GAB Decision 781
August 28, 1986
Indiana Department of Public Welfare;
Docket No. 85-27
Ballard, Judith A.; Teitz, Alexander G. Garrett, Donald F.
(1) The Indiana Department of Public Welfare (Indiana, State)
appealed a determination by the Health Care Financing Administration
(HCFA, Agency) disallowing $153,256.76 in federal funding claimed by the
State under Title XIX (Medicaid) of the Social Security Act (Act) for
the quarters ending March 31, June 30, and September 30, 1984. Based on
a validation survey, HCFA concluded that Indiana did not have an
effective program of utilization control of long-term stay services as
required by section 1903(g) (1) (A) and (D) of the Act. Specifically,
HCFA found that patients requiring the level of care of an intermediate
care facility (ICF) were improperly retained in the East Chicago
Rehabilitation Center, which was certified under the Medicaid program as
a skilled nursing facility (SNF). /1/ Additionally, HCFA found that the
State failed to conduct annual medical reviews for individual patients
at the Lake County Convalescent Home ICF and the Cardinal Health Care
Center ICF. During the course of this appeal, HCFA withdrew its finding
of a violation at Cardinal Health Care Center for the quarter ending
September 30, 1984. HCFA Ex. B. HCFA also withdrew its finding of a
violation at the East(2) Chicago Rehabilitation Center for the quarter
ending March 31, 1984. See HCFA Response, July 14, 1986, p. 11. HCFA
indicated that it will recalculate the disallowance after receipt of
Based on the analysis below, we uphold the disallowance as revised by
HCFA. Our decision is based upon the briefs and documents submitted by
both parties. Indiana had requested an evidentiary hearing in this
matter, but subsequently withdrew that request. See Indiana Letter, May
During the period in question, section 1903(g) of the Act required
the state agency responsible for administration of a state's Medicaid
plan show to the satisfaction of the Secretary that the state had an
effective program of control over utilization of long-term inpatient
services in certain facilities, including ICFs and SNFs. This showing
was required for each quarter that the federal medical assistance
percentage (FMAP) is requested with respect to amounts paid for such
services for patients who have received care for 60 days in ICFs or SNFs
or the FMAP will be decreased according to the formula set out in
section 1903(g) (5). Specifically, section 1903(g) (1) (A) provided
that a state must show that --
(A) In each case for which payment is made under the State plan,
physician certifies . . . (and recertifies, where such services are
furnished over a period of time, in such cases, at least every 60 days .
. .) that such services are or were required to be given on an inpatient
basis . . .;
This provision was implemented at 42 CFR 456.260 (1983).
456.260(b) provided that, for SNF patients, recertification "that SNF
services are needed" must be made "at least every 60 days after
Section 1903(g) (1) (C) requires a state to maintain a continuous
program of utilization review whereby each Medicaid patient is reviewed
by independent medical and other professional personnel in accordance
with established criteria. Additionally, section 1903(g) (1) (D)
requires a showing that a state has, in any calendar quarter for which
the state submits a request for payment for long-stay services, --
. . . an effective program of medical review of the care of
. . . pursuant to section . . . 1902(a) . . . (31) whereby the
professional management of each case is reviewed and evaluated at least
annually by independent professional review teams.
(3) The section 1903(g) (1) (D) medical review requirement is
referred to in this decision as the annual review requirement.
Section 1902(a) (31) required in pertinent part that a State
(B) for periodic on-site inspections to be made in all . .
intermediate care facilities . . . within the State by one or more
independent professional review teams (composed of physicians or
registered nurses and other appropriate health and social service
personnel) of (i) the care being provided in such . . . facilities to
persons receiving assistance under the State plan, (ii) with respect to
each of the patients receiving such care, the adequacy of services
available. . . .
The implementing regulations are found at 42 CFR Part 456.
In particular, section 456.652 provides that:
(a) . . . (in) order to avoid a reduction in FFP, the Medicaid
must make a satisfactory showing to the Administrator, in each quarter,
that it has met the following requirements for each recipient;
* * * *
(4) A regular program of reviews, including medical evaluations,
annual on-site reviews of the care of each recipient. . . .
(b) Annual on-site review requirements. (1) An agency
quarterly on-site review requirements of paragraph (a) (4) of this
section for a quarter if it completes on-site reviews of each recipient
in every facility in the State, and in every State-owned facility
regardless of location, by the end of the quarter in which a review is
required under paragraph (b) (2) of this section.
(2) An on-site review is required in a facility by the end of
quarter if the facility entered the Medicaid program during the same
calendar quarter 1 year earlier or has not been reviewed since the same
calendar quarter 1 year earlier. If there is no Medicaid recipient in
the facility on the day a review is scheduled, the review is not
required until the next quarter in which there is a Medicaid recipient
in the facility.
(4) (3) If a facility is not reviewed in the quarter in which it
required to be reviewed under paragraph (b) (2) of this section, it will
continue to require a review in each subsequent quarter until the review
* * * *
Failure to adhere to the applicable utilization control
subjects a state to a reduction in FMAP for the affected quarters. See
section 1903(g) (5) of the Act and 42 CFR 456.657.
Other regulations are referred to as appropriate in the course of
1. Certification Requirements - East Chicago Rehabilitation Center
East Chicago Rehabilitation Center is a skilled nursing facility.
state review team functioning as both a Utilization Review and
Inspection of Care team under sections 1903(g) (1) (C) and (D) of the
Act conducted a review at East Chicago on March 6-8, 1984. Based on
that review, Indiana notified the facility on March 21, 1984 that the
level of care for 13 patients had changed from skilled to intermediate.
The patients were provided the opportunity for an informal review of
Indiana's findings. The affected patients took advantage of this
opportunity and on May 1, 1984, Indiana upheld the change in level of
care for nine patients. The May 1 notice also provided a right to a
hearing in each instance (which none of the patients invoked) and
notified the facility that skilled nursing coverage would end May 25,
1984. See Indiana Exs. J-L. The facility acknowledged Indiana's
decision in a May 8 letter to State officials, but indicated that it had
not found placement for the nine patients and requested permission to
retain them at ICF rates until placement could be accomplished. Indiana
granted a "waiver" permitting retention of these individuals at ICF
rates through June 30, but indicated that after that date waivers of
this type would no longer be available to East Chicago or any other
facility. By July 1, 1984, the facility successfully placed six of the
nine patients; payments for the remaining three patients were stopped
at that time. See Indiana Exs. M-P; and Indiana Brief, pp. 4-5.
HCFA based its findings for East Chicago on the fact that the facility
had retained ICF patients in a facility (5) certified to provide only
SNF care during the quarter ending June 30, 1984. /2/
Indiana contended that the disallowance did not cite an express
prohibition against the type of temporary waiver the State had granted.
Indiana indicated that the facility's decision to retain the patients
was a reaction to a "temporary emergency situation" and argued that
neither HCFA nor the State suffered financial harm as a result of the
retention of ICF patients in East Chicago. Indiana Response, July 29,
1986, p. 2. Rather, the State noted, the facility may have incurred a
loss as it was reimbursed at an ICF rate for what were normally SNF
beds. Indiana contended that the purpose of Medicaid is to enable
states to furnish necessary medical services to individuals who
otherwise could not afford them. Indiana maintained that if a state can
provide Medicaid services in an SNF at ICF costs, then it has fulfilled
the demands of the statute.
As HCFA noted, we have addressed substantially similar arguments on
issue presented by the states of Wisconsin, Minnesota, and Michigan. In
Wisconsin Department of Health and Social Services, Decision No. 525,
March 30, 1984, we addressed the propriety of SNFs retaining ICF
patients. /3/ In that decision we found that the utilization(6) control
regulations for SNFs at 42 CFR 456.650 require a recertification for
each SNF patient that SNF services are needed. We concluded that the
regulations were designed to prevent the retention of ICF patients in
SNFs. We accepted the Agency's interpretation that the recertification
requirement is met only where there is an assurance that the patient is
receiving appropriate care, and concluded that appropriate care does not
mean care at a higher level. See Wisconsin, supra at 4.
Our holding in Wisconsin, supra, served as a basis for our conclusion in
Minnesota Department of Public Welfare, Decision No. 575, October 25,
1984. There, we determined that --
A further critical aspect of utilization control, however, is
patients certified as requiring a particular level of care reside in a
facility which provides that level of care. Otherwise, a
recertification of the patient's need for a particular level of care is
rendered a meaningless paper exercise. Federal regulations set out the
principle that a facility cannot be qualified to provide a specific
level of care unless the facility is certified. We think it is obvious
that the statutory framework of section 1903(g) encompasses placing
Medicaid patients in appropriate facilities so that they receive the
Id. at 6.
Further, in Michigan Department of Social Services, Decision No.
November 13, 1984, we reemphasized that the Act clearly distinguished
between skilled and intermediate care on a qualitative, rather than
solely on an economic, basis. (See Georgia Department of Medical
Assistance, Decision No. 508, January 31, 1984, p. 12.) We found that
the inherent differences between the two levels of care are reflected
throughout the entire statutory and regulatory scheme as well as the
accompanying legislative history. See Michigan, supra at 6-7.
The Wisconsin and Michigan decisions cited above have given us
opportunity to address the subject of state-created "variances" or
"waivers" by which the states attempt to retain patients certified for
one level of care at facilities certified to provide another level of
care to its patients. We have recognized that neither the statute nor
the regulations expressly authorize waivers in the operation of
utilization control. Further, 42 CFR 456.2 requires a state to indicate
in its state plan the procedures it will use to comply with section
1903(g). Michigan, supra at 7-8.
(7) We conclude that the holdings of the Board's earlier decisions
here as well. As HCFA noted, the State neither sought nor obtained
approval of its waiver procedure as part of its State plan. Section
1903(a) of the Act permits federal reimbursement for expenses incurred
under an approved State plan. The waiver permitting the State to retain
ICF patients in a SNF was not authorized under Indiana's approved State
plan. The consequences of the State's action are not mitigated by the
fact that the facility was reimbursed at the ICF rate for those patients
since the facility was not authorized to be reimbursed at that rate
under these circumstances.
HCFA did not rule out the possibility that federal reimbursement might
be continued for a limited period after a level of care change if the
State and facility encountered difficulty in placing the patient in
another facility. HCFA argued, however, that no relocation time for
this purpose was specifically authorized by policy issuances or
regulations and that the outer time limit for placement could not exceed
30 days in view of the rules under which a facility whose provider
agreement had expired or been terminated may have up to 30 days of
federal funding for reasonable efforts to transfer Medical patients to
alternate facilities. The Agency noted that the 30-day limit (as set
out in 42 CFR 441.11 and 442.15(c)) is provided in the context of mass
transfers, perhaps the entire facility, not just when a small number of
patients need to be transferred. HCFA Response, July 14, 1986, pp.
We conclude, as did HCFA, that the time authorized by the State
relocation was not demonstrated to be justified under the circumstances
of this case.
The record shows that Indiana and the facility were on notice of
potential need to find ICF beds for patients at East Chicago as early as
March 21 when the State first made its findings on the proper level of
care. Once the findings were affirmed on May 1 (about six weeks later),
Indiana gave the facility a three week period to place the individuals.
Just eight days later the facility notified the State that it was unable
to place nine patients and requested a waiver to receive payment at the
ICF rate. On May 23, the State gave the facility a waiver for continued
payment at the ICF rate for almost 40 additional days until July 1. As
it turned out, six of the nine patients were placed in three facilities
on the first day the facility was to get no reimbursement (July 1,
1984). When the State granted the waiver it advised the facility that
effective July 1, 1984 it would stop allowing facilities to bill
Medicaid for a level of care which the facility is not certified to
deliver. This decision was made "because of numerous problems the
Medicaid Division has had in granting(8) (waivers)." Indiana Ex. O. The
letter also indicated that the facility could contact the division if it
desired the assistance of staff in finding appropriate placements. Id.
Although the State has argued that its actions were justified based on
the temporary unavailability of ICF beds, the State submitted no
evidence to show what steps were taken by either the facility or the
State to place these individuals in ICFs.
The State did not demonstrate, for example, what efforts, if any,
State took to assist the facility in placing the individuals or how
extensive the search for new facilities actually was. When East Chicago
requested a waiver on May 8, it merely indicated that it needed a waiver
because it had not yet "found placement for all of (the patients)."
Indiana Ex. N. There is no indication of the nature of any difficulty
or the extent of the search. As HCFA indicated, several measures may
have been possible under these circumstances, including expanding the
area of the search and investigating the possibility of having this or
another nearby SNF receive dual certification for certain beds to
provide either SNF or ICF level of care. Finally, in view of the
absence of any authority here for the State to grant waivers such as
these under its State plan, we think it was incumbent on the State to
verify its proposed waiver action with the Agency before proceeding as
For the foregoing reasons, we conclude that patients requiring ICF
of care were improperly retained in East Chicago Rehabilitation Center
and uphold the disallowance for that facility for the quarter ending
June 30, 1984.
2. Medical Review Requirements - Lake County Convalescent Center
Cardinal Health Care Center
The Agency also determined that the State failed to conduct an
medical review for one ICF patient at Lake County Convalescent Home for
the quarter ending March 31, 1984; and for one ICF patient at Cardinal
Health Care Center for the quarters ending March 31, and June 30, 1984.
As noted above, sections 1903(g)(1)(D) and 1902(a)(31)(B) of the
establish the annual review requirement for ICF patients and clearly
indicate that each patient is to be reviewed. /4/ The implementing
regulations at 42 CFR Part(9) 456 establish the guidelines for a
satisfactory review. Among other requirements, a medical review must
include "personal contact with and observation of each recipient" by the
state inspection team. 42 CFR 456.608(a)(1).
HCFA determined that during their medical reviews the State review teams
failed to have personal contact with one patient in each facility as
required by 42 CFR 456.608(a)(1). /5/ See HCFA Exs. B and C; Indiana
Exs. B and H. Indiana argued that HCFA's findings were incorrect
because "the reviewing physician and state reviewer" approved the
recertifications for each of these patients. Indiana noted that HCFA
had originally found seven deficiencies at these two facilities. The
State contended that all seven patients had been properly recertified as
demonstrated by additional documentation submitted during these
proceedings. Further, Indiana contended that HCFA's review was
inadequate because HCFA did not conduct an exit conference at the end of
its review. Indiana Brief, pp. 8-10. Indiana insisted that HCFA's
failure to provide an exit interview had cost the State additional
expense to demonstrate where "federal auditors failed in their review
process." Indiana Reply Brief, pp. 5-6.
Indiana's arguments do not address the basis for the disallowance
relating to these facilities. The notice of disallowance and its
attachments clearly indicated that the basis for HCFA's findings at the
Lake County and Cardinal Health Care facilities was the State's failure
to conduct a satisfactory annual medical review in accordance with 42
CFR 456.652(a)(4) and 42 CFR 456.608. Indiana Ex. A; HCFA Ex. A. The
annual medical review requirement is concerned with the full range of
medical care and services provided to Medicaid recipients in Medicaid
certified facilities. As its name suggests, the annual review occurs
once a year and is a process by which a state inspection team reviews
the care and services provided to Medicaid recipients in an ICF, (10)
SNF, or institution for mental diseases. See generally, 42 CFR Part
456, Subpart I.
The State's position assumes that compliance with the
requirements contained at 42 CFR 456.360(b) would enable it to meet the
medical review requirements. The recertification requirements in effect
during this period directed that an appropriate medical official at the
ICF was to recertify on a regular basis (usually at least every 60 days)
that ICF services were needed for a particular patient. The
recertification requirement was by statute a different process than the
annual medical review requirement.
During an annual review it would be possible for a state inspection
to verify that a patient had been properly recertified. However, the
mere existence of a proper recertification cannot by itself satisfy the
annual medical review requirement. The medical review requirement is
composed of various other elements including the element cited by HCFA
as violated for these two patients, i.e., personal contact with the
patients by the state inspection team. The evidence in the record
indicates that this contact did not take place. /6/ Accordingly, we find
that Indiana did not meet the medical review requirement as established
in the Act and implementing regulations.
(11) As we have concluded in prior Board decisions concerning the
medical review requirements, the statute contains no indication that the
Secretary has discretion to find that the State has made a valid showing
if the State did not review patients who were Medicaid eligibles or who
reasonably should have been identified as such and the exceptions did
not apply. See, e.g., North Carolina Department of Human Resources,
Decision No. 728, March 18, 1986, pp. 7-8; Delaware Department of
Health and Social Services, Decision No. 732, March 21, 1986; New
Hampshire Department of Health and Welfare, Decision No. 756, May 30,
1986. Furthermore, the Agency has taken the position, based on advice
from the Comptroller General (Decision of the Comptroller General,
B-164031(3).154, March 4, 1980), that the Secretary may not find a
state's showing with respect to a particular facility valid if there is
a finding of even one violation in a facility. The Board has upheld
that position as a reasonable interpretation of the statutory provision.
North Carolina, supra.
In response to Indiana's contention that it was denied an exit
conference, HCFA contended that it had offered Indiana an opportunity
for an exit conference, "but state representatives decided it was
unnecessary." HCFA Brief, p. 12. Indiana did not specifically rebut
HCFA's assertion in its Reply Brief, but merely alluded to the fact that
no exit conference had taken place. See Indiana Reply Brief, p. 6. We
therefore cannot find that the State was denied its opportunity. Even
if the State had been denied an exit conference, that fact alone does
not relieve a state of the burden of demonstrating its compliance with
applicable requirements during proceedings before this Board. See
Michigan Department of Social Services, Decision No. 518, February 29,
1984; New York State Department of Social Services, Decision No. 531,
April 23, 1984; Oklahoma Department of Human Services, Decision No.
672, July 10, 1985.
Accordingly, based on the foregoing, we uphold HCFA's findings relating
to Lake County Convalescent Home and Cardinal Health Care Center.
Based on the analysis above, we uphold the disallowance in an amount to
be recalculated by HCFA consistent with this decision. /1/ The Deficit
Reduction Act of 1984 (DEFRA), Public Law 98-369, July 18, 1984,
eliminated the provisions at section 1903(g) of the Act requiring a
state's showing to include evidence of certification, recertification
and plans of care. See generally, Pub. L. 98-369, section 2363(a) (2).
In an opinion titled Effect of DEFRA Amendments on Utilization Control
Disallowances, Decision No. 655, June 7, 1985, the Board concluded that
no disallowance could be taken for the quarter beginning July 1, 1984
(and subsequent quarters) based on the failure to make the proper
certification showing. Indiana was one of eight appellant-states who,
along with HCFA, submitted briefing on the effect of DEFRA on
utilization control disallowances. /2/ HCFA had originally
included the March 31 quarter in the disallowance on the basis that the
review team's findings concerning level of care were made on March 21.
However, in response to questions from the Board, HCFA withdrew that
quarter from the disallowance, recognizing that the findings regarding
the patients at issue did not become final until May 1, 1984, after the
close of the quarter. HCFA Response, July 14, 1986, pp. 10-11.
/3/ Decision No. 525 was the second in a series of three decisions
involving the Wisconsin Department of Health and Social Services. See
also Decision No. 482, November 30, 1983; and Decision No. 547, June 27,
1984. In general, the issue in all three cases was the propriety of
Medicaid facilities retaining patients certified for levels of care
other than that which the facilities themselves were certified to
provide. (Intermediate care patients in SNFs and skilled care patients
in ICFs.) The Board's decisions in those three cases were upheld by the
U.S. Court of Appeals in State of Wisconsin, Department of Health and
Social Services v. Bowen, No. 85-1207 (7th Cir., July 21, 1986).
/4/ A state's showing may still be found to be satisfactory, however, if
it meets the requirements of the exception provided by section
1903(g)(4)(B) and 42 CFR 456.653. The State has never here argued that
it could qualify under the exception. /5/ HCFA initially
determined that the State had failed to review a total of seven patients
at the two facilities. However, after reviewing documentation submitted
by the State during the course of this appeal, HCFA revised its findings
so that we are now concerned with one patient at each facility. /6/
Both patients' medical review records indicate that they were "not
seen." While the patient at Cardinal Health Care Center apparently had
an eye doctor appointment at the time of her review on October 11
(Indiana Ex. H), the State presented no explanation why she could not
have been seen either before or after her appointment on October 11 or
indeed on another day of the facility-wide review, which lasted from
October 10-12. The patient at Lake County was one of four patients in
the facility originally cited by the Agency as not having been seen who
attended cerebral palsy school. Indiana Ex. B. The State submitted
additional documentation during the course of Board proceedings which
the Agency accepted as demonstrating that three of the patients were in
fact observed in spite of the "not seen" notation on their records.
HCFA Brief, pp. 11-12; HCFA Exs. B and C. No additional evidence,
however, was submitted for the remaining patient and the State presented
no explanation why this patient could not have been seen, particularly
when the other three patients attending the school were personally
observed during the facility-wide review from October 18-20.