GAB Decision 467
Docket No. 83-121
September 30, 1983
Illinois Department of Public Aid;
Garrett, Donald; Settle, Norval Ford, Cecilia
The Illinois Department of Public Aid (Illinois, State) appealed a
$4,753,260 disallowance by the Health Care Financing Administration
(HCFA, Agency) of federal financial participation (FFP) claimed by the
State under Title XIX of the Social Security Act in reimbursement for
services provided by State owned and operated intermediate care
facilities for the mentally retarded (ICF/MRs) during the period July 1,
1977 to June 30, 1979. /1/
In calculating this disallowance, the auditors divided the total
allowable actual costs of operating each facility by the total number of
ICF/MR patient-days (both Medicaid and non-Medicaid). This resulted in
what the auditors described as a daily actual cost rate for each
facility. The auditors multiplied their daily cost rate by the number
of patient-days claimed under Title XIX on behalf of each facility, and
compared the results with the per diem charges claimed. The auditors
found that, overall, the State's claim exceeded its actual costs by
$10,213,284. /2/
Effective January 1, 1978, the State plan approved by HCFA provided
for the State to base its claims for reimbursement on a prospective
class rate methodology. The question here is whether for State-owned
facilities the State's claim for FFP (at a 50 percent rate) is limited
to no more than the actual costs, retrospectively determined, of
operating the facilities. We conclude that under the reasonable
cost-related reimbursement methods then in effect, where prospective
class rates were used, there was no such ceiling, (2) even for
State-owned facilities. /3/ The record in this appeal includes a
transcript from a conference held in Chicago on July 28, 1983.
Summary
In its implementation of a statutory mandate, HCFA determined that
prospective class rates were a reasonable cost-related method of program
administration. Prospective rate methodology contemplates the
possibility, arguably even the likelihood, of cost fluctuations over
time which even out in the long run. There may be an issue concerning
the reasonableness of the class grouping or some other aspect of the
rate involved here, but at the parties' insistence the sole issue
presented to the Board was whether HCFA improperly imposed an actual
cost ceiling on the State's claim for FFP for its State-owned
facilities. Our conclusions, as developed more fully in the Analysis,
include the following:
* Statutory and regulatory provisions concerning cost-related
reimbursement clearly permitted prospective class rates for state-owned
as well as private facilities. Testimony by Agency officials in this
and a related case and an Agency issuance show also that HCFA
interpreted the applicable statutory and regulatory language to permit
prospective class rates for state-owned as well as private facilities.
* Payment of FFP based on prospective class rates is consistent with
the statute and regulations referring to reimbursement of an "amount
expended" or of "expenditures" and with applicable cost principles
because the rate shows that HCFA did not treat prospective class rates
as simply billing rates subject to later adjustment to reflect actual
costs.
(3) Background
The statute
Title XIX of the Social Security Act (the Act), 42 U.S.C. 1396 et
seq., provides for the establishment of cooperative federal-state
programs, commonly called "Medicaid," to provide "medical assistance"
to
certain needy "individuals whose income and resources are insufficient
to meet the cost of necessary medical services." Section 1901 of the
Act. States are not required to institute a Medicaid program, but if
they choose to do so, they must submit to the Secretary a satisfactory
"state plan" which fulfills all the requirements of the Act. Section
1902(a). The Secretary must approve a plan which meets all requirements
of the statute and implementing regulations. Sections 1902(b) and (c).
With that approval, a state becomes entitled to federal funds
reimbursing part of the expenditures which the state has made in
providing medical assistance to eligible individuals under the state
plan, in accordance with federal conditions. The federal share is known
as the federal medical assistance percentage (FMAP). Section
1903(a)(1). The term "medical assistance" is defined by section 1905(
a) as payment for part or all of the costs of care and services itemized
in the provision.
The Social Security Amendments of 1972 included a requirement that
state plans for medical assistance programs must provide for payment of
skilled nursing facility (SNF) and intermediate care facility (ICF)
services provided under the plan on a reasonable cost-related basis, as
determined by methods and standards developed by a state on the basis of
cost-finding methods approved and verified by the Secretary. Section
1902(a)(13)(E) of the Act.
The Agency explained Medicaid reimbursement prior to the 1972
amendments this way:
The Medicaid law did not initially include any specific requirements
regarding the methods of payment to be used to pay for either SNF or ICF
services. As a result, individual States were permitted to develop
their own payment methods, subject only to the general requirement, in
section 1902(a)(30) of the Act, that payments not exceed reasonable
charges consistent with efficiency, economy, and quality of care. Under
the initial Medicaid law, States developed a variety of payment methods.
(4) These methods ranged from the retrospective, reasonable cost
reimbursement system used by Medicare (see 42 CFR Part 405, Subpart D),
to prospective rates based, in some instances, on State budgetary
considerations and other factors not directly related to actual (long
term care) facility costs.
46 Fed. Reg. 47964, September 30, 1981.
Congress amended the Social Security Act in 1972 to reflect a
requirement for payment on a reasonable cost-related basis because it
was concerned about the effects of overpayment and underpayment of
providers of long-term care services under then current methodologies,
and because it was aware that the retrospective, reasonable cost
reimbursement approach used by Medicare and Medicaid at that time was
not entirely satisfactory. S. Rep. No. 1230, 92nd Cong., 2d Sess. 287
(1972).
Implementing regulations
The Act does not define or explain the meaning of reimbursement on a
reasonable cost-related basis. In 1976 the Agency promulgated
regulations implementing section 1902(a)(13)(E) of the Act. When the
Agency published the regulations, it included a preamble which contained
a lengthy and thorough discussion of provider reimbursement. 41 Fed.
Reg. 27300, July 1, 1976 (Preamble). The Preamble said that the
respondent developed its description of reasonable cost-related payments
on the basis of the legislative history. The Preamble distinguished
between reasonable costs (as used in the Medicare program) and
reasonable cost-related payments, and emphasized that states were free
to develop simpler and less expensive methods than the Medicare system.
For example, the Preamble gave states the option of using prospective
and class rates. The Preamble pointed out that rates set prospectively
on the basis of past experience cannot reimburse the actual costs of
each facility with the same degree of precision possible under the
reasonable cost formula used under Medicare and would inevitably result
in some degree of overpayment or underpayment. The Preamble pointed
out, however, that Congress clearly intended to sacrifice a certain
amount of precision to afford states the option of using simpler and
less expensive methods. 41 Fed. Reg. 27303.
42 CFR 450.30(a)(1) (1977) required that a state plan for medical
assistance under Title XIX of the Act must describe the policy and the
methods to be used in establishing payment rates for each type of
covered care or service.
(5) 42 CFR 450.30(a)(3)(iv)(A) (1977) stated:
(iv) The State plan shall set forth the methods and standards used by
the State to determine reasonable cost-related payment rates, and shall
set payment rates on the basis of such methods and standards, to be
effective no later than January 1, 1978. The State plan shall provide:
(A) Methods and standards that reasonably take into account actual
costs of the items of allowable cost . . . . (Payment rates shall not
be set lower than the level which the State reasonably finds, or in the
case of a prospectively determined rate, the level which the State
reasonably expects, to be adequate to reimburse in full such actual
allowable costs of a facility that is economically and efficiently
operated);
42 CFR 450.30(a)(3)(v) required that the plan provide assurance that
the state will pay the amount determined according to the methods and
standards set forth in the plan.
The Preamble noted that there were a variety of acceptable methods
for provider reimbursement and that the states had freedom to define and
set the methods they would use. It also clearly pointed out, however,
that the Secretary had to seek to assure that the methods would result
in reasonable cost-related reimbursement in order to carry out his
statutory mandate to review, aprove, and verify the states' methods. 41
Fed. Reg. 27300.
General Explanation of Prospective and Retrospective Reimbursement
The Preamble discussed the history of the amended section 1902(a)(
13)(E) and its purpose. It explained that the amended Act provided
maximum flexibility to states to develop methods for payment,
particularly to develop methods less cumbersome and expensive than the
Medicare retrospective system. 41 Fed. Reg. 27300. Although the
Preamble stated that a variety of reimbursement methods msight be
acceptable, it discussed two basic reimbursement systems, prospective
and retrospective. It described these two systems ins the following
way:
Prospective rate setting systems, as defined for purposes of this
regulation, involve payment rates not subject to further adjustment on
the basis of the actual costs of a particular provider of long-term care
services. The Department believes that the inherent cost containment
potential of such limits negates the need for an additional ceiling.
(6) * * *
In the case of retrospective payment systems (i.e., systems in which
there is any retrospective determination of payment or settlement of
costs), the use of a Medicare ceiling determination is continued.
41 Fed. Reg. 27302.
The Preamble stated specifically that "there is no single figure that
is the reasonable cost, but rather a spectrum of figures within an
acceptable range, any one of which is a reasonable cost." 41 Fed. Reg.
27303.
Operation of the State Plan
Effective January 1, 1978, Attachment 4.19D of the Illinois State
plan provided for reimbursement for nursing home services, including
ICF/MR services, based on a prospective class rate. The State-owned
ICF/MRs were a single class. To calculate the reimbursement rate,
allowable costs from a prior period (here the fiscal year ending June
30, 1977) were arrayed by facility, after some component costs were
adjusted for inflation. In general, a median was selected, with an
equal number of facilities above and below the median, and the rate for
each facility was based ons the median. The rate methodology did not
include any retrospective adjustment to reflect actual costs experienced
during the performance period (i.e., the period to which the rate
applied -- here, January 1, 1978 -- July 30, 1979). The Agency
auditors' opinion was that the rate methodology's use of the group
median for a class containing only the State owned ICF/MRs (where the
bulk of the patients were in the larger, lower cost facilities) resulted
in reimbursement rates which in the aggregate exceeded actual costs.
The State disagreed with the Agency concerning the effect of the rate
methodology and pointed out that in subsequent years the State was
reimbursed for less than its actual costs. Tr. 93-95. /4/
(7) Funding
The Illinois Department of Mental Health and Developmental
Disabilities (MHDD) operated the ICF/MRs in question with funds
appropriated by the Illinois legislature. The Illinois Department of
Public Health calculated the reimbursement rates. Using data supplied
by MHDD, the Illinois Department of Public Aid filed claims with HCFA
for the federal share. The amount paid by HCFA became part of the
general revenues of the State. No funds were transferred between Public
Aid and MHDD. Tr. 119-120
(8) Analysis
Both parties agreed that in claiming reimbursement for January 1,
1978 -- June 30, 1979, the State received an amount which exceeded the
FMAP applied to the actual costs of operating the ICF/MRs during that
period. The State argued that its claim was proper because, under the
State plan, reimbursement was based on a prospective class rate which
was not adjusted retrospectively to reflect actual costs. Both parties
also agreed that the prospective rate system found in the Illinois State
plan based the rate for the performance period on cost data from a prior
period, and that the State could not change the rate thus set merely
because the cost data in the year of performance was different. The
Agency asserted, however, that regardless of the rate set, the amount of
the actual costs for the State facilities was a ceiling ons the amount
the State could claim for FFP. Thus, under the Agency's view, for the
State facilities, FFP could not exceed the FMAP of actual costs for the
performance period.
The State argued that approval by HCFA of a State plan with a
prospective reimbursement rate system entitled the State to claim FFP
based on the rate even if its claim was higher than the actual costs in
the performance period, noting that in other years the State did operate
at a cost greater than the rate and thus at a loss. HCFA contended that
the State is entitled only to the lesser of actual costs or the
reimbursement rate. /5/
In our discussion below, we point out that the Medicaid cost
reimbursement regulations do not provide any support for HCFA's
position. HCFA did not rely on those regulations, but instead relied
primarily on general cost principles in 45 CFR Part 74 and on its view
that the amount claimed was not an "amount expended" under section
1903(a)(1) of the Act. If accepted by us, HCFA's reasoning would have
led to the anomaly of the State having proposed for itself a system
where it could lose, but never win.
(9) HCFA permitted prospective class rates
The Board has previously discussed the Medicaid cost reimbursement
regulations in Arkansas Department of Human Services, Decision No. 357,
November 15, 1982. There, as here, the State had a prospective rate
system. In the period at issue there, the State's actual costs had
exceeded by $12 million the amount claimed for FFP based on the use of
prospective rates for State-owned and operated ICF/MRs. Arkansas argued
that the intent and meaning of its State plan allowed retrospective
adjustment to reflect the actual cost of operating State facilities
during the performance period. The Board held that use of a prospective
rate system ruled out such a retrospective adjustment, even for State
facilities. HCFA argued here that in rejecting an actual cost floor in
Arkansas, the Board did not preclude the possibility of an actual cost
ceiling.
At the conference in this case, the Board gave the parties copies of
part of the transacript of a conference in Arkansas held July 22-23,
1982, containing testimony by the Chief of the Long Term Care Section,
Division of Alternative Reimbursement, Bureau of Program Policy of the
HCFA central office. The witness described himself as having had
extensive experience with reimbursement under prospective and
retrospective methods of reimbursement. He testified:
The majority of states throughout the country use some type of
prospective reimbursement system or some type of elements of
prospectivity in their reimbursement systems -- their rate setting
methods.
* * *
The emphasis in a prospective system is on a provider knowing what
his rate is going to be in a future period and the emphasis is to hold
down his costs to either meet or beat that rate.
Now, the risk factor that I am talking about works both ways in the
sense that if a provider underscores or undershoots what his rate is
going to be in terms of costs, he makes a profit. There is no
recoupment of that profit. That again is one of the beauties that
Congress intended in a prospective rate setting system.
* * *
But there is no obligation on their prospective reimbursements nor is
there an obligation under the Arkansas plan, to actually recoup if a
provider undercuts its costs that were (prospectively) determined. * *
*
Arkansas Transcript pp. 196-197, 209.
(10) An Illinois official testified in this case that at the time he
was negotiating with HCFA for approval of the State plan:
We clearly pointed out that there could be differences between cost
and reimbursement in these facilities. We talked at one meeting before
the final meeting with (HCFA Administrator Robert A. Derzon) about the
implication of having mental health facilities, state facilities
reimbursed differently than their cost . . .
We clearly pointed out and, in fact, had two days of discussion with
them that the median, reimbursing on a median cost meant a profit for
some, a loss for others, and, again, they explicitly, not only approved,
but required we provide the same kinds of incentive in state
(facilityies). They said you can't reimburse just one cost if you're
reimbursing these other people in terms of medians.
Transcript of July 28 Conference, p. 77.
A HCFA regional audit official and the Office of Inspector General
auditor testified that they were sure that HCFA was aware that rates for
some facilities would be in excess of cost and for others less than
cost. Tr. 93, 111. Counsel for HCFA asserted that federal regulations
did not proscribe use of either a prospective rate or a class rate, and
agreed that the State could claim reimbursement based on such rates even
though the rates for some State facilities might be in excess of actual
cost. Tr. 108. He specified that it was only when the claim for the
entire group of State ICF/MRs exceeded their actual costs that the
ceiling applied. Tr. 108.
We find that the statements of HCFA officials in both this case and
Arkansas indicate that at the time of adoption of the Illinois State
plan and perhaps even until the disallowance in this case, HCFA
interpreted the statute and regulations as entitling a state to FFP
based on prospective class rates even if those rates were higher than
actual costs. /6/
(11) HCFA emphasized repeatedly here that its alleged actual cost
ceiling applied only to state facilities, not private ones. In the
Preamble to its regulations implementing the 1976 amendments to the Act,
HCFA characterized the Act and the implementing regulations as giving
states greater flexibility in meeting cost containment objectives by
permitting prospective and class rates, as well as retrospective,
methods of reimbursement. 41 Fed. Reg. 27300, July 1, 1976. The HCFA
official testifying in the Arkansas case in July 1982 identified a HCFA
Action Transmittal dated December 14, 1977, which interpreted
regulations dealing with ICF/MR reimbursement as requiring a state to
use the same reimbursement methodology for state facilities as it does
for private facilities. Ark. Tr. 171-172; HCFA-AT-77-114. Thus,
HCFA's own words and actions prior to this case support the State's
position that the State was free to adopt a prospective class rate
system and that, having done so, it was required to use it for both
State and private facilities. Since there was no actual cost ceiling
for private facilities, there could not be a ceiling for State
facilities either. /7/ The State pointed out that HCFA was concerned
about inflation of health care costs and hoped to provide different
incentives, through cost-related reimbursement methodologies, to hold
costs down. Tr. 76.
Whether Part 74 imposed a ceiling
HCFA argued that an actual cost ceiling was required by 45 CFR Part
74, Appendix C, Principles for Determining Costs Applicable to Grants
and Contracts with State and Local Governments. HCFA cited this
sentence from the Objectives:
No provision for profit or other increment above cost is intended.
The State contended that Part 74 did not apply because it was not
designed to deal with the particulars of a specific program such as
Medicaid. The State also noted that 45 CFR 74.170 makes the Part 74
cost principles inapplicable where inconsistent with federal statutes
and regulations. In reply, HCFA cited 45 CFR 201.5(e), which states
that the provisions of Part 74 apply to Medicaid grants to the States.
We conclude that generally the cost principles in Part 74 apply to the
State as recipient of a Medicaid grant, to the extent not inconsistent
with Medicaid regulations. See New York Department of Social Services,
Decision No. 452, July 29, 1983, pp. 10-12; and 45 CFR 74.171.
However, we also conclude that the cost principles did not impose an
(12) actual cost ceiling on claims for reimbursement for medical
assistance provided by state-owned ICF/MRs.
HCFA's auditor stated that if the federal share were based on a
rate-produced cost of, for example, $12 million instead of an actual
cost of $10 million, the FMAP of 50 percent of $12 million would
reimburse the State for $6 million rather than the appropriate $5
million. Tr. 124-125. Implicit in the auditor's statement is an
assumption that unless the State were held to an actual cost ceiling,
the federal share would be higher than that authorized under the FMAP so
that the State would be paid a prohibited "increment above cost."
The
Agency did not argue, however, that for State-owned facilities FFP was
always the FMAP applied to actual costs. Rather, the Agency asserted
that FFP must be based on the rate, not the State's actual costs, if the
State's claim were less than its actual costs. In essence, the Agency's
view is that its share of the State's actual costs could fall below 50
percent but never exceed 50 percent.
Although the Agency relied on the "increment above cost" language
as
primary support for a prohibition on the payment of more in FFP than the
FMAP applied to the actual costs of operating the facilities, the
language relied on simply does not have the meaning assigned to it by
the Agency. Under the Medicaid program, the State is to be reimbursed
for a portion of the costs of medical assistance. Here the State did
not receive more in FFP than its actual costs so that there was no
"profit" or "increment above cost" within the ordinary meaning
of those
terms. Consequently, we think that the issue is whether the cost
principles place an upper limit on the amount of FFP, i.e., federal
share, to be paid. The paragraph of Appendix C which ends with the
sentence containing the statement on "increment above cost," also
states
that:
The principles are for the purpose of cost determination and are not
intended to identify the circumstances or dictate the extent of Federal
and State or local participation in the financing of a particular grant.
Thus, whether the State is reimbursed for 40 percent or 50 percent or
60 percent of its actual costs is a matter of extent of participation,
and by its own terms Appendix C would not dictate this.
Moreover, looking at the terminology of Appendix C itself, we see
that cost is defined very generally to mean:
(Cost) as determined on a . . . basis acceptable to the Federal
grantor agency as a discharge of the grantee's accountability for
Federal funds.
(13) Under reasonable cost-related reimbursement, the states set
their cost finding (the process whereby a provider's allowable costs are
determined) and rate determination methods, subject to Agency approval.
These processes are independent of the calculation of FFP. The cost
principles neither set the FMAP nor speak to the calculation of FFP.
Here, the Agency has equated the costs to the State as operator of the
ICF/MRs with the costs to the State as Medicaid grantee which are
properly used to calculate FFP. In this case, however, HCFA approved a
State plan making the prospective class rate the basis and measure for
the State's claim for the federal share of medical assistance. The
amount disallowed was within that rate and thus was based on "cost"
not
an "increment above cost." Even for the State-owned ICF/MRs, the rate
is
the cost of medical assistance by which FFP is determined and the State
discharges its accountability for federal funds.
Whether section 1903(a)(1) imposed a ceiling
The Agency also argued that the State was not entitled to an amount
in excess of the FMAP of actual cost because section 1903(a)(1) of the
Act authorized payment only of the federal share of the total amount
expended as medical assistance. HCFA reasoned that the amount in excess
of the FMAP of actual cost was not expended as medical assistance in the
performance year, so, accordingly, the federal government was not
authorized to pay the State the federal share for that excess.
The Agency also relied on the regulations at 45 CFR 201.5 (1977) and
42 CFR 430.1 (1978). Section 201.5 of 45 CFR refers to quarterly grants
for "expenditures." Section 430.1 of 42 CFR defines FFP as the "Federal
Government's share of a State's expenditures" and the FMAP as "used
to
calculate the amount of the federal share of State expenditures for
services."
There is no definition of "expenditures" in the Act or regulations.
Section 1902(a)(13)(E), which was added in 1972, provided for payment of
ICF (including ICF/MR) services on a reasonable cost-related basis. In
the regulations which implemented this section, the Agency recognized
the use of a prospective class rate as being reasonably cost-related.
By arguing that the State may claim FFP based on its prospective rate or
its actual costs, whichever is lower, the Agency recognized that where
the State's claim based on a prospective rate was less than actual
costs, FFP must be less than the FMAP applied to actual costs. In our
view, the Agency must also recognize that where a properly determined
prospective rate causes the State to claim FFP in an amount which
exceeds actual costs, FFP must be more than the FMAP applied to actual
costs. We conclude that this result is (14) consistent with the
Agency's objectives in implementing the statutory requirement for
reimbursement of ICF and SNF services on a "reasonable cost-related
basis." As shown below, our analysis of the regulations and the
preambles associated with them leads us to conclude that even for State
facilities the Agency considered a prospective rate as determining the
reimbursement amount without requiring either upward or downward
adjustment to account for the amount identified as the actual cost of
providing the services.
HCFA implemented the Act with regulations permitting prospective class
rates for governmental providers without requiring an adjustment to
reflect actual costs.
The regulations which the Agency initially proposed included this
example of a method which a State could adopt in determining a
reimbursement rate:
Except for government owned and operated facilities, reimbursement
rates may include an amount for profit (which only in the case of
proprietary providers may include a return on net owners' equity) and
incentive payments applied on an inverse percentage basis to the cost of
providing services in order to reward efficient management consistent
with the provision of quality care.
41 Fed. Reg. 15560, 15561 (col. 1), April 13, 1976.
The exception against governmental facilities indicates that there
were options available in setting rates for other types of providers
that did not apply when the State owned or operated the facility. It
also indicates that where the Agency thought such a restriction existed,
it expressed the restriction in the regulation.
The provision in question was dropped from the final regulation. In
the Preamble, the Agency explained that efficiency bonuses were not a
true cost item and could not be reconciled with the statutory mandate
that payment be on a reasonable cost-related basis. 41 Fed. Reg. 27303
(col. 3). The Preamble also noted that the return on an owner's net
equity was the only item of profit that could be included as an item of
allowable cost, although "such a profit factor may not be an appropriate
element in the calculation of the reimbursement rate for non-profit and
governmental providers." Ibid. In that same discussion, the Agency
noted:
While return on proprietary owners' net equity is the only item of
profit that may be included as an allowable cost, these regulations also
provide another opportunity for profit, in permitting states to set
payment rates on a class basis. (Emphasis added.)
(15) The Preamble also reported that the legislative history made
clear that although the use of prospective and class rates inevitably
resulted in some facilities being paid at a rate in excess of cost and
others less than cost, Congress intended to give up a certain amount of
precision in reimbursing for actual costs in order to allow states to
use simpler and less expensive methodologies. Id. at 27303, col. 1.
/8/
We conclude that the Preamble shows that the Agency meant to
authorize prospective class rates for governmental as well as other
providers. Apparently it did not consider the Act to impose an actual
cost ceiling or other restriction on governmental providers.
In addition, we find that the discussion by the Agency in the July 1,
1976 Preamble demonstrated the Agency's understanding that Congress
intended to authorize reimbursement for services by state-owned as well
as other providers on the basis of rates in lieu of actual costs in the
year of performance. We conclude that in its regulations implementing
the Act, as well as in the approval of the Illinois State plan, the
Agency was construing "expenditures" as tantamount to rates and has
failed to convince us otherwise. /9/
The significance of approval of the State plan
HCFA argued that its approval of the Illinois State plan providing
for a prospective class rate did not authorize federal participation in
an amount in excess of actual costs, (16) citing Michigan Department of
Social Services, Decision No. 370, December 28, 1982. In Michigan the
Agency based its disallowance on an audit finding that the State had
inappropriately included Medical Assistance (MA) cases related to
Supplemental Security Income recipients in the case count base used in
allocating county offices' administrative costs to the (MA) program.
The Board found that the amount thus allocated was disproportionate to
the benefit received by the MA program. The Board upheld the
disallowance because Part 74 permits costs to be allocated to a program
only to the extent of benefits received by the program. In rejecting an
argument by Michigan that it should prevail because it had allocated the
costs in question in accordance with a Cost Allocation Plan (CAP)
approved by the Agency, the Board held that an approved CAP does not
constitute prior approval to deviate from applicable statutes and
regulations. p. 6.
The Agency's reliance on Michigan is misplaced. As discussed above,
the Agency agreed that a state may use a prospective class rate for
state-owned ICF/MRs. The Agency did not persuade us that the statute or
regulations imposed an actual cost ceiling. As we noted, the Agency's
approval of the State plan and its contemporaneous statements in various
Preambles indicate a belief that the statute and regulations did not
require an actual cost ceiling. Thus, here there was no deviation and
Michigan is inapposite. In relying on Michigan, the Agency attempted to
equate the prospective class rate with a prospective billing rate which
necessarily would be adjusted to reflect actual costs. There is simply
no basis for the view that the "prospective" rates used in Illinois
for
Medicaid facility reimbursement were simply billing rates subject to
later adjustment.
The related organization analogy
HCFA argued that the actual cost ceiling it applied here was
analogous to the restriction on allowable costs imposed by 42 CFR
450.30(a)(3)(iii)(D). Tr. 18. /10/ For cost reporting purposes, that
regulation limits the allowable cost of purchases from organizations
related to the provider by common ownership or control to the lower of
the cost to the (17) related organization or the comparable price if
purchased elsewhere. HCFA contended that the State as administrator of
the State plan was dealing with itself as ICF/MR provider and by analogy
with the above could not claim at a rate which exceeded actual cost.
The regulation cited is a restriction on allowable costs. Once
allowable costs have been determined, this regulation has no relevance
to the method applied, using those allowable costs, to calculate the
reimbursement rate or the amount of FFP ultimately paid to the State.
We find that HCFA's failure to demonstrate elsewhere that it was
required to impose an actual cost ceiling on rates for State facilities
is not overcome by its flawed analogy here.
Conclusion
For the reasons stated above, we reverse that part of the
disallowance for the period January 1, 1978 -- June 30, 1979. As noted
at the outset of this Decision, we have remanded the remaining part of
the disallowance (covering the period July 1, 1977 -- December 31, 1977)
for additional review by the parties.
Our holding here is simply that there is no actual cost ceiling
limiting the State's claim for FFP based on prospective class rates. We
do not decide whether the rate claimed was in fact reasonably
cost-related or perhaps flawed for some reason. /1/ This case was
originally docketed as No. 82-214. Two of the issues involved
ins that appeal were disposed of in Decision No. 441, June 30, 1983.
The record in No. 82-214 was incorporated by reference here. /2/
Of the $10,213,284 allegedly excessive amount claimed, $706,763 was
disallowed for other reasons and is not involved here. $4,753,260 is
the federal share of the balance of $9,506,521. /3/ This holding
pertains only to the period January 1, 1978 -- June 30, 1979. $880,695
of the $10,213,284 was for the period July 1, 1977 -- December 31, 1977.
The parties agreed that the reimbursement methodology was different
during this six month period and that the State may have inadvertently
failed to adjust its claim to reflect its actual costs, as required by
its then applicable methodology. Accordingly, the parties will review
the disallowance for this first six month period. The State may return
to the Board if the parties cannot agree on the amount of any required
adjustment. Transcript (Tr.) of July 28 conference, pp. 51-55 and 127.
/4/ The State plan rate methodology was complex. The rate was made up
of cost components: (1) operating costs, which were support (such as
housekeeping) costs and program (such as nursing) costs; and (2)
capital costs. Each of these rate elements was calculated separately.
In support costs, an inflation factor was used and the median was the
group ceiling. For a facility above the median the rate was set at the
median, and for a facility with support costs below the median the rate
was set at with support costs below the median the rate was set at one
half the difference between the median and the support costs for that
facility. (This use of a group ceiling in the calculation of
prospective class rates is described by the Agency in its statement at
43 Fed. Reg. 4861, 4863.) For program costs, thirty-two percent of that
component of the rate was to be derived by assigning point counts based
on the level of patient care. (The actual payment to the facility would
be per point with, for example, 0 points paid for a patient requiring no
medication and 2 points paid for a patient requiring staff administered,
prescribed medication.) The balance of the program rate component was
the median of the inflated program costs. The capital cost component
for State facilities was simply the median facility depreciation cost
(without any inflation factor). The State used essentially the same rate
methodology for all long term care facilities. At the time that the
State made the claim for reimbursement involved here there was no point
count data for State facilities, so the State used instead the median
per diem program costs of nursing and medical services. The parties
agreed that the State did not follow the rate methodology precisely as
set out in the plan, but also agreed that this is not material here.
Thus the Board excluded as irrelevant the information the State offered
to prove that had the State followed the plan to the letter, its claim
would have been for an even greater amount. Tr. 62-67, 126. In
addition, we note that the regulations and the State plan call for
annual review of prospective rates. The State used the rate calculated
based on the FY 1977 cost reports for the entire time period at issue.
Also, as the audit report points out, the State did not meet the audit
requirements for the facility cost reports. The Agency did not rely on
these actions as support for the actual cost ceiling and we do not
discuss them further. /5/ The State offered to accept reimbursement on
the basis of actual costs for services from January 1, 1978 to
the present. HCFA declined, on the ground that HCFA was limited by the
State plan to the prospective reimbursement rate, even if the State's
actual costs were greater, and that what the State was suggesting would
have required an impermissible retroactive amendment to the State plan.
/6/ This is underscored by the recollection of the HCFA regional audit
official that, when considering incentive rates for public facilities,
HCFA sought assurance that any gains in the form of rates in excess of
cost for some facilities would be "washed out in total" by rates at
less
than cost for others. Tr. 111. The State argued that its offer to
settle for its actual costs evidenced its agreement that "it does wash
out over time." The State objected, accordingly, to singling out
particular years for disallowance. Tr. 112. /7/ Subsequent to
the period in question here, HCFA did permit different treatment of
state-owned ICF/MRs. /8/ At the July 28 conference, counsel for
HCFA contended that it was significant that in a notice published in the
Federal Register in response to the order in American Health Care Assn.
v. Califano, HCFA referred to class and prospective rate systems as
opportunities for profit for non-profit as well as for profit providers.
43 Fed. Reg. 4861, 4863 (col. 3), February 6, 1978. In the paragraph
preceding that reference, HCFA had noted that a return on net invested
equity would not be an appropriate element in the rate for non-profit
and governmental providers. In the referenced paragraph, HCFA could
have meant to include governmental providers within the term nonprofit.
In any event, whatever significance the alleged omission has, we are not
persuaded that it necessarily conveyed that HCFA was saying there was an
actual cost ceiling for governmental providers. /9/ As we discuss in
the preceding section, the Act and implementing regulations did
not define expenditures but clearly did permit the use of prospective
class rates as being reasonably cost-related. /10/ The Agency
also mentioned Illinois statutory provisions concerning charges to State
facility residents who have financial resources as being inconsistent
with payments under Medicaid based on more than actual costs. Tr.
17-18. The Agency presented no facts on this point and we cannot
conclude that the statutory provisions giving the state legislature
discretion to set such charges support the disallowance at issue here.
Agency submission of August 2, 1983.
NOVEMBER 14, 1984