Expanding Due-Process Standing: Skilled Nursing Facilities Gain Direct Appeal Rights in Hawaiʻi Medicaid Eligibility Disputes

Introduction

Case: In re FT, by and through Aloha Nursing Rehab Centre v. Department of Human Services, SCWC-18-0000677, Supreme Court of Hawaiʻi, 29 July 2025.
Parties:

Petitioner/Appellant: Aloha Nursing Rehab Centre (“Aloha”), a private skilled-nursing and hospice facility.
Respondent/Appellee: Department of Human Services, State of Hawaiʻi (“DHS”), the state Medicaid agency.

Key Issue: Whether a skilled nursing facility may initiate an administrative appeal of DHS’s termination of a resident’s Medicaid eligibility when the resident and her authorized representative are incapacitated or unavailable.
Holding: The Court recognizes (1) a constitutionally protected property interest for nursing facilities in payments for services rendered in reliance on a DHS eligibility approval; and (2) a corresponding due-process right to notice and an opportunity for a contested-case hearing. Consequently, facilities obtain standing to appeal adverse eligibility determinations under defined circumstances.

Summary of the Judgment

The Supreme Court of Hawaiʻi overturned the circuit court and Intermediate Court of Appeals, ruling that Aloha had standing and due-process rights to challenge DHS’s retroactive termination of resident FT’s Medicaid benefits. The Court held:

Skilled nursing facilities possess a protected property interest in Medicaid reimbursement for care delivered in reliance on an initial eligibility determination.
Article I, §5 of the Hawaiʻi Constitution demands that, where a resident (and any authorized representative) cannot act, DHS must provide the facility with (a) timely notice of any adverse eligibility action and (b) the opportunity to request a contested-case hearing.
If those procedural safeguards are denied, any facility appeal cannot be dismissed as untimely.
The new rule applies prospectively and to all cases “in the pipeline” (direct review/not yet final).
The matter is remanded to the Administrative Appeals Office for a hearing on the merits of FT’s eligibility from 2012 until her death in 2014.

Analysis

1. Precedents Cited and Their Influence

Sandy Beach Defense Fund v. City Council, 70 Haw. 361 (1989) – foundational articulation of procedural due-process requirements (notice and meaningful opportunity to be heard).
In re Application of Maui Electric Co. (MECO), 141 Haw. 249 (2017) – clarified that contested-case hearings may be “required by law” through constitutional due-process even if no statute or rule expressly provides one.
ʻĪao Ground Water …, 128 Haw. 228 (2012) – explained creation of property interests through “rules or understandings” external to the Constitution.
Keahole Defense Coalition v. BLNR, 110 Haw. 419 (2006) – distinguished discretionary government benefits (no property interest) from entitlements; used to show Medicaid payments are non-discretionary once eligibility exists.
Alakaʻi Na Keiki v. Matayoshi & AlohaCare v. DHS – warned against administrative power unchecked by judicial review.
Federal models: Mathews v. Eldridge (U.S. 1976) for balancing test; Oberlander v. Perales (2d Cir. 1984) and Anchorage SNF v. Padilla (D. Md. 2023) for provider property interests.

These authorities guided the Court to treat Medicaid reimbursement as a non-discretionary entitlement once services are rendered to an approved beneficiary, thereby importing full due-process protections.

2. The Court’s Legal Reasoning

Identifying the Property Interest
a. Hawaii Administrative Rules §17-1739.2-3(b) obligates DHS to pay a facility-specific per-diem rate for institutional long-term-care services delivered to an eligible resident.
b. Payment flows directly to the provider (“vendor-only” system).
c. Consequently, when a resident is admitted under a Notice of Eligibility, the facility gains a legitimate claim of entitlement to reimbursement for services already performed.
Due-Process Analysis (Mathews/Sandy Beach factors)
• Private interest – substantial (over \$120,000 unpaid).
• Risk of erroneous deprivation – high where no guardian appeals and the facility is shut out.
• Government burden – minimal; DHS already has procedures for beneficiary appeals.
Balancing favors adding notice to the facility and a hearing opportunity.
Standing
Because a contested-case hearing is constitutionally “required by law,” the facility is a “person aggrieved” with prudential standing to invoke judicial/administrative review.
Statutory Rules Harmonized
HRS §346-12 and HAR §17-1703.1-3 limited appeals to applicants/recipients/authorized reps. The Court held those rules yield to the Constitution where they preclude review and create separation-of-powers issues.
Retroactivity Choice
The Court applied the new rule to the parties and all non-final cases (“pipeline”)—a middle-ground promoting fairness without destabilizing closed cases.

3. Anticipated Impact

Facilities’ Enforcement Power: Nursing homes can now directly safeguard their reimbursement streams, reducing uncompensated-care risk and supporting willingness to admit Medicaid residents.
DHS Administrative Practice: The agency must revise notice protocols to include facilities whenever a resident’s eligibility is modified and no active representative exists. Expect an uptick in contested-case hearings, but confined to a narrow fact pattern.
Long-Term-Care Market: By reducing financial uncertainty, the decision may improve Medicaid patient access to scarce skilled-nursing beds—a pressing issue highlighted by the Court’s demographic discussion.
Litigation Landscape: Sets persuasive precedent for similar provider-standing questions in other benefit programs (e.g., foster-care providers, home-health agencies).
National Reference Point: Adds state-supreme-court authority to the emerging body of federal cases recognizing provider property interests; may influence courts in jurisdictions grappling with analogous Medicaid disputes.

Complex Concepts Simplified

Medicaid “Vendor-Only” Payment System: Medicaid pays providers directly for services; beneficiaries never hold the money.
Prospective Per-Diem Rate: A fixed daily amount DHS agrees to pay a facility for every Medicaid-eligible resident, adjusted for medical acuity and provider cost history.
Contested-Case Hearing: A formal administrative trial-type proceeding governed by the Hawaiʻi Administrative Procedure Act where evidence and legal arguments are presented before an impartial hearings officer.
Property Interest vs. Expectation: You own a property interest when rules mandate payment once conditions are met. A mere hope of payment, dependent upon agency discretion, is not protected.
Pipeline Retroactivity: The new rule applies to this case and all other cases still on direct appeal or not yet finalized, but not to closed, past cases.

Conclusion

The Hawaiʻi Supreme Court’s decision in In re FT re-configures the procedural landscape of Medicaid eligibility disputes by:

Affirming that skilled-nursing facilities have a legally enforceable property interest in Medicaid payments for services rendered in reliance on an eligibility approval.
Imposing a constitutional duty on DHS to provide facilities notice and an avenue for administrative appeal when no resident representative can act.
Establishing that such facilities possess standing to demand contested-case hearings, thereby ensuring external review of agency decisions and protecting a critical sector of Hawaiʻi’s long-term-care infrastructure.

By bridging the due-process gap that previously left providers “holding the bag,” the Court not only secures fair treatment for healthcare institutions but also fortifies the Medicaid safety net essential to Hawaiʻi’s rapidly aging population. Future disputes over public-benefit terminations will now proceed under a clearer, more balanced framework that honors both fiscal integrity and fundamental rights.