West Virginia Department of Human Services, DAB No. 956 (1988)


Department of Health and Human Services

SUBJECT:  West Virginia Department  of Human Services

Docket Nos. 87-64 and 87-126
Decision No. 956

DATE: May 19, 1988


The West Virginia Department of Human Services (State or DHS) appealed
two disallowances by the Health Care Financing Administration (Agency or
HCFA) of a total of $60,459,469 in federal funding claimed under Title
XIX (Medicaid) of the Social Security Act.  HCFA had conducted a review
of DHS' use of "donated funds" as the State's share of Medicaid
expenditures.  HCFA determined that funds contributed to DHS from West
Virginia hospitals participating in the Medicaid program could not
qualify as the State's share of financial participation under standards
set forth in 42 C.F.R. 433.45.  HCFA concluded that the State had never
contributed its share of funding ($22,829,509) for program expenditures
totalling approximately $83,000,000, and disallowed the total amount of
federal funding that was made available for those expenditures,

For the reasons described below, we uphold the Agency's finding that the
funds received from the hospitals were not "donated funds" as required
by the regulation, and therefore do not qualify as the State's share.
We conclude that the funds were not "donated" because the facts
surrounding their transfer were not consistent with the commonly
accepted meaning of the term "donation" and because the State's program
contained abusive and unauthorized practices that were inconsistent with
the purpose of the regulation.

Since the transferred funds here do not qualify as a donation but
clearly can be viewed as a discount in claims from the hospitals for
services previously rendered, we find that they must be deducted from
the State's program expenditures as an "applicable credit." Under the
applicable credit regulation, the fund transfers from the hospitals are
viewed as reducing overall program costs for the hospital services
involved and the federal and state shares for these costs are reduced
proportionally.  Under the facts here, the overall costs of the
services, as reduced by the fund transfers, would be $60,459,469.  The
federal share would be $43,887,528 and the state share would be
$16,571,941.  Since the Agency has already paid the entire amount of
$60,459,469 in costs, it is entitled to be repaid $16,571,941.
Accordingly we uphold $16,571,941 of the disallowance and reverse the

The Board had previously issued a draft decision in this appeal in which
it proposed to find that the funds met the standards of 42 C.F.R.
433.45.  The draft decision, as did the parties in their initial
briefing, focused on whether the funds came under the "administrative
control" of the State as required by section 433.45(a)(2), and whether
funds from proprietary hospitals met the requirements of section
433.45(a)(3).  The Agency in its comments on the draft decision argued
that the State failed to meet the threshold criterion of section 433.45
that funds must be "donated." Agency Comments on Draft Decision, p. 3.
The Agency asked the Board to find that the facts surrounding the
transfers prevented them from qualifying as bona fide donations and
requested an evidentiary hearing on factual issues.  Although the State
argued that a hearing was not necessary, it did not object to the
Agency's request.  The hearing was held on March 1 and 2, 1988.  During
the hearing, several critical aspects concerning the State's donation
program were clarified.  Newly developed facts, not available to us when
we developed the draft decision, convincingly support the Agency's
position and compel us to conclude that our preliminary analysis must be
modified.  Among those critical facts are the following:

     o The State unquestionably provided preferential treatment for
     hospitals participating in its program.  Contrary to allegations
     made repeatedly by the State in submissions preceding the hearing,
     there were no valid explanations for payment irregularities.  The
     hearing testimony demonstrated that the State paid only
     participating hospitals in the payment runs following the fund
     transfers.  Even hospitals that were late in making their fund
     transfers did not receive reimbursement until they made a transfer.

     o The State's increase in its interim reimbursement rate to 95% did
     not benefit nonparticipating hospitals since the State
     intentionally did not make payments to them while the increase was
     in effect.

     o The State did not consider individual cost histories of
     providers, as required, when it increased the interim rate to 95%.
     The State's inflated interim payments were used as a means of
     inducing fund transfers and subjected the program to the
     possibility of substantial overpayments.

     o Probably a majority of the hospitals that made fund transfers
     hoped to recoup the transfers in some form or other by claiming the
     transfers as expense items on their cost reports.  This is clearly
     inconsistent with a donative intent and, indeed, is inconsistent
     with viewing the transfer as the State funding share.

     o Contrary to its usual procedures, the State did not process the
     $83 million in claims payments through its Medicaid Management
     Information System (MMIS), nor did it provide the hospitals with
     payment vouchers that corresponded to the amount of the check being
     mailed to them.  In many instances, the State inexplicably paid
     more than 100% of the amount of the claims purportedly covered by a
     particular payment run.  The State's actions caused considerable
     confusion concerning which claims were actually being paid and
     considerably increased the administrative efforts necessary to
     trace whether the payments made were proper.  In some instances,
     the State apparently paid at the higher interim rate claims that
     had already been settled at a lower rate.

Factual Background

During the early fall of 1986, the State had a backlog of approximately
$44 million in unpaid claims filed by West Virginia hospitals for
services the hospitals had rendered to Medicaid beneficiaries.  (By the
end of January 1987, the pending claims had increased to $83 million.)
The backlog existed because the State had insufficient funds to pay its
share of the claims, and without State funds the State was unable to
draw down federal funding for these claims.2/

In October 1986, the Governor of West Virginia held a meeting with the
West Virginia Hospital Association (WVHA).  HCFA Exhibit (Ex.) 7.  The
Governor proposed that each WVHA member hospital could make a
contribution to West Virginia's Indigent Care Fund to help reduce the
backlog of unpaid hospital claims.3/ At approximately the same time,
discussions and meetings occurred between DHS and HCFA personnel on the
Governor's proposal.  In September 1986, Phillip A. Lynch, Assistant
Director of the State Medicaid agency, telephoned Ted Gallagher, of the
regional HCFA financial staff, and discussed regulations governing the
use of voluntary donations in the West Virginia Medicaid program.
Agency brief, p. 3; State brief, p. 8.  HCFA regional staff and State
representatives met on November 18, 1986, to discuss various Medicaid
issues, including hospital donations.  Agency brief, p. 3; State brief,
p. 10.  HCFA representatives advised the State that the only Agency
regulation applicable to the State's use of funds derived through the
proposed contribution program was 42 C.F.R.  433.45.  However, they also
indicated that they were unsure of the meaning of certain sections of
the regulation.  At the conclusion of the November 18, 1986 meeting, the
HCFA regional representatives indicated that they would take steps to
have the federal matching funds requested by the State as a result of
its hospital program placed in the State's account.4/

While the discussions were proceeding, the hospitals began sending funds
to the Indigent Care Fund on November 24 and 25, 1986.  The amounts of
the hospitals' transfers were determined by WVHA, possibly in
conjunction with the State.5/ The President of WVHA confirmed that the
amounts of the November contributions were related to "legislatively
mandated hospitals assessments which occurred in late September, 1986."
State Ex. AA.  Each hospital's donation amount in fact did equal the
amount of the October 1, 1986 check the hospital received following the
1986 assessment.  The hospital contributions made on December 22, 1986
and January 12, 1987 "were based on each hospital's level of outstanding
net Medicaid receivables on those respective dates." Id.6/

Following each fund transfer from the hospitals (which took place on or
about November 24, 25, December 8, 22, and January 12), the State made
"payment runs" within one or two days of receiving a transfer.  During
each payment run, it implemented across-the-board increases in its
interim rates for the hospitals.  Under the State's Medicaid program,
hospitals are reimbursed initially at an interim rate, and only receive
final reimbursement after a final cost settlement.  Prior to the
donation program, the interim rates for hospitals were determined
individually for each hospital by looking at how closely a hospital's
previous claims approximated its actual costs during a given period.
Tr. I-184.  The interim rates varied in a range between 60% and 90%.
The State increased the interim rate for every hospital to 95% for three
payment runs.  State letter to the Board dated March 16, 1988, p. 2.
This increase applied to checks dated November 24 and 25, 1986 and was
applied a third time to the payment run producing checks dated December
9, 1986.  A fourth payment run paid hospitals at their previously
established rate plus $500.  The percentage increases from the
additional $500, therefore, varied from provider to provider.  The fifth
and final payment run during the program paid the providers at a 5%
higher rate than their previously established rate.  Id.

By the end of December 1986, 62 hospitals in West Virginia had
contributed $17,394,311 to the Indigent Care Fund, which was used to
generate $46,065,415 in federal funding.  In January 1987, an additional
$5,435,198 was contributed to the fund, which was used to generate an
additional $14,394,054 in federal funding.  The practical effect of the
program was that it enabled the State to generate its share to reimburse
its outstanding Medicaid claims and to receive matching federal funds
for the claims.  Almost immediately after receiving contributions from
the hospitals, the State was in a position to pay its backlogged claims
at an increased interim rate with hospital and federal funds.

HCFA issued two separate disallowances, on April 2, 1987 and July 6,
1987, in the total amount of $60,459,469 in federal funding, finding
that the hospital contributions failed to "meet the regulatory
definition of donated funds which may constitute the state share
eligible for federal matching."

Applicable Regulation

The Medicaid program was designed as a cooperative federal-state
venture.  Each state participating in the program shares in its costs
along with the federal government.  The federal contribution is an
amount equal to a state's federal medical assistance percentage of the
total amount expended by the state as medical assistance under the state
Medicaid plan.  Section 1903(a) (1).  In West Virginia the federal
percentage is 72.59 percent.  The State's share of financial
participation, therefore, is 27.41 percent.

The only Medicaid regulation that contains the conditions for
determining which funds may qualify as a state's share of Medicaid
expenditures is 42 C.F.R. 433.45.  This regulation provides:

 Sources of State share of financial participation.

     (a) Public funds as the State's share.  (1) Public funds may be
     considered as the State's share in claiming FFP [federal financial
     participation] if they meet the conditions specified in paragraphs
     (a)(2) and (3) of this section.

     (2) The public funds are appropriated directly to the State or
     local Medicaid agency, or transferred from other public agencies
     (including Indian tribes) to the State or local agency and under
     its administrative control, or certified by the contributing public
     agency as representing expenditures eligible for FFP under this

     (3) The public funds are not Federal funds, or are Federal funds
     authorized by Federal law to be used to match other Federal funds.

     (b) Private donated funds as the State's share.  (1) Funds donated
     from private sources may be considered as the State's share in
     claiming FFP only if they meet the conditions specified in
     paragraphs (b)(2) and (3) of this section.

     (2) The private funds are transferred to the State or local
     Medicaid agency and are under its administrative control.

     (3) The private funds do not revert to the donor's facility or use
     unless the donor is a non-profit organization, and the Medicaid
     agency, of its own volition, decides to use the donor's facility.

This regulation was promulgated on November 12, 1985 and replaced 42
C.F.R. 432.60, which authorized the use of donated funds as a state's
Medicaid share for training expenditures.  The new regulation made two
significant changes.  It expanded the use of donated funds as a state's
share to cover all types of Medicaid expenditures and it eliminated the
old condition on private donations that the funds be donated "without
any restriction which would require their use for. . .particular
individuals or at particular facilities or institutions."

In the preamble to section 433.45, HCFA explained its reasons for
expanding the allowability of donated funds as a state's share for all
Medicaid expenditures.  Noting that states' budgets had become more
austere, HCFA declared that "State legislatures have looked increasingly
to alternative sources for funding a larger portion of the Medicaid
program." 50 Fed. Reg. 46652, 46657 (November 12, 1985).  HCFA stated
that its previous regulation, section 432.60, had placed an
administrative burden on states in terms of cost allocation. Id.
Section 433.45, permitting donations to be used for all Medicaid
expenditures, would allow the states more flexibility in administering
their Medicaid programs and would reduce record keeping. Id.

HCFA also stated that in formulating the previous version of the
regulation, it had been concerned about potential for abuse.  HCFA
specifically wanted to prevent donations that could be conditioned on
some benefit to the donor.  For example, HCFA was concerned that a
"kickback" situation could result from private donations made by a
proprietary organization.  HCFA noted, however, that up until then:

     Experience has shown no abuse of public and private funds through
     conditional donations or kickbacks.  Generally donated funds are
     commingled with all other Medicaid funds under the State agency's
     administrative control.  Id.

Furthermore, in response to one commenter's concern that opportunities
for abuse would result under the amended regulations, HCFA stated that
it would be able to identify any major violations of the regulation
through the HCFA financial management review.

We conclude that the State's "donation" program does not meet the
foregoing regulatory standards because the facts surrounding the fund
transfers are plainly inconsistent with the commonly accepted definition
of "donation" and because, contrary to the expressed purpose of the
regulations, the fund transfers result from abusive or unauthorized
practices on the part of the State.

The transfers were not "donated" under the commonly accepted meaning of
the term.

The case law meaning, and indeed, the commonly accepted dictionary
meaning of a "donation" is a voluntary gift without payment or
consideration from the party receiving the gift.7/ Here, however, the
hospital fund transfers were induced or coerced by the State, and thus
lacked the requisite voluntariness of a bona fide donation.

The State has a unique relationship with the provider community in the
Medicaid program.  As the program administrator, it is responsible for
many aspects of program implementation, including the formulation of
interim rates and other critical program policies relating to claims
reimbursement.  Here, not only were the hospitals vulnerable because
they had to deal with the State on ongoing matters relating to program
reimbursement, but also because the State owed them approximately $83
million in pending claims.  The State's unauthorized modification of key
features of its reimbursement practices, under these circumstances,
eliminated the voluntariness that is implicit in the term "donation."8/



The record indicates that the State made it clear from the outset that
hospitals participating in the "donation" program would receive
preferential treatment in claims reimbursement.  Agency Ex. 21.  And, in
fact, the State offered testimony at the hearing that it intentionally
did not reimburse any non-participating hospitals in the payment runs
following the donations.9/ The State's payment records also demonstrate
that hospitals that did not participate initially in the State's
program, such as Ohio Valley, did not receive any claims reimbursement
until they had made their first fund transfer.  Ohio Valley had
$1,250,244 in claims ready for payment as of November 15, 1986.  During
the November payment runs, at least 58 hospitals that made fund
transfers received payments on their claims when Ohio Valley did not.
Tr. II-298; Agency Hearing Ex. 1.  Obviously this hospital was under
considerable pressure to contribute by December 8, the next projected
round of "donations." As it turned out, Ohio Valley contributed $422,459
on December 8, reaping the benefit of the last payment run in which the
State paid hospitals at the 95% interim rate.

The State's increase in interim rates, which was not authorized by the
State plan, also had the effect of coercing or inducing hospitals to
participate.  The State increased the interim rates to 95% during the
first three payment runs and then implemented smaller increases for
subsequent runs.  The hospitals were aware that after they made their
fund transfers, they were to receive immediate reimbursement for pending
claims and that this reimbursement was to be made at a higher interim
rate than their existing rate.10/ It stands to reason that the increase
in the interim rate was an inducement in their decision to participate
in the State's donation program.  This rate increase provided immediate
reimbursement for a significant portion of a hospital's transfer.ll/
While the interim rate increase would not permanently compensate the
hospital for its fund transfer, a hospital would likely retain the
benefits of the interim rate increase until final cost settlement for
particular service claims, which typically occurred approximately two or
three years after services were rendered.  Moreover, probably a majority
of the hospitals made claims for their transfers as an allowable cost on
their cost reports.  Tr. I-217, I-214; I-104.  While such a claim would
clearly be unallowable, the possibility existed that the claim might be
overlooked and paid.  If that happened, the hospital would not only have
the benefit of the increased interim rate, but also would receive
compensation for its fund transfer as well.

Aside from testimony from one hospital official at the hearing, the
State presented no direct evidence concerning what motivated hospitals
to participate.  The sole hospital official (representing Wheeling
Hospital, which contributed $204,000) testified that he did not feel
intimidated or coerced into participating.  Tr. I-96.  On the other
hand, his favorable reactions to the program appeared to be influenced
by the very features that were designed to induce providers to
participate, such as the 95% interim rates and the very rapid
"turnaround" on pending claims.  As he stated, "You have got to bear in
mind, we were so desperate to receive Medicaid funds that we felt it was
a good investment." Tr. I-lOl.  It is also noteworthy that very few of
the hospitals expressly

identified their transfers as "donations" on documents accompanying
their transfers and elsewhere.  Instead, they referred to the transfers
as "loans," "rollovers," "Medicaid program advances," "voluntary
assessments," "deposits," "payments," and "remittances." A State
official testified that probably a majority of the participating
hospitals treated the transfers as an allowable expense on their cost
reports, which is inconsistent with viewing the transfers as a donation
or as a source of the State share for program funding.12/

Thus, we find that the State's program effectively combined elements
that could be expected either to coerce or induce hospitals to
participate in the program, and the transfers therefore can not
reasonably be viewed as falling within the commonly accepted definition
of a "donation." All of the Medicaid hospitals in the State had aging
claims for services rendered up to two years previously.  The record
suggests, moreover, that many of the hospitals were in such straitened
financial circumstances that they had to cash in bonds or take out loans
in order to make their fund transfers.  Tr. I-45; see also Agency Ex.
19.  The threat of not receiving immediate reimbursement of pending
claims at higher interim rates and instead having to endure further,
possibly lengthy, delays in receiving reimbursement at previous interim
rates could be expected to have a coercive effect on the hospitals, and
is inconsistent with the voluntary intent required for a donation.

The State's program contained abusive and unauthorized practices that
were inconsistent with the purpose of the regulation.

Although the Agency liberalized its regulations in 1985 by deleting the
restriction on conditional donations, it reaffirmed the position,
consistently taken in previous versions, that the regulations did not
authorize "abusive" donations.  Indeed, the Agency indicated that it
would be able to identify major violations of the regulations through
financial management reviews.  50 F.R. 46661 (November 12, 1985).  We
find that the State's program here was abusive in its treatment of
federal funding and in its treatment of hospital reimbursement.  Some of
the abusive elements overlap with factors already considered in our
discussion of a donative intent.

 o The State's reimbursement procedures did not authorize any
 form of preferential treatment in the payment of pending claims.
 The State described its system as being basically a first
 in--first out or FIFO system.  See Tamplin affidavit, State Ex.
 M; State comments on Board draft decision, p. 14; State Ex. U.
 The State at the hearing, however, admitted that it withheld
 payments to any hospital that did not participate in its program
 regardless of whether that hospital's claims had priority under
 its FIFO system.  Tr. I-137.  This unauthorized preference was
 clearly an abuse of the State's own procedures.  The State's
 preferential treatment was not authorized by the statute,
 regulations or its Medicaid State plan.

 o The State argued nevertheless that preferential treatment was
 authorized by 42 C.F.R. 433.45 since the regulation does not
 preclude "conditional" donations and the preferential treatment
 was given in response to conditions imposed by the hospitals.
 The State, however, has not established through credible
 evidence that any of the fund transfers at issue here were made
 with the condition that subsequent reimbursement of backlogged
 claims would only be provided to participating hospitals.  Even
 if the State were able to establish that this particular
 condition applied in each case, we would still conclude that
 such a conditional transfer was not authorized by the
 regulation.  While the regulation was revised in 1985 to delete
 the prohibition on conditions as to use of donated funds, the
 Agency did not thereby authorize or sanction donations with
 abusive conditions.

In revising the regulations, the Agency indicated that experience had
not shown that conditional donations were per se abusive, and that
therefore the requirement on conditional donations could be deleted.
The preamble, however, clearly did not disavow the Agency's abiding
concern about abusive donations nor suggest that donations with abusive
conditions would now be authorized.  We find that conditioning a
donation on preferential payment for long pending program claims would,
in fact, be an abusive condition.  At the time that the hospitals
provided the services in question, they reasonably expected
reimbursement without any form of preference or favoritism.  Any
after-the-fact change in reimbursement procedures designed to show
preference to donating providers would be abusive in our view.13/

 o The West Virginia State plan provides that interim payments be
 made on a percentage of charge or per diem rate, reconciled to
 cost using the individual provider's cost reports.  Agency Ex.
 14.  The existing rates applicable to hospitals had ranged from
 60% to 90%.  The State witness in charge of developing interim
 rates testified that interim rates are set on an individual
 basis by looking at each hospital's ratio of costs to charges as
 reflected in cost reports.  Tr. I-184.  In the three payment
 runs that followed fund transfers in November, the State
 authorized an across-the-board increase to 95% for every claim
 covered in the payment run, regardless of the hospital making
 the claim and regardless of the time period covered by the
 claim.  The State has never provided the Board with any
 demonstration of how cost histories of individual providers
 could justify an across-the-board increase in this manner.  The
 official that had the responsibility for making the decision
 testified that he was concerned about the financial plight of
 hospitals caused by declining revenues, declining patient loads
 and other factors.  Tr. I-48.  The State plan and indeed its
 practice, however, requires the State to reconcile any change of
 rate to individual provider cost reports.  Here, that clearly
 was not done.  Tr. II-394; I-188.  Indeed, the State official
 who had the responsibility to calculate the rate for each
 hospital testified at the hearing that he was not aware of the
 interim rate changes until February or March of 1987.  Tr.
 I-193.  While the State testified that it may have lowered all
 interim rates by a set percentage amount, such as 3%, in the
 past, such a change was arguably still consistent with its plan
 requirements since the 3% was subtracted from the existing rate
 that had been reconciled to a hospital's cost experience.  Tr.
 I-195, 196.  In the instant case, every hospital received a 95%
 rate, and this 95% rate obviously did not bear any particular
 relationship to the hospital's existing rate.14/

 o The unauthorized rate increases served in effect as an
 interest free loan to the provider (by means of federal funding)
 until the claims were resolved through final cost settlement.
 While the providers benefited from having the funding during
 this period, the Agency, as the primary, if not the only,
 funding source, effectively lost the use of the funds for the
 same time period.  Since time does equal money, this represented
 a considerable loss to the Medicaid program.  Moreover, the
 State's actions greatly increased the possibility of
 overpayments, which also weaken the program.  Tr. I-73.  (In
 this regard, states customarily employ protracted repayment
 schedules for financially distressed providers which could also
 increase the Medicaid program's recovery cost.  Tr. II-336.) The
 interim rate methodology the State was required to use served to
 prevent overpayments by basing the interim rate on the
 provider's prior cost experience as compared to its charges.
 Obviously, when the State implemented its across-the-board
 increase to 95%, these considerations were disregarded.  The
 State attempted to justify what it did by suggesting that the
 interim rate change covered only a very short period of time,
 and that under the State's cost settlement experience following
 the change, the State has owed money to providers, not
 vice-versa.  The State's 95% interim rate change, however,
 involved over $40 million in backlogged claims spanning two
 years.  The fact that it was implemented during a short time
 period cannot diminish its substantial impact nor lessen the
 possibility of overpayments.  Moreover, while certain initial
 settlements may not have resulted in overpayments (see State
 letter to the Board dated March 16, 1988), the point remains
 that at the time the change was made, the State was needlessly
 subjecting the program to the possibility of substantial
 overpayments by not following the usual and required
 procedures.15/ In fact, it appears that the State's higher
 interim rate may have caused it to overpay certain hospitals for
 claims stemming from 1984 because the claims had already been
 settled and were based on a final rate that was not subject to
 further modification.

 o The State's decision to provide virtually instantaneous
 payment of claims following the fund transfers, and its decision
 to make three different across-the-board changes in the interim
 rates during a two month period, made it impossible for the
 State to provide accurate remittance advices with its checks or
 even to process its payments through its MMIS system before
 making them.  The State's actions necessitated considerable
 administrative efforts in tracing the payments against existing
 claims and caused confusion in the provider community.  Tr.
 I-194, I-97, I-112.  According to the Agency, it also caused the
 State to pay contributing hospitals an amount higher than the
 actual claims included in the payment runs.  The State, however,
 provided a series of exhibits, Exhibits FF and GG, to refute
 that it provided to any hospital more than 100% of the
 provider's total outstanding clean claims.  See State's Letter
 to the Board dated March 16, 1988.  Nevertheless, these exhibits
 do not conclusively refute the Agency's proposition that the
 State paid more than 100% on claims actually covered by any
 given payment run.  See Agency letter to the Board dated April
 4, 1988.  Thus, it is clear that the State's program needlessly
 placed federal funding in jeopardy, caused long lasting
 confusion concerning the precise amount of claims that were paid
 and considerably increased the administrative efforts necessary
 to trace whether payments made were proper.

Thus, we conclude that the State's donation scheme contained substantial
abuses from the State's failure to follow program rules and practices
and that these abuses were clearly inconsistent with a bona fide
donation and with the intent of the regulations.

The Agency's application of its regulation here furthers the overall
purposes of the Medicaid program.

The Agency's application of its regulation to require a voluntary act
that is not induced by abusive or unauthorized practices furthers the
purposes of the Medicaid program.  The State here, by its donation
program, effectively substituted the Medicaid service providers for
itself as the Federal Government's partner in funding the Medicaid
program.  (The fund transfers here amounted to a very substantial
percentage of the State's annual Medicaid budget.) There is clearly no
indication from either the language of the regulation or the preamble
that the donation regulation was intended to bring about a change in a
state's Medicaid program of this magnitude.16/

Prior donations considered by the Board involved only experimental
projects or donations from educational institutions that provided
training to State officials.  See our discussion on prior Board cases

The Agency, moreover, may rightfully be concerned that the State Agency
could be perpetually in the driver's seat through a "donation" program
of this type in its ability to extract concessions from the provider
community at large and that many other states might attempt to implement
similar programs to meet their particular fiscal needs.  Moreover, the
statute, regulations and State plan all contemplate that the providers
will receive full reimbursement for the services they provide, not
discounted reimbursement.  See. e.g., section 1902 (a)(13)(A).  Any
program that has the effect of inducing a discount for pending claims
would violate the intent of these provisions.  Finally, the many abusive
or unauthorized features of the State's scheme previously identified
were all contrary to broader program purposes, such as fiscal
accountability and equal treatment of providers in program dealings.

The Agency's policy was consistent with previous Board decisions on

The Board previously considered three cases involving donations in
Department programs.17/ Although the Board upheld the use of donations
as the state share in the previous cases, the instant case is
distinguishable on several critical grounds.  In all three previous
cases, the donors had an actual choice whether to participate or not and
thus, were not effectively coerced or induced into making a donation so
that they could be paid what they were already entitled to be paid under
the program.  Here, the hospitals were coerced or induced to make
transfers under the cloud of $83 million in pending claims.  Thus, the
instant case, in contrast with the earlier cases, lacks the element of
voluntariness that is inherent in the concept of a donation.  Moreover,
while the previous cases involved elements of benefit for both the
donating institutions and the states concerned, they did not involve
practices on the part of the state Medicaid agency that were clearly
unauthorized and abusive under the program rules.  Finally, the Texas
case, the only previous Medicaid case, can be specifically distinguished
on the grounds that the program involved was experimental and small in
scale, the Agency had given informal approval for the program during its
early stages and the preferential treatment afforded the donating
hospitals was negligible, if any.  (See pages 9-10 of the Texas

Thus, contrary to the State,s arguments, our prior decisions do not
support the State's position here.

The State had notice of the Agency's policy and, even if it did not, the
policy can be retroactively applied.

Having concluded that the Agency's policy is consistent with the
commonly accepted meaning of the term "donated funds" in the regulations
and with the expressed purpose of the regulations of sanctioning
donations that are not induced by abusive or unauthorized practices, we
address the State's arguments that it lacked notice of the Agency's
policy and that the policy may not be retroactively applied.

As is evident from our preceding analysis, we find that the State did
have notice of the Agency's policy from the regulation.  Our analysis is
based on the regulatory language and its purpose as expressed in the
preamble.  The State argued that the Agency's delay in notifying the
State about the effect of the regulation demonstrated the lack of an
actual policy.  On the contrary, we find that any delay on the Agency's
part can be directly attributed to the State's delay in disclosing all
relevant aspects of its program.  Many facts concerning the State's
program were not fully revealed until the hearing held in this appeal on
March 1 and 2, 1988.  As late as December 23, 1987, the State, in its
comments on the Board's draft decision, responded to the Agency's
charges of preferential payment by alleging that the Agency had
misinterpreted the State's payment system and claims data supplied by
the State.  These allegations were supported, in part, by affidavits by
the Division Director of the Division of Medical Claims Processing, DHS.
State Exs. M and U.  Yet at the hearing on March 1, this official
testified that he was aware all along that nonparticipating hospitals
would not be paid at the same time as participating hospitals, and that
the payment runs following the fund transfers were for participating
hospitals only.  Tr. I-137.  Other facts revealed for the first time at
the hearing included the State's failure during its program to process
its payments through its MMIS system and provide accurate remittance
advices consistent with the amount of the check to the hospitals.  Even
facts revealed to the Agency prior to the hearing, such as the State's
95% interim rate increase, were revealed after the completion of the
donation program itself.18/

Moreover, the record demonstrates that the Agency never gave the State
any form of approval for its program.  (Binding approval would not have
been possible in any event due to the State's failure to disclose all
relevant facts concerning the program in discussions with the Agency
that preceded the State's program.) There is no basis in Title XIX or in
the Medicaid regulations to conclude that the Agency has approved the
allowability of federal funds merely because it permits those funds to
be drawn down on the State's declaration that it has available to it the
matching State share of funding.  As the Agency argued, even at the
point that the Agency had determined that the funds in question here
should be disallowed, the Agency was precluded by a federal court from
withholding any subsequent funding based on the Agency's view of the
invalidity of the State's program.  See Agency letter to the Board dated
March 8, 1988 and accompanying court documents.

Finally, even if the Agency was applying a retroactive interpretation of
its regulation, we would still find that case law does not preclude such
an interpretation under the circumstances here.  See, e.g., New York
State Department of Social Services v. Bowen, 835 F.2d 360 (D.C.  Cir.
1987), where the court permitted retroactive application of a policy the
court found was first established after the period covered by the
disallowance.  The Agency here has a compelling interest in preventing a
"donation" program of this type in which the providers were effectively
substituted for the State as the Federal Government's partner in the
funding of the Medicaid program.  This interest would outweigh the
State's interest in receiving prior notice.  Moreover, the Agency should
not be placed in the position of having to accept a donation program as
qualifying merely because the regulations did not identify ahead of time
every specific type of abusive practice that might be employed by a
provider or a state.  The preamble clearly indicated that the Agency was
concerned about the potential for abuse even if experience under the
previously existing version had generally suggested the absence of
abuse.  Finally, if the State needed more explicit notice of the
Agency's policy, the State should have been forthright in revealing all
facts concerning its program and should have delayed implementation
until the federal program official with the authority to do so had given
specific approval.

The applicable credit regulations apply here.

Our prior Texas decision recognized that if transferred funds did not
qualify as a state's matching share, they potentially would be subject
to the applicable credit provisions in the cost principles (OMB Circular
A-87, Att.  A, sections C.3.a. and C.l.g.) made applicable in the
Medicaid program by 45 C.F.R. 74.171(a).  DGAB No. 381 Amended, p. 4.

Applicable credits are defined as:

     receipts or reduction of expenditure-type transactions which offset
     or reduce expense items allocable to grants as direct . . . costs.
     Examples of such transactions are:  purchase discounts; rebates or
     allowances . . . . (Section C.3.a.)

Section C.l.g. of Att. A, OMB (Office of Management and Budget) Circular
A-87 requires that for a cost to be allowable under a grant program, it
must "be net of all applicable credits."

For many of the same reasons we concluded that the transferred funds
here could not qualify as donations, we conclude that they do qualify as
an "applicable credit." In exchange for immediate reimbursement on $83
million in pending claims, along with several other inducements
including increased interim rates, the hospitals effectively discounted
their pending claims by the amount of their transferred funds.  The
transfers were definitely made in contemplation of receiving payment on
specific pending claims.  (As we explained in our Background Section,
the amount of the transfers in some payment rounds equalled the State
percentage share of the claims (27.41 percent); in other payment rounds,
the providers used a formula based on State payments made following a
prior year's assessment.) This form of discount is in our view clearly
within the scope of the transactions contemplated by the applicable
credit regulations.  The State here through its "donation" program
effectively engineered this discount in its Medicaid claims.  Although
the State ostensibly acted to generate its own funding share and thus to
draw down the federal funding to pay the providers, the net effect of
its action was to decrease the overall cost to the program for the
providers' services.  The $83 million in claims from the providers was
reduced by their transfers of $22,829,509 to $60,459,469.  The Federal
Government is accordingly entitled to a proportional reduction in its
funding share for these services.  For this level of expenditures, the
federal share (72.59 percent) is $43,887,528 and the State share (27.41
percent) is $16,571,941.  Since the Agency has up to this point paid the
full $60,459,469, it is entitled to be repaid $16,571,941.

In a letter to the Board dated March 16, 1988, the Agency stated that it
"would not object if the Board applied the applicable credit or discount
theory to create an equitable remedy for resolution of this appeal." The
Agency noted, however, that the Board had not previously considered the
applicable credit provisions in situations involving abuse and that the
Agency did not wish the application of these provisions "to be construed
. . . as an expedient, after-the-fact cure-all for systemic program
failures, such as a missing state share." While the Agency concerns are
indeed pertinent, and while the Agency seemed to view the applicable
credit provisions as an "equitable remedy" for resolution of the appeal,
we think there is a sound legal basis for applying these provisions in
instances where provider transfers have not qualified as the state share
and instead function as discounts on claims for services rendered under
the program.


Based on the foregoing analysis, we uphold $16,571,941 of the
disallowance, and reverse the remainder.  We find that the hospital fund
transfers under the State's program do not qualify as "donated funds"
under the regulations and instead are "applicable credits" which must be
deducted from the overall costs claimed for the hospital services in

 ________________________________ Norval D. (John) Settle

 ________________________________ Alexander G. Teitz

 ________________________________ Donald F. Garrett Presiding
 Board Member

1/  The Agency in its letter to the Board dated March 16, 1988 indicated
that it would not object to a reversal of the remaining part of the
disallowance through the application of the applicable credit provisions
in this manner.

2/  With the submission of a HCFA-25 form, a state indicates the amount
of funds it has available as the state share.  HCFA then approves the
transmittal of matching federal funds.

3/  The West Virginia State legislature had established the Indigent
Care Fund as an account in the general treasury to be used to supplement
the general appropriation to the West Virginia Medicaid program.  The
Indigent Care Fund account was held under the name of the Health Care
Cost Review Authority (HCCRA), an autonomous division of the West
Virginia Department of Health that acts as West Virginia's health
planning and development agency.

4/  On December 15, 1986, HCFA requested further information from the
State concerning the operation of its program.  HCFA stated:

     We understand your problems and concerns regarding the necessity of
     raising sufficient state funding to match federal funding.
     However, our concerns revolve around the appropriateness of this
     procedure and its compliance with federal requirements.  In order
     for us to properly assess this area we asked [on November 18] that
     you provide us in writing an accurate description of these
     assessments and donations so that we could review it for compliance
     with the regulations.  I ask that this be provided by December 31,
     1986.  Agency Ex. 3, p. 1.

Although the State's response dated December 29, 1986 suggested that the
State had taken precautions to comply with the requirements of the
regulation, it did not provide any specific details about the program

5/      The Agency alleges that WHVA received the raw data used in
determining contribution amounts from the State Medicaid Agency and
questioned whether the State, rather than the WHVA, determined the
donation amounts.  The State conceded it had "ballpark" figures in mind.
Transcript (Tr.) I-86.

6/      The December 22, 1986 donation amounts correspond to amounts
listed on the DHS Accounts Payable file dated December 13, 1986, and the
January 12, 1987 donation amounts correspond to amounts listed on the
DHS Accounts Payable file dated January 3, 1987.  State Letter to the
Board dated March 16, 1988, p. 2.

7/ The description of "donation" in Corpus Juris Secundum is as follows:

     The term. . .has been defined as an act by which the owner of a
     thing voluntarily transfers the title and possession of the same
     from himself to another without any consideration; a gift. . . or
     voluntary alienation of property.  28 C.J.S.  Donation.

Virtually the same definition is contained in Black's Law Dictionary.
5th ed., 1979 and Webster's Third New International Dictionary, 1976.

8/   Cf. the federal regulations at 5 C.F.R. Part 950 cited by the
Agency at the hearing, which deal with combined federal campaign
donations.  These regulations specifically exclude attempts to solicit
contributions by offering inducements to employees or by exerting
pressure.  5 C.F.R. 950.107.

9/  The payment records themselves substantiate this conclusion.
Beckley Hospital had a backlog of claims totaling $142,752 on November
15.  It did not participate at all in the State's program.  Twenty-six
other providers that did participate, all of whom had a lower backlog
than Beckley, received payments on November 24 and 25.  Agency Hearing
Ex. 1.  Beckley only received reimbursement on pending claims at the end
of January 1987.  Tr. II-298; State letter to the Board dated March 16,
1988, p. 4.  There is no evidence in the record that during the pendency
of the program, Beckley received any assurance that its pending claims
would be paid.

10/     One hospital letter gives a complete outline of the whole plan,
with its conditions.  This is the letter from Jefferson Memorial
Hospital forwarding its "donation." Agency Ex. 17.  Although the State
claims no knowledge of receiving this letter, no evidence was offered to
show that the letter was not actually sent.  The hospital's
"understanding," from a telephone conversation originated by the head of
WVHA, was that the remittance check from the hospital was to be received
by the State by November 24, 1986.  By November 26, the State would
remit payment to the hospital of approximately the amount enclosed with
the letter, to be applied against existing Medicaid claims.  Within a
short period of time thereafter, the hospital was to be paid an
additional amount equal or exceeding twice the enclosed check, these
payments to be applied against Medicaid claims presently existing.  In
addition, the interim reimbursement rate would then be paid at 95% of
billed charges "rather than the 80% currently being paid until the
amount of the enclosed check is recouped." (Emphasis added.) The letter
went on to say that the Cost Report for the current fiscal year "will
not be adjusted to negate the benefit which the hospital obtains from
these transactions."

Also, in a letter to the HCCRA Chairman dated November 20, 1986 from the
Administrator of Princeton Memorial Hospital, the Administrator stated:

     It is our understanding that payments to Princeton Community
     Hospital will be increased to 95% of charges until such time as the
     difference between our present reimbursement rate and the 95%
     recoups the full amount of the deposit, that being $338,644.27.  It
     is further understood that when the hospital files its year-end
     settlement report (June 30, 1987), the Department of Human
     Resources auditors will not adjust our reimbursement rate back to
     the present level.  State Ex. D.

Although a HCCRA Board Member alleged that this letter was subsequently
withdrawn by the Administrator, it clearly demonstrates that an increase
in interim rates was under consideration at that time and that such an
increase was known to the hospital.

11/     Suppose a hospital had pending claims of $1 million and an
existing interim rate of 75%, and that the hospital made a fund transfer
of $270,000 based on the amount of the State share for its pending
claims.  If the hospital had been reimbursed at its existing interim
rate, it would have received $750,000 minus its transfer of $270,000,
netting only $480,000 on its $1 million in claims.  If, however, the
hospital had the benefit of the 95% interim rate, it would receive
$950,000 minus its transfer of $270,000, netting $680,000.  The $680,000
in this example is only $70,000 less than the interim payment the
hospital would have received without a donation program.

12/     In its closing statement at the hearing, the State argued that
the question of coercion was a "non-issue" since the State had
previously imposed an assessment against providers and an assessment was
more coercive than the fund transfers here.  Tr. II-403.  The validity
and effect of the assessment is not presently before the Board, however,
so we make no finding in that regard.  An assessment, moreover, is
clearly distinguishable from the transfers here in that it is raised by
the State legislature through its power to tax.  The regulations at
issue were specifically designed to address the effect of private
"donated funds" that are received by states under circumstances that are
distinct from a state's exercise of its power to raise revenues through
taxation.  We also find that the circumstances here are clearly
distinguishable from the frequent flyer programs sponsored by airlines
cited by the State because of the existence of the large backlog in
claims for services already rendered by providers at the time of the
fund transfers and because of the unauthorized and abusive practices
used by the State to induce the transfers.  See discussion in the next
section of this decision.

13/   The State argued nevertheless that the nonparticipating hospitals
were left in a more advantageous position since they ultimately would
receive full payment for their claims and since the State could pay them
more promptly from other funds.  While the non-participating hospitals
may ultimately be better off in this narrow sense, in the short term
they were denied the same prompt reimbursement of their claims as the
participating hospitals and the benefit of the 95% interim rate.  The
primary point, however, is that the preferential treatment served as an
inducement for the other hospitals to participate in the State's program
and that the nonparticipating hospitals were left with no guarantee or
assurance as to when their pending claims would be paid.

14/     The change was also irregular in that it applied only to claims
the State decided to pay during these three payment runs.  The increase
was not based on when the service was provided or when the claim was
presented or when it became "clean" for payment.  If, for example,
certain priority "clean" claims were not included in these payment runs
because the hospitals had not participated in the "donation" program and
the State decided not to pay them, the hospitals would not receive the
advantage of the 95% interim rate.

15/     The State argued that the amount of federal funding represented
by the interim rate increase was approximately $4.7 million and that if
the Board concluded that the change in rates was an abuse, only this
amount should be disallowed.  State letter to the Board dated March 24,
1988, p. 16, fn. 12; Tr. II-224.  The increase in rates is only one of
several features of the State program that lead us to conclude that the
funds transfers.at issue cannot be viewed as "donated funds." There is
no basis for singling out the interim rate increases and disallowing for
them alone.

16/     A recent report from the House Committee on the Budget to
accompany the Omnibus Budget Reconciliation Act of 1987 is relevant in
this regard.  The Omnibus Budget Reconciliation Act of 1987 would have
included statutory authorization for the use of donations as the state's
share in the Medicaid program.  In commenting on that provision (which
was deleted in the conference agreement), the Committee suggested that
the provision would serve to pay the state share for expansion of
Medicaid eligibility or services, or for the increased reimbursement to
disproportionate share hospitals.  The Committee noted, however, that it

     troubled by reports that one State, having exhausted its revenues
     and unable to meet legitimate claims already submitted for payment
     by its Medicaid program. induced one class of providers to "donate"
     funds which the State used to draw down Federal Medicaid matching
     funds which were in turn used to make payment on the claims that
     had already been submitted by those same providers.  These reports,
     if accurate, represent a clear abuse of the current regulations,
     and the Committee does not intend that its amendment legitimize
     such conduct. (Emphasis supplied.)

Agency Ex. 27.

17/   The only other Medicaid case considered by the Board was Texas
Dept. of Human Services, DGAB No. 381 - Amended (1986).  There,
hospitals agreed to contribute one-half of the salaries of state
eligibility workers in exchange for having the workers placed on site in
the hospital buildings.  The Board also previously considered whether
donations from educational institutions that provided training to state
agencies qualified as the state share under Title XX.  See Connecticut
Dept. of Human Resources, DGAB No. 406 (1983), and New Mexico Human
Services Dept., DGAB No. 382 (1983).

18/   The Agency learned of the interim rate increases through
conversations with the State in January 1987.  Tr. II-260.  The State
official responsible for computing the interim rates for individual
hospitals testified he did not learn of the changes until February or
March 1987.  An Agency official testified at the hearing that the Agency
has never been able to get any background information on the increase
from the State.  Tr. II-276.

The Board received a description of the effective dates of the increases
and the manner in which the increases were computed in response to a
specific request at the hearing.  See State's letter to the Board dated
March 16,