For-Profit Nursing Home Medicaid Rate-Setting: Land Acquisition Value Excluded from Capital “Equity” Reimbursement; Methodological Challenges Must Be Brought Within Four Months

1. Introduction

Matter of Richmond Ctr. for Rehabilitation & Specialty Healthcare v. McDonald (2026 NY Slip Op 03856, 3d Dept, June 18, 2026) is an Appellate Division, Third Department decision reviewing New York’s Medicaid nursing home rate-setting rules for for-profit residential health care facilities.

The petitioner, a licensed for-profit nursing home in Richmond County and a Medicaid provider, challenged determinations by the Department of Health (“DOH”) and the Commissioner of Health (James McDonald). The dispute arose after petitioner sought a rate revision, arguing DOH (i) improperly excluded the value of land it acquired when purchasing the facility and (ii) improperly denied sales tax reimbursement adjustments and a recalculation of certain earlier rates (2013–2014) based on allegedly incorrect cost-report inputs. DOH ultimately rejected the land-inclusion request on regulatory grounds and deemed the other challenges untimely.

The key issues were:

• Substantive rate-setting: whether DOH acted rationally in excluding the purchase price/value of land from the capital/equity component of petitioner’s Medicaid reimbursement rate under 10 NYCRR 86-2.21.
• Procedure and timeliness: whether petitioner’s other claims were barred as untimely methodological challenges, or for failure to exhaust administrative remedies (including the 120-day administrative appeal rule for computational issues).

2. Summary of the Opinion

The Third Department affirmed Supreme Court’s dismissal of the petition/complaint.

• On the merits, the court held DOH’s exclusion of land value from the rate was rational and consistent with the governing regulatory framework—particularly as interpreted in Matter of Concourse Rehabilitation & Nursing Ctr., Inc. v Zucker.
• On the remaining claims, the court agreed they were properly dismissed as time-barred (methodological challenges not brought within the applicable four-month CPLR article 78 window) and/or barred for failure to exhaust administrative remedies (including failure to pursue a timely administrative appeal under 10 NYCRR 86-2.13 (a)).

3. Analysis

3.1 Precedents Cited (and How They Drove the Outcome)

Deference and the “Heavy Burden” in Medicaid Rate Challenges

• Matter of Nazareth Home of the Franciscan Sisters v Novello, 7 NY3d 538 (2006).
  The court relied on this Court of Appeals authority for the proposition that Medicaid rate-setting is “quasi-legislative” and will not be annulled absent a compelling showing that the underlying calculations are unreasonable. This framed the petitioner’s burden as unusually high.
• Matter of Arnot Ogden Med. Ctr. v New York State Dept. of Health, 214 AD3d 1195 (3d Dept 2023), lv denied 41 NY3d 905 (2024), and Matter of New York Univ. Med. Ctr. v Axelrod, 188 AD2d 207 (3d Dept 1993), lv denied 81 NY2d 711 (1993).
  These cases reinforce that courts give substantial deference to DOH’s rate methodology and uphold it if it has a rational basis.
• Matter of Concourse Rehabilitation & Nursing Ctr., Inc. v Zucker, 217 AD3d 1189 (3d Dept 2023).
  This was the decision’s central substantive anchor. Concourse held that under the “fiscally restrained regulatory landscape,” 10 NYCRR 86-2.21 does not provide direct reimbursement for post–March 10, 1975 purchase/lease of land; rather, it permits reimbursement for interest on debt incurred in acquiring land and for capital improvements. Richmond Center is, in effect, an application (and reaffirmation) of that rule to a purchase-price claim.
• Pinnacle Nursing Home v Axelrod, 126 AD2d 940 (4th Dept 1987), and Matter of Benenson v Axelrod, 111 AD2d 453 (3d Dept 1985).
  These older authorities were used to corroborate that the regulatory scheme limits reimbursement for land acquisition costs in the manner DOH applied.

Standards of Review Under CPLR Article 78

• Matter of Concourse Rehabilitation & Nursing Ctr., Inc. v Zucker, 217 AD3d 1189 (3d Dept 2023), Matter of Evercare Choice, Inc. v Zucker, 218 AD3d 882 (3d Dept 2023), Matter of John E. Andrus Mem., Inc. v Commissioner of Health of the N.Y. State Dept. of Health, 225 AD3d 959 (3d Dept 2024), and Matter of Ventresca-Cohen v DiFiore, 225 AD3d 9 (3d Dept 2024).
  These cases supplied the familiar “arbitrary and capricious/rational basis” framework and the principle that courts uphold agency action if supported by reason and facts, even if a court might have decided differently.

Agency Deference on Interpreting Its Own Regulations

• Matter of Tomei v McDonald, ___ AD3d ___, 254 NYS3d 722, 2026 NY Slip Op 01571 (3d Dept 2026), and Matter of Wayne Ctr. for Nursing & Rehabilitation, LLC v Zucker, 197 AD3d 1409 (3d Dept 2021), lvs denied 37 NY3d 919 (2022), 37 NY3d 919 (2022).
  These decisions supported deference to DOH as drafter and implementer of the rate-setting regulations, strengthening the court’s willingness to accept DOH’s reading of “equity” and its distinction between land and land improvements.

Methodological vs Computational Challenges; Timeliness and Exhaustion

• Matter of Atlanticare Mgt., LLC v Ives, 212 AD3d 132 (3d Dept 2022), lv denied 40 NY3d 902 (2023).
  Richmond Center used Atlanticare’s characterization framework: when a claim “necessarily implicate[s] DOH’s interpretation and application of its own rate-setting regulations,” it is methodological. That classification drives a short limitations period.
• Matter of Amsterdam Nursing Home Corp. [1992] v Daines, 68 AD3d 1591 (3d Dept 2009), and Matter of Pinegrove Manor II, LLC v Daines, 60 AD3d 767 (2d Dept 2009), lv denied 14 NY3d 713 (2010).
  These cases established that methodological challenges must be brought as a CPLR article 78 proceeding within four months of receipt of the initial rate computation sheet. The 2013–2014 claims were dismissed under this rule.
• Matter of Eastman Dental Ctr. v Axelrod, 129 AD2d 254 (3d Dept 1987).
  This case supported dismissal where a party failed to exhaust required administrative remedies—here, failure to file timely administrative appeals regarding computational items.

3.2 Legal Reasoning

(A) Land Value Exclusion: Rational Basis Under the Regulatory Scheme

The court treated DOH rate-setting as highly deferential territory: petitioner had to show the methodology was unreasonable and unsupported by any evidence. Against that standard, DOH prevailed for three main reasons.

• Regulatory text and structure: The court emphasized that Medicaid rates contain multiple components, including capital costs, and that the capital component includes a “payment factor sufficient to return equity” (10 NYCRR 86-2.21 [e] [4]). Critically, 10 NYCRR 86-2.21 [f] [3] provides that the capital cost component “shall not be affected by any sale, lease or transfer occurring after March 10, 1975.” The court read this as supporting the Concourse rule: post-1975 land transactions do not produce direct reimbursement of land purchase/lease value.
• Concourse as controlling interpretation: The petitioner sought inclusion of land “purchase price” in the rate. The court treated that request as materially identical to the land-lease inclusion request rejected in Matter of Concourse Rehabilitation & Nursing Ctr., Inc. v Zucker and therefore inconsistent with 10 NYCRR 86-2.21 as previously construed.
• Deference to DOH’s application and technical explanations: DOH submitted affidavits explaining its routine practice of excluding land value from equity and distinguishing land from improvements (including the rationale that land does not depreciate like buildings). The court deferred to DOH’s construction as the responsible agency, and it accepted DOH’s rebuttal of petitioner’s third-party examples as either incomplete, misinterpreted, or erroneous/pending audit.

(B) Dismissal of 2013–2014 Recalculation Claims: Methodological and Untimely

Petitioner argued DOH used “inapplicable cost reports” to set 2013 and 2014 rates (i.e., reports predating its ownership). The court agreed with Supreme Court that this is a methodological challenge because it attacks DOH’s interpretive application of the rate-setting regulations and inputs, not an arithmetic mistake.

Under Matter of Amsterdam Nursing Home Corp. [1992] v Daines and Matter of Pinegrove Manor II, LLC v Daines, methodological challenges must be commenced within four months of receiving the initial rate computation sheet. Because petitioner sued years later, the claims were time-barred.

(C) Sales Tax Claims: Dismissal Either Way (Time-Bar or Failure to Exhaust)

The court noted uncertainty as to whether the sales tax issues were methodological or computational, but held dismissal followed under either classification:

• If methodological: they are time-barred for the same four-month reason.
• If computational: petitioner had to file an administrative challenge within 120 days of receiving the initial rate computation sheet under 10 NYCRR 86-2.13 [a]. DOH’s evidence showed no timely appeals were filed; therefore, petitioner failed to exhaust administrative remedies, requiring dismissal under principles reflected in Matter of Eastman Dental Ctr. v Axelrod.

3.3 Impact

• Reinforcement of Concourse’s “no direct land acquisition reimbursement” rule: Richmond Center strengthens the practical reach of Matter of Concourse Rehabilitation & Nursing Ctr., Inc. v Zucker by applying it to a land purchase (not just a lease) and by rejecting efforts to prove a contrary agency “practice” through selective rate examples.
• Greater clarity on “equity” arguments: The court’s acceptance of DOH’s position—“investments in land” meaning land improvements rather than the land itself—signals that litigants must confront DOH’s interpretive distinction head-on with regulatory-history and methodology evidence strong enough to overcome deference.
• Procedural discipline in rate litigation: The decision underscores that providers must quickly identify whether a dispute is methodological (four-month article 78) or computational (120-day administrative appeal), and act accordingly. Delay will likely be fatal even if the provider believes the agency later “revisited” the issue through a lagged recalculation.
• Limited persuasive force of post hoc administrative decisions: The opinion acknowledged recent DOH administrative decisions that differed from Concourse (in OMIG audit-overpayment contexts), but did not allow them to displace binding appellate precedent—particularly where those administrative rulings did not address Concourse.

4. Complex Concepts Simplified

• Medicaid “rate-setting”: DOH calculates what Medicaid pays a facility using formulas set by regulation. For nursing homes, the rate is built from components (direct, indirect, noncomparable, capital).
• “Capital” and “equity” in this context: The capital component includes items like financing costs and returns related to long-term assets. “Equity” is the owner’s invested stake for which the rules allow a “return” factor—but, per this decision line, not a direct pass-through of post-1975 land acquisition value.
• “Arbitrary and capricious” review: In an article 78 case, courts do not decide what policy is best; they ask whether the agency had a rational basis and followed lawful procedure.
• “Quasi-legislative” deference: Rate-setting is treated like a policy-making function delegated to DOH. That is why challengers face a “heavy burden.”
• Methodological vs computational challenges:
  • Methodological = attack on the formula/interpretation/inputs required by regulation (very short court filing deadline: typically four months).
  • Computational = claim the agency miscalculated under the correct method (must usually be raised first through the agency’s administrative appeal process, here within 120 days).
• Exhaustion of administrative remedies: If rules require you to appeal to the agency first (and on time), you generally cannot bypass that step by going straight to court.

5. Conclusion

Matter of Richmond Ctr. for Rehabilitation & Specialty Healthcare v. McDonald confirms that, for for-profit nursing homes under 10 NYCRR 86-2.21, DOH may rationally exclude the value/purchase price of land from Medicaid reimbursement calculations, consistent with Matter of Concourse Rehabilitation & Nursing Ctr., Inc. v Zucker. It also delivers a procedural warning: challenges that implicate rate methodology must be brought promptly (within four months of the initial rate sheet), and computational disputes must be timely raised through DOH’s administrative process (including the 120-day appeal rule). In combination, these holdings further insulate DOH’s rate-setting decisions from late-stage litigation and narrow the viable pathways for providers seeking retrospective rate relief.