that all individuals living in disability-specific housing are 'receiving Medicaid HCBS,' and all individuals in the 'broader community' are not receiving HCBS. But not all individuals with disabilities receive Medicaid, and many disability-specific housing complexes will continue to house a majority of private-pay residents who do not receive Medicaid-funded services."

• CMS’s Treatment of Disability-Specific Housing Is Not Supported By the Administrative Record

…”CMS’s post-regulatory guidance completely disregards the comments on the proposed rules and the regulatory changes CMS made in response to those changes. The comments focused on the fact that including disability-specific housing would eliminate consumer choice and be an unwarranted restriction of housing options. CMS’s regulations purport to respect such choice. But CMS’s post-regulatory guidance eliminates that choice by instructing states to apply 'heightened scrutiny' that, in effect, is likely to be the equivalent of an absolute prohibition, because it creates a tremendous amount of work for states seeking to qualify individuals."

"…the standard should not be whether those settings satisfy CMS’s preference as to where individuals should be living, but rather whether it is the preference of the individual receiving services.” [Emphasis added]