GAB Decision 608
December 12, 1984
New Jersey Department of Human Services;
Ballard, Judith; Settle, Norval Garrett, Donald
Docket Nos. 84-108 and 84-157
The New Jersey Department of Human Services (State) appealed two
determinations by the Health Care Financing Administration (Agency)
disallowing federal financial participation (FFP) claimed by the State
under Title XIX (Medicaid) of the Social Security Act for the period
July 1972 through June 1980. The Agency disallowed a total of
$2,642,069 for retroactive reimbursement of ancillary costs in State
psychiatric hospitals because the State used Medicare statistics to
calculate the amount of ancillary costs attributable to Medicaid
patients. We uphold the disallowances. Although the State was
authorized to use Medicare standards and principles, the applicable law,
regulations and guidelines require use of Medicaid data to calculate
reimbursement under Title XIX.
Applicable Law and Regulations
Under Title XIX of the Act, a state must administer its Medicaid
program in accordance with a state plan approved by the Agency.
Sections 1901 and 1903(a) of the Act. The state plan must provide for
reimbursement by a state to hospitals for the costs of covered services.
Section 1902(a)(13)(D) provided:
for payment . . . of the reasonable cost of inpatient hospital
services provided under the plan as determined in accordance with
methods and standards . . . which shall be developed by the State and
reviewed and approved by the Secretary and . . . included in the plan,
except that the reasonable cost of any such services as determined under
such methods and standards shall not exceed the amount which would be
determined (2) under section 1861(v) as the reasonable cost of such
services for purposes of title XVIII, . . . .
The regulation implementing section 1902(a)(13)(D) was found at 42
CFR 447.261 (1980). /2/ That regulation provided, in part:
(a) The Medicaid agency must pay the reasonable cost of inpatient
hospital services under methods and standards developed by the State and
approved by the Regional Medicaid Director before implementation.
(b) The methods and standards must --
* * *
(2) Adopt the Medicare standards and principles for determining
reasonable cost reimbursement in Secs. 405.402 through 405.435 of this
chapter or, as an alternative, meet the criteria in paragraph (d) of
this section.
(c) If the Medicare standards and principles are adopted, they must
be modified to --
(1) Exclude the inpatient routine nursing salary costs differential
under Sec. 405.430 of this chapter; and
(2) Apply the limits established by the Secretary under Sec. 405.460
of this chapter.
The Medicare standards and principles set out at 42 CFR 405.401 et
seq. provide that payment is to be made on the basis of current costs
and indicate that application of these standards will result in meeting
actual costs of services. 42 CFR 405.402(a). Moreover, they require a
division of allowable costs between the beneficiaries of Medicare and
the other patients "that takes account of the actual use of services by
the beneficiaries of this program and that is fair to each provider
individually." Section 405.402(b)(3). Section 405.403 sets out
standards for apportionment of allowable costs. In addition, the
Provider Reimbursement Manual (HIM-15), section 2208.1, sets out five
methods for apportioning costs for all-inclusive rate or no-charge
structure providers such as the State psychiatric hospitals involved
here. Agency Exhibit 7.
(3) Under the Medicare standards and principles, providers receive
interim payments based on estimated costs. These payments are
subsequently adjusted to reflect actual costs as reported through
approved cost reporting methods. Section 405.454(a). Providers are
required to maintain "sufficient financial records and statistical data
for proper determination of costs payable. . . ." Section 405.406(a).
Ancillary services are defined at section 405.452(d)(3) as services
for which charges are customarily made in addition to routine services.
The Provider Reimbursement Manual (HIM-15), Part I, section 2202.8
defines these services as:
. . . laboratory, radiology, drugs, delivery room . . ., operating
room (including postanesthesia and postoperative recovery rooms), and
therapy services (physical, speech, occupational). Ancillary services
may also include other special items and services for which charges are
customarily made in addition to a routine service charge.
Background: The State's Method of Reimbursement for Ancillary Costs
Under Medicaid in State Psychiatric Hospitals
The State plan adopted the Medicare standards and principles as the
method of reimbursement under Medicaid. State Brief, p. 1; Agency
Exhibit 4. State psychiatric hospitals are allinclusive rate or
no-charge structure hospitals; that is, they have one charge covering
all routine and ancillary services. State Brief, p. 3; Agency Brief,
p. 7. The State used Method A, Departmental Statistical Data Method,
set out in HIM-15, section 2208.1A, for apportioning costs in these
hospitals. State Brief, p. 3; Agency Brief, p. 8. Under this method,
the costs of ancillary services are apportioned departmentally on the
basis of the ratio of covered beneficiary inpatient statistics to total
inpatient statistics applicable to such costs. The method provides that
the data must satisfy audit verification, and hospitals that have
maintained a count of services rendered to Medicare and non-Medicare
patients may apply those statistics. Hospitals that did not record
statistics during their first cost reporting period may use statistical
sampling techniques approved by the intermediary.
The State compiled departmental statistics on ancillary services for
Medicare patients only. "Medicaid patient statistics were not counted
simply because the volume was prhibitive." State Brief, p. 4. The State
then claimed FFP under Medicaid for the costs of ancillary services
based on the Medicare statistics, apportioned as described in Method A.
(4) The Agency determined that this was improper, alleging that while
the State correctly used Medicare standards and principles, it should
have applied them to Medicaid data. Moreover, the Agency asserted, in
the absence of statistics relating to the universe of Medicaid patients,
Method A called for the use of an approved sampling technique, which the
State did not use. The Agency alleged that the State's improper use of
Medicare statistics resulted in a Medicaid claim that exceeded the
providers' expense for ancillary services for all patients and also
exceeded the actual costs attributable to Medicaid patients. /3/
The Agency recalculated the costs attributable to Medicaid by
applying the average per diem rate for ancillary services for all
patients in each institution to the total number of Medicaid days billed
for each institution. The Agency then deducted these amounts from the
amounts claimed by the State and disallowed the difference. Agency
Brief, p. 16.
The State's Arguments
The State argued that its use of Medicare statistics here was
reasonable because Medicare and Medicaid populations in State
psychiatric hospitals are "for all intents and purposes, the same."
State Brief, p. 8. Moreover, the State argued that the effect of using
the Medicare ancillary rate would be to lower the Medicaid rate because
the State did not include Medicaid patients under 21 years old in the
statistics. The State also argued that the Agency's position that the
State must use Medicaid statistics for the ancillary costs component is
inconsistent with Board Decision No. 396, New Jersey Department of Human
Services, March 8, 1983, and that the Medicare Part A all-inclusive
rate, including the ancillary component based on Medicare statistics,
should be used.
The State further asserted that the disallowance should not be taken
because the Agency has "routinely accepted" the Medicare per diem
rate
for purposes of Medicaid reimbursement. State Brief, p. 6. The State
argued,
This late action on the part of the Agency is arbitrary and
capricious in that the continued acceptance and payment of the Medicare
Part A rate for routine and ancillary services rendered to Medicaid
patients for the (5) years in question by HCFA has led the State to
conclude that the practice was acceptable and satisfactory. To allow
HCFA to reverse its position at this late date is highly prejudicial to
the ability of the State to alter its claims to reflect anything but the
Medicare Part A statistics.
Finally, the State argued that if the ancillary costs component is
separated from the average per diem rate, then the costs must be
calculated by one of the methods set out in HIM-15, section 2208.3.
Analysis
Whether applicable law and regulations permit the State to use
Medicare statistics to apportion ancillary costs to Medicaid
Both parties agree that the approved State plan requires the State to
use Medicare standards and principles to calculate reimbursement under
Medicaid. However, the State's arguments implied that this would be
synonymous with using the Medicare Part A rate. The Agency argued that
the State must apply Medicare standards and principles to Medicaid
costs, and that the Medicare rate will not necessarily be the same as
the Medicaid rate, even though the same standards and principles are
used, because there are differences between the two programs in terms of
allowable costs and between the two patient populations in terms of
utilization of services.
The regulations on reimbursement do not specifically refer to rates;
instead they refer to the use of Medicare standards and principles as
one permissible method of calculating reimbursement of costs incurred
under Medicaid. The authorization to use Medicare standards and
principles for reimbursement under Medicaid cannot be translated into
permission to use the Medicare rate. We think it is self-evident that
Medicaid data must be used in calculating reimbursement under the
Medicaid program. This is supported by the language of the statute, the
regulations and the guidelines.
Section 1903(a)(1) provides that the State is entitled to federal
financial participation in the "total amount expended . . . as medical
assistance under the State plan . . . for individuals who are eligible
for medical assistance under the plan. . . ." Thus, the State may be
reimbursed only for services rendered to Medicaid recipients, not for
services rendered to Medicare recipients. Sections 405.402 and 405.403
of 42 CFR emphasize this by requiring apportionment of allowable costs
between beneficiaries of Medicare and other patients. Section 2208.1A
of HIM-15 also provides that the costs of ancillary services be
apportioned on the basis (6) of the ratio of covered beneficiary
inpatient statistics to total inpatient statistics, applying statistics
for Medicare and non-Medicare patients. When applied to Medicaid, these
principles mean that Medicaid inpatient statistics must be used. Even
the State plan acknowledges this scheme by providing that the "inpatient
routine services costs for medical assistance recipients will be
determined subsequent to the application of the Title XVIII method of
apportionment, and the calculation will exclude the applicable Title
XVIII inpatient routine service charges or patient days as well as Title
XVIII inpatient routine service costs . . . ."
Moreover, regulations require that the final adjustments in provider
rates must reflect actual costs as reported. Sections 405.402(a) and
405.454(a). The determination of payable costs must be supported by
sufficient financial records and statistical data. Sections 405.406(a)
and 447.203. Here, the rates could not have reflected actual Medicaid
costs because the rates resulted in claims higher than the total
ancillary costs incurred by the providers. Nor were the claims
supported by Medicaid statistical data.
Thus, we conclude that the statute, regulations, guidelines, and the
State plan all support the Agency position that the State must apply
Medicare standards and principles to Medicaid data.
Moreover, we do not agree that Board Decision No. 396 supports the
State's position. Rather, we think that it directly supports the
Agency's position that the State must use Medicaid costs, while applying
the Medicare standards and principles. Decision No. 396 involved the
State's claim for routine services, in particular, the services provided
in certain units of the hospitals. The State alleged there that the
costs in certain units were higher than those included in the Medicare
per diem. The Board found that the State plan called for calculating
Medicaid reimbursement by using Medicare standards and principles and
concluded that those methods and principles did not permit the State to
identify and add in the higher costs of certain units, but rather
required the State to treat routine costs as a single unit. The Board
also concluded that the State could not use methods which deviated from
those set out in the Medicare standards and principles without obtaining
approval through a plan amendment. The Board did not conclude, however,
that the State must use the Medicare rate or Medicare costs for Medicaid
reimbursement. /4/
(7) Here, Medicare standards and principles require the State to
apportion costs by programs. The method chosen by the State, which
specifically applies to all-inclusive rate hospitals, requires
apportionment using statistics drawn from the population for which costs
are being claimed, i.e., Medicaid. Adherence to these principles and
standards is consistent with the holding in Decision No. 396.
The State argued, however, that its use of the Medicare statistics
was reasonable because the Medicaid and Medicare populations in State
psychiatric hospitals are the same. Yet the State failed to present any
evidence to that effect and admitted that one element of the Medicaid
population, those patients under the age of 21, was not included in the
Medicare statistics. Furthermore, the State admitted that patients are
not recipients under both Medicare and Medicaid programs during the same
period of time. The Agency asserted that Medicare patients use more
ancillary services than do Medicaid patients and that, where Medicare
patients become Medicaid patients as their Medicare benefits run out,
the use of ancillary services by those patients has decreased by the
time they become Medicaid patients. The State explained its failure to
compile Medicaid statistics by asserting that the number of such
patients was voluminous, yet it also asserted that the patient
populations were the same. These statements are inconsistent with each
other. Moreover, if the burden of collecting data on Medicaid patients
was in fact heavy, the method chosen by the State permitted it to obtain
approval to use statistical sampling.
The statutory and regulatory pattern clearly requires the use of
Medicaid data when applying Medicare standards and principles. The
State failed to support its position about why its practice was
reasonable and to demonstrate that the Medicaid and Medicare populations
were the same. Thus, we conclude that the State erred in using Medicare
statistics to determine Medicaid reimbursement for ancillary costs.
Whether the Agency is estopped from taking this disallowance
The State alleged that the Agency accepted the State's use of the
Medicare per diem rate for Medicaid reimbursement and that the Agency
did not inform the State until 1984, when the Agency issued the
disallowance letters for the claims in question here, that it could not
use the Medicare statistics. The State asserted that it relied on the
Agency's acceptance of the State's practice and that it is now
prejudiced because it cannot now collect Medicaid statistics for the
periods involved.
The Agency responded, however, that it had never examined the interim
rate which the State paid its psychiatric hospitals and, therefore, did
not know that the State may have (8) been using the Medicare rate as the
basis for its Medicaid payments. See Agency Exhibit 5, Affidavit of
Norman Kahn. The State did not submit to the Agency until 1980 the
costs associated with its final rates for the years 1972 through 1978.
The Agency also alleged that as early as 1981, after it had examined the
State's basis for the final rates, it informed the State that the use of
Medicare statistics was improper. See State response to the Agency's
deferral action, Agency Exhibit 8.
This Board has held on numerous occasions that the Agency is not
estopped from disallowing a claim which is unauthorized under the
program laws and regulations simply because it initially paid FFP in a
claim. See, e.g., New York State Department of Social Services,
Decision No. 449, July 29, 1983. The Agency's initial payment of claims
on the basis of as yet unsubstantiated expenditure forms submitted by a
state does not mean that the claims paid are allowable under federal
laws and policies. The nature of the fiscal relationship between the
federal government and the states has resulted in an advance payment
system under which the states are paid on the basis of cost estimates,
and later adjustments are made to those estimates based upon actual
expenditures, as claimed by the states. 45 CFR 201.5. The process does
not lend itself to immediate examination of individual items included in
the gross claims made each quarter. Thus, the Agency may perform a
review or audit of program costs (or adopt findings from other audits
including those performed by states) well after the initial
reimbursement of those costs. Indeed, the Agency would not necessarily
be able to determine whether costs are allowable in individual instances
until an audit or review has been performed. Moreover, in a situation
such as this, the State pays providers on an interim basis using
estimated costs and then later adjusts the interim rate to reflect
actual costs following its own audits of cost reports submitted by the
providers. Thus, the State's own procedures leading to a final rate
further delay Agency review or audit of the State's claim based on its
actual costs.
The State has the ultimate burden of documenting its claims and must
show that it used appropriate methods under the statute and regulations,
including as required here the actual costs. 42 CFR 405.402, 405,406,
405.452, 447.202 and 447.203. Moreover, the regulations for calculating
Medicaid and Medicare reimbursement put the State on notice, as we
discussed above, that it must use Medicaid statistics or choose another
method for apportioning the ancillary costs under the Medicare and
Medicaid programs. The State failed to do either. Thus, we conclude
that the Agency is not estopped from taking this disallowance merely
because it initially reimbursed the State for the interim rate.
(9) Calculation of the amount of ancillary costs attributable to
Medicaid patients
The State asked that the disallowances be remanded to the Agency so
that the amount of the claims can be recalculated according to section
2208.3 of HIM-15. We do not think this is necessary or appropriate.
The Agency's method of determining the costs attributable to Medicaid
(described at page 4, supra) appears to be reasonable given that the
State has not provided any data to document the costs attributable to
Medicaid patients and, indeed, admitted that it cannot provide such
data. Section 2208.3 sets out methods of apportioning costs under
Medicare Part B. The State did not explain why this should apply to the
costs in question here, why the other methods set out in section 2208.1
would be unsatisfactory or, indeed, how any method other than that used
by the Agency would be appropriate in view of the State's admitted
failure to obtain Medicaid statistics. (In any event, the Agency
asserted that Medicaid data would be used even with section 2208.3.)
Therefore, we decline to remand this appeal for further calculation of
the amounts.
Conclusion
We conclude that the State must use Medicaid data to apportion the
costs of ancillary services provided to Medicaid patients in State
psychiatric hospitals for the years 1972 through 1980, and that the
Agency is not estopped from taking these disallowances. We uphold the
disallowances in the amount of $2,652,069. /1/ Section 1902(a)(13)(D)
was amended and then repealed in 1981; however, neither the
amendment nor the repeal were effective in the period in question here.
/2/ The same regulation was originally set out at 45 CFR 250.30 (1972),
redesignated as 42 CFR 450.30 (1977), and then redesignated without
substantial change as 42 CFR 447.261 (1978). /3/ The State
attempted to justify this excess reimbursement by saying that "it
appears that the number of Medicaid patient days for purposes of
ancillary services had been overstated when the claim was calculated."
See fn. in State Brief, p.
Medicaid reimbursement based on application of Medicare principles.
This does not mean, however, that the Medicaid reimbursement will simply
incorporate the Medicare rate.
MARCH 19, 1985