GAB Decision 624
February 12, 1985
Iowa Department of Human Services;
Ford, Cecelia Sparks; Settle, Norval D. (John) Ballard, Judith A.
Docket No. 84-46.
The Iowa Department of Human Services appealed a decision by the
Health Care Financing Administration (HCFA) disallowing $774,786 in
federal financial participation (FFP) claimed by Iowa under Title XIX
(Medicaid) of the Social Security Act. The State subsequently
recomputed its claim to $662,623. The State said this amount
represented increases in the reimbursement rates for State institutions
participating in the Medicaid program to reflect statewide or
departmental central services costs incurred during the period October
1, 1980 through December 31, 1982 for support functions such as
accounting and payroll services. HCFA's disallowance and the parties'
briefs raised three threshold issues, which the parties agreed the Board
should address in this decision. The Board issued a proposed analysis
of these threshold questions, inviting comments from the parties; HCFA
alone responded. For the reasons set out below, we uphold the
disallowance of $112,163 and remand the remaining $662,623 disallowance
to HCFA, on the bases discussed below. This decision is based on HCFA's
comments, the briefs and documentation submitted by both parties, and
the tape of a conference call conducted October 18, 1984. Below, we
first provide a brief summary of our decision. We then provide a more
detailed discussion of the background of the case and our analysis of
the threshold issues. Summary of decision The State's claim here is for
expenditures for services provided by six State institutions. It is
undisputed that the institutions provided Medicaid reimbursable services
to eligible individuals, previously claimed FFP in expenditures for
those services (as measures by per diem rates), and now seeks to
retroactively increase the amount of the rates. For purposes of this
decision, it is also undisputed that the rate increases were calculated
in accordance with Iowa's(2) system for reimbursing providers, approved
in its State Medicaid plan. (Of course, HCFA now has an opportunity to
further examine the claims to ensure that the approved reimbursement
system was followed.) The dispute here arises because that system was
"cost-related," that is, the amount of the rates was calculated using
various underlying costs incurred by the institutions. The specific
underlying costs used in calculating the rate increases sought here are
"central services" costs (that is, costs of support services such
as
accounting, personnel, and payroll provided to the institutions by other
governmental components). Medicaid reimbursement systems may permit a
state to include some of these central services costs in calculating a
per diem rate for public institutions, so long as they are properly
allocated to the institution. During the time period in question here,
the State had approved cost allocation plans (CAPs), allocating central
services costs from the statewide and departmental levels to the
departmental component operating the institutions (but not to the
institutions themselves). The State later received approval of a CAP
containing a method for allocating the costs from the operating
component to the institutions. The State said it used this method in
retroactively calculating its rate increases (with one exception
discussed below, the parties agreed that the issue of retroactivity per
se would not be reached here). Notwithstanding all of the above factors,
HCFA disallowed the rate increases on the basis that the CAP allocating
the central services costs to the institutions was not, and could not
be, effective for the relevant time period. HCFA relied on an Office of
Management and Budget Circular (OMB A-87) for this position. OMB A-87
sets out procedures for timely submission of CAPs covering central
services costs. HCFA said that the State was precluded from using
central services costs in its per diem rate calculations if it did not
follow these procedures. Below, we conclude that OMB A-87 cost
principles simply do not apply in determining what costs can be used to
calculate a Medicaid reimbursement rate. Indeed, OMB A-87 specifically
exempts public providers of medical care from its requirements. OMB
A-87 does refer generally to central services costs, requiring timely
submission of both a statewide CAP allocating these costs and indirect
cost proposals (a type of CAP) for each governmental department or unit
charging indirect costs to federal grants. But, here, the State is
charging payment of the rate as a direct cost of Medicaid. Neither OMB
A-87 nor Medicaid regulations require a state to follow CAP procedures
for a governmental component which is providing services to program
recipients, but not itself claiming indirect costs under a federal
program. This omission, whether by design or not, is critical here;
where the State did not have notice that approval procedures(3) applied,
it is simply unfair to preclude the State from claiming otherwise
allowable rate increases solely for failure to follow those procedures.
Certainly, HCFA has a legitimate interest in assuring that using central
services costs to calculate a rate does not result in any inequity to
the federal government. But this is not a situation where the lack of
an approved allocation method during the relevant period renders the
State unable to provide those assurances. The State had approved
statewide and departmental CAPs covering the costs, and HCFA did not
allege that the later approved method allocating the costs to the
institutions was not otherwise appropriate for the relevant period. The
parties also argued at length over the applicability of HCFA's current
regulations allowing retroactive approval of CAPs to avoid a
"significant inequity." As discussed below, we do not need to reach
this
issue, but we discuss it to show how the provisions support our
interpretation of OMB A-87, and the result here. We also conclude that
the rate increases are not precluded for two of the institutions simply
because they were subject to a prospective Medicaid reimbursement
system. Having addressed these threshold issues, we remand the
disallowance of $662,623 to HCFA for further consideration of whether
the State properly calculated the rate increases. HCFA may reaffirm the
disallowance of this amount in whole or in part if the State cannot
document that it did properly calculate the increases. We uphold the
disallowance of $112,163, based on the State's recomputation of the rate
increases. Background Prior to 1983, the State's CAPs contained methods
for allocating a share of statewide and departmental costs incurred for
central support services functions (such as accounting, data processing,
and payroll planning) to the Division of Mental Health, Mental
Retardation, and Developmental Disabilities (Division), which operated
six institutions providing Medicaid services. However, the approved
CAPs did not contain any method for further distributing the costs to
these six institutions. Based on advice from an accounting firm, Iowa
determined that part of the costs allocated to the Division were
attributable to Medicaid since the institutions provided services to
Medicaid recipients. Iowa first submitted a claim for FFP at the
administrative cost rate of 50 percent for costs it said were actual
costs incurred in support of the institutions for the period October 1,
1980 to September 30, 1982. When HCFA deferred this claim, Iowa
withdrew the claim, revised it to also include the final(4) quarter of
1982, and resubmitted it as a claim for medical services at the federal
medical assistance percentage rate (55.35%). Iowa also submitted an
indirect cost rate proposal (a type of cost allocation plan), specifying
a methodology for distributing central services costs from the Division
to the institutions. /1/ This proposal was approved, with an effective
date of April 1, 1983. (Iowa Ex. 14; HCFA Ex. 6) During Board
proceedings, Iowa further revised its claim, alleging that the new
computation is based on adjusting the per diem rates previously used to
reimburse the institutions for Medicaid services so the rates would
reflect the part of the central services costs allowable under Iowa's
system for determining reimbursement rates for Medicaid facilities.
Since the recomputed claim is less than the disallowed claim, Iowa has,
in effect, acknowledged that the disallowance is appropriate to the
extent of the difference: $112,163. /2/
With respect to the remaining $662,623 disallowance, the parties and the
Board agreed that the Board would first address certain threshold issues
since, if HCFA prevailed on these issues, that would resolve the
dispute. /3/
(5)$%These issues are: * Are the rate increases precluded on the basis
that the State did not have an approved method for allocating the
central service costs to the institutions prior to 1983? * Could the
later approved CAP be effective retroactively to provide a method for
allocating these central service costs? * Does the use of a prospective
rate method for reimbursing some of the institutions preclude the type
of retroactive rate increases claimed here? Analysis I. Are the rate
increases precluded on the basis that the State did not have an approved
CAP? A. The parties' positions HCFA asserted that since Iowa's
approved CAPs did not allocate costs any further than the Division,
Iowa's claim for federal reimbursement was inappropriate. HCFA's
primary support for this position is Office of Management and Budget
Circular A-87 (OMB A-87) which provides at Attachment A, Section J:
1. General. A plan for allocation of costs will be required to
support the distribution of any joint costs related to the program.
* * * *(6)
2. Requirements. The allocation plan of the grantee department
should cover all joint costs of the department as well as costs to be
allocated under plans of other agencies or organizational units which
are to be included in the costs of federally sponsored programs. . . .
/4/
Iowa conceded that its approved departmental CAP did not specify a
method for cost allocation to the six institutions and did, in fact,
state generally that there was no further allocation of costs below the
Division level. Iowa indicated that since it was not including the
costs in its rate calculation at the time the plan was approved, it had
seen no reason to allocate the costs to the institutions. While
admitting that the CAP did not specify a method for allocating the costs
to the institutions, Iowa argued that the costs were of the type which
would have been clearly allowable if the CAP had specified an allocation
method originally. Iowa contended that the general allowability of
these costs was demonstrated by the approval of Iowa's current CAP
(effective April 1, 1983), which includes these same costs. Iowa
presented alternative arguments with respect to the relationship of OMB
A-87 to the facts of this case. Iowa maintained that OMB A-87 was
inapplicable here because of a specific exemption in A-87 for publicly
owned hospitals and other providers of medical care subject to
requirements promulgated by sponsoring federal agencies. Iowa also
claimed that, even if OMB A-87 was generally applicable, it did not
specifically prohibit Iowa's claims. (Iowa Brief, p. 9; OMB A-87,
Attachment A, A., 3) B. Applicability of OMB A-87 to the State's Claim
As HCFA noted, Medicaid funds are not "grants" to hospitals; rather,
they are "grants" to states. (HCFA Brief, p. 3) OMB A-87 applies
generally to costs charged to Medicaid by state and local governments,
except where inconsistent with specific Medicaid provisions. We also
agree with HCFA that central support service costs incurred at the State
or departmental level are the type of joint costs that generally should
be covered by a CAP. Indeed, the State understood this and the costs
were covered by the statewide and/or departmental CAPs to the extent of
(7) being allocated to the Division. However, the State is correct that
its publicly-owned Medicaid providers are exempted from the provisions
of OMB A-87. As explained in this Department's instructions on
procedures for establishing CAPs (OASC-10), OMB A-87 does not apply to
such institutions because their organization differs markedly from other
operations of State and local governments. (OASC-10, p. 18) Thus,
special cost principles apply. (Below, we discuss what principles apply
under Medicaid.) Moreover, even if OMB A-87 did apply, OMB A-87 simply
does not address the question of when a state can include central
services costs in determining institutional reimbursement rates. OMB
A-87 requires that a CAP include any costs claimed as a "charge to"
federal funds. Iowa is not seeking to charge the central services costs
themselves, however. Rather, Iowa is using some of the central services
costs attributable to the six institutions in recalculating the per diem
rates charged by the institutions for Medicaid services. To understand
why this distinction is relevant it is important to understand generally
how provider reimbursement works under Medicaid and what expenditure the
State is claiming here. C. Provider Reimbursement Systems Under
Medicaid, the cost of services provided by hospitals or intermediate
care facilities (ICFs) is determined according to the methodologies set
out in the approved state plan for Medicaid. See 42 CFR Part 447,
Subpart C. (Four of the six institutions here were mental health
hospitals and the remaining two were ICF/MRs.) The Iowa State Plan
adopts Medicare reimbursement methods for hospitals and prospective
reimbursement method for ICF/MRs which employs Medicare principles,
where necessary, to fill in gaps. Using these methods, Iowa establishes
per diem rates applicable to the institutions. The per diem rates are
based on the costs the institutions incur and report, but various limits
apply. When a prospective rate-setting system is used, such as the one
Iowa employs for its ICF/MRs, a rate is set based on historical costs of
the facility (usually adjusted by an inflation factor), rather than the
actual cost of providing the services for which the rate is claimed.
The applicable principles for determining the allowability of costs used
to calculate the rates are those established by Medicare cost principles
or the State Plan, rather than those set out in OMB A-87. When the
State Medicaid Agency submits an expenditure report for services
provided by the institutions, it is seeking FFP in the amount of the per
diem rate paid for each patient day of service provided by one of the
institutions to a Medicaid recipient. What is key here is that while
the rate is(8) calculated using the underlying costs, it is not merely a
shorthand summary for costs which are themselves directly claimable as
Medicaid expenditures. What is claimed as a Medicaid expenditure is the
cost of the service as measured by the rate. The State alleged that its
claim here was calculated in accordance with Medicare cost principles
which permit governmental central services costs to be included in
calculating rates for public providers under certain conditions when
related to patient care. /5/ The Medicare reimbursement principles do
not, however, specifically state that, to be considered in calculating
the reimbursement rates, these central services costs must have been
allocated in a cost allocation plan approved by DCA. See generally,
Provider Reimbursement Manual (HIM-15), Part I, section 2156. /6/
D. OMB A-87 and the rates When a private facility is reimbursed under
Medicaid, there is no question that a state Medicaid agency's
expenditure, in which it claims FFP, is the payment to the provider for
the service, as determined by the applicable rate. The underlying costs
used to calculate the rate are incurred by the private provider, not by
the state, and Medicaid reimbursement principles apply to those costs,
not OMB A-87. When the provider is a public institution, however, the
purposes behind the OMB A-87 CAP procedures have some(9) relevancy. The
provision of the service to the recipient is what gives rise to the
state's entitlement to FFP in the amount of the rate, as determined by
the rate-setting methods and cost principles applicable to all
providers. Yet, where the underlying costs are ones which have been
incurred by a state government agency which provides central support
services, they are the type of joint costs which may be charged in part
as administrative costs of other federal programs or activities. Thus,
the federal government has a legitimate interest in ensuing that they
have been properly allocated to the state institutions and not charged
to other federal programs. The difficulty is that OMB A-87 simply does
not address this issue. While OMB A-87 does refer generally to "joint
costs" as ones which must be included in a CAP, it also contains
language about costs "charged" to federal funds. Strictly speaking,
the
cost charged to federal funds here is the cost of the service provided
to the recipient, i.e., the rate, and it is incidental that in
calculating the rate the State included the costs of services provided
to the institution by various State government agencies. In interpreting
what must be covered by central services CAPs, the Guide for State and
Local Government Agencies, issued in December 1976 as OASC-10, refers to
support services rendered by one state or local government agency to
another and speaks of identifying "the costs of each service to be
claimed." (OASC-10, p. 6) This kind of language does not apply where a
State is not claiming FFP for the governmental agency's service to the
institution but for the institution's service to the program recipient.
Moreover, in referring to CAPs other than statewide CAPs, OASC-10 speaks
of indirect cost proposals which must be submitted by each governmental
unit that wishes to claim indirect costs on federal grants. The State's
claim here is a charge for the Medicaid services to the recipient, a
direct cost clearly allocable to Medicaid. Since OMB A-87 does not apply
to institution rate-setting, we do not think the Circular provided
notice to the State that the failure to specify in a CAP a method for
allocating these costs to the institutions would preclude the State from
including the costs in calculating the rates. Thus, we believe that OMB
A-87 cannot be a basis for disallowing rate increases due to including
these costs, simply because there was no CAP which specified a method
for allocating them to the institutions. E. The incompleteness of the
plans is not critical here HCFA argued that it was not holding the State
to a merely technical, procedural requirement but that the allocation of
these costs was essential to assure that they were of a type(10)
allowable under Medicaid. We belive that the particular circumstances
of this case provide HCFA with means of receiving these assurances. As
Iowa noted, the costs were effectively allocated one layer about the
institutions, that is, at the Division level. Moreover, the Iowa State
Plan's methodology for calculating the reimbursement rate addressed
these costs. /7/ Thus, HCFA has the means to determine whether the costs
in issue are related to patient care and otherwise properly included in
the rates. What HCFA found lacking was a method showing how the costs
would be allocated to the six institutions. If, as Iowa alleged, it
used the method later approved as part of its CAP and, therefore,
acceptable to the Division of Cost Allocation (the component of HHS
responsible for approving cost allocation methods), this concern has
been adequately addressed as well. HCFA did not allege any reason why
this method would not be appropriate for the period in question.
We are simply not faced with a situation in which Iowa was allocating
costs by employing a methodology different from, or inconsistent with,
that specified in a CAP. Rather, Iowa was attempting to merely fill an
alleged gap in the existing CAPs. Moreover, it is undisputed that the
State did not previoisly claim reimbursement for the central services
costs, and, if they were allocated to the Division using an approved
method, this assures that they were not charged to other federal
programs. Thus, permitting the State to fill in the gap will not result
in duplicate charges or inconsistent treatment of costs, nor did HCFA
argue it will place any undue burden on the federal government. In
summary, OMB A-87 did not provide notice to the State that CAP
requirements applied here. Given the fact that HCFA should reasonably
be able to determine the allowability of the rate increases under
Medicaid, we conclude that the failure to have advance approval does not
preclude the claim here.(11) II. Could the later approved CAP be
applied retroactively? We have concluded that the State may include
allowable central services costs in calculating its reimbursement rates,
under the particular circumstances here. Thus, strictly speaking, we do
not need to decide here whether the method for allocating costs to the
institutions could be applied retroactively as an amendment to the
Department's CAP. However, we have provided a discussion of this issue
since it bolsters our conclusion above. HCFA argued that it had no
discretion to apply the method retroactively to cover the costs in
question. HCFA noted that the CAP amendment process is now controlled
by 45 CFR Part 95, Subpart E. /8/ HCFA then contended that Subpart E
presented two impediments to any attempted CAP amendment. First, HCFA
pointed out that Iowa had agreed that the costs in question should have
been classified as vendor payments (HCFA Brief p. 6; Exhibit 4).
Subpart E does not apply to vendor payments. See 45 CFR 95.505.
Second, HCFA argued that, assuming that Subpart E did apply, 45 CFR
95.515 prohibited the amendment. That regulation provides:
As a general rule, the effective date of a cost allocation plan
amendment shall be the first day of the calendar quarter following the
date of the event that required the amendment . . . However, the
effective date of the amendment may be earlier or later under the
following conditions:
(a) An earlier date is needed to avoid a significant inequity to
either the State or Federal Government.
HCFA argued that Iowa's situation did not demonstrate inequity which
would justify an amendment of its CAP back to October 1980. HCFA
contended that Iowa had merely failed to(12) file a complete CAP and was
now attempting to correct its mistake. HCFA noted that other states had
included these costs in their CAPs and argued that, therefore, there was
no inequity in requiring Iowa to do the same. (HCFA Brief, p. 7) Iowa
argued that, since HCFA had the discretion to allow Iowa to
retroactively amend its CAP, the disallowance was inequitable, whether
or not Iowa could be faulted for not including these costs in its CAP.
We do not share HCFA's view that the central services costs incurred in
support of the six institutions are "vendor payments" for purposes
of
Subpart E. While the State expenditures for the Medicaid services,
claimed for federal reimbursement based on the per diem rates, are
payments made to a "vendor" of Medicaid services, the underlying costs
included in the rate calculations are not. Moreover, the position that
the central services costs are "vendor payments" and therefore not
subject to Subpart E is inconsistent with the view that OMB A-87 applies
to the State's claim here. As Medicaid vendor payments, the
expenditures would not fit the concept of joint costs, subject to OMB
A-87 CAP procedures. In general, we think that the lack of clarity
concerning the scope of Subpart E, when dealing with central services
costs used to calculate a per diem rate for State institutions, supports
our conclusion above that there was no guidance on this issue. In
responding to our preliminary analysis, HCFA said that it believed it
was proper to look at the costs incorporated in the institutional claims
as vendor payments. HCFA asserted that this view was consistent with
the statute, which authorizes payment not for central services costs but
for medical services which may or may not include central service costs.
We agree with HCFA that the basis for the State's claim for FFP is the
payment for medical services provided by the institutions. That payment
(the per diem rate times the number of patient days of service provided)
is intended in part to reimburse the State for costs incurred in
providing the services, which may reflect some element of central
services costs. But the vendor payment to the institution is not a cost
which needs to be allocated under a CAP. The entire payment of the rate
is readily identifiable as a Medicaid expenditure to the extent it is
payment for a covered service to an eligible individual. The question
here is whether the central services costs incurred by a component of
state government in providing a service (such as accounting, payroll,
ect.) to the institution is itself a vendor payment for medical
services. Even if HCFA's view that it(13) is a vendor payment were the
preferable view, our primary point -- that the regulation is not clear
in this regard -- would still be valid. /9/
We do not believe that Iowa's initial failure to include a method in the
CAP for allocating these costs to the institutions now precludes
retroactive approval of a method. Iowa's CAPs were approved, although,
in retrospect, HCFA would have preferred that the costs were allocated
to the institution level. Given the complexities of determining costs
for provider institutions, the mere fact that other states submitted
more detailed CAPs does not mean that Iowa should have been expected to
know that its plans should also have been more detailed. Moreover, a
stated objective of the cost principles governing cost allocation plans
is to ensure that federally-assisted programs bear their fair share of
costs. OMB A-87, A., 1. HCFA's decision would entirely preclude
recovery by Iowa of the federal share of the rate increase to reflect
these costs. HCFA has recognized the general allowability of these
types of costs for later periods as allocated in the approved CAP
effective April 1, 1983. Given the facts of this case, we think that to
adopt HCFA's position that recovery is precluded would impose the type
of inequity upon Iowa which 45 CFR 95.515 seeks to avoid. In its
comments, HCFA argued that "the Board concludes, in effect, that a
disallowance is per se inequitable." HCFA's Response, p. 4. According to
HCFA, "With that precedent any procedural requirement may be ignored if
it would result in a disallowance because disallowances are per se
inequitable and 45 CFR Sec. 95.515(a) seeks to avoid inequity." Id.
HCFA has obviously misread our conclusion. Certainly, we are not
implying that any disallowance is inequitable. A state would not be
treated inequitably by a disallowance of unallowable costs or if a state
had failed to follow clear procedural requirements deliberately or due
to its own mismanagement. But here, we have concluded that the State
did not have notice that the procedural requirement applied. We
noted(14) that HCFA's position would totally deny the State any
reimbursement for an allowable rate increase in order to distinguish
this situation from that where a state is simply seeking to substitute
one allocation method for another method found to result in some
inequity which is relatively insignificant. Moreover, even if there
were some inadequacies in how the State proceeded here, the regulation
in question contemplates this; it is designed to suggest that in some
circumstances the normal restrictions may be waived. Thus, contrary to
HCFA's assertions, we do not think our result above sets a precedent in
conflict either with Medicaid regulations or OMB A-87. III. Is Iowa
precluded from recovering these costs because of its prospective rate
methodology? HCFA argued that Iowa could not recover these costs
because it employed a prospective reimbursement system for its ICF/MRs
during the period in question. In support of this position, HCFA cited
the Board's decision in Arkansas Department of Human Services, Decision
No. 357, November 15, 1982. In Arkansas, we upheld a disallowance by
HCFA because (among other reasons) the Arkansas State Plan did not
provide for additional payment to reflect the difference between the
prospective rate paid to Medicaid institutions and actual costs incurred
during the period the rate was paid. Arkansas was attempting to recover
the difference between what the institutions were paid under their
prospective rate for a particular period and the actual costs incurred
during that period. In other words, Arkansas was seeking full
reimbursement of costs in contravention of its State Plan, which
provided for payment of the prospective rate only. That is not the
situation presented by these facts. Iowa is merely seeking to
recalculate what the prospective reimbursement rate should have been
based on historical costs. The record here supports the conclusions
that Iowa could properly have included some central services costs in
its prospective rate calculations, and would have done so had it
initially been aware of the fact that this was possible. The State has
also alleged that its State Plan permits adjustment of the prospective
rate under circumstances where costs could have been included in
calculating the rates initially, but were not. Since the factual setting
here differs substantially from that presented in Arkansas, we conclude
that our decision in Arkansas does not preclude recovery of these costs,
so long as the rate calculations are, in fact, in accordance with the
Iowa State Plan.(15) Conclusion For the reasons stated above, we uphold
the disallowance of $112,163 and remand the remaining $662,623 to HCFA.
The parties have indicated that, based on our decision, they would
attempt to resolve any issues remaining in dispute. If they cannot
resolve these issues, the State may return to the Board within 30 days
of receiving HCFA's final written decision on any remaining issue. /1/
As HCFA pointed out, our preliminary analysis mistakenly
identified this as a CAP "amendment" although it was in effect
considered a new CAP, separate from previously approved statewide and
departmental CAPs. We disagree with HCFA, however, that this is critical
here; rather, we think it is important that the State had approved
statewide and departmental CAPs that covered the costs in question,
allocating them to the Division level. Thus, there were existing plans
which included the costs. We also note that it would have been
permissible for the State to cover the allocation from the Division
level to institutions in a consolidated Departmental Plan. See 47 Fed.
Reg. 17507 (April 23, 1982). /2/ In response to our preliminary
analysis, HCFA said that it does not have documentation supporting the
revised amount of $662,623 and that the State had not yet submitted a
revised expenditure report to reduce its FFP claim to that amount. Our
decision does not hold that the $662,623 is allowable. HCFA may
reaffirm its disallowance if the State cannot document that it is
entitled to this amount. Since we uphold the disallowance of the
remaining amount, the State should make the appropriate decreasing
adjustment of $112,163 in an expenditure report if it has not already
done so. /3/ In its comment on the Board's preliminary analysis
of the threshold issues, HCFA said that the Board should also consider
in this opinion how agencies should interpret the following statutory
and regulatory provisions: section 1902(a)(13)(A) of the Social
Security Act; 42 CFR 447.256(b); and 45 CFR 201.3. Essentially, HCFA
had argued in its initial brief that the State was precluded from its
claim here because it was attempting to retroactively amend its State
Medicaid plan provisions on provider reimbursement without following the
appropriate procedures. HCFA did not identify this issue as one which
it wished us to address with the other issues identified in the
conference call as threshold issues, but, if we agreed with HCFA that
these requirements applied here, this conclusion would likewise resolve
the case. We had thought that HCFA had chosen not to pursue this issue
because the State's rebuttal was very persuasive: the State is simply
not attempting here to amend its reimbursement methodology but is
asserting that, under its existing methodology, it was permitted to
include certain additional costs. We see nothing in the cited
provisions which precludes this. /4/ OMB Circular A-87, issued
January 28, 1981 (46 Fed. Reg. 9548), was previously designated as FMC
74-4. The cost principles set out in OMB A-87 had initially been
contained in 45 CFR Part 74, Appendix C, which has since been removed
(45 Fed. Reg. 34274). Part 74 now incorporates OMB A-87 by reference.
See 45 CFR 74.171. /5/ The State also pointed out that the
principles applicable to ICF/MRs under the State plan treat costs of a
"parent company" as allowable when specified conditions are met. The
State alleged that those conditions were met here and that these central
services costs could be treated as parent company costs. /6/ As
HCFA pointed out in commenting on our preliminary analysis, HIM-15 does
require the State to have an acceptable allocation method approved for
Medicare. But HIM-15, at Part I, section 2156.2 sets out acceptable
allocation bases for various types of services and requires approval by
the Medicare fiscal intermediary only for an allocation basis different
from that listed or for an additional type of service. HCFA said the
allocation basis used by Iowa is one requiring approval, but cited
nothing to support this. Iowa's Exhibit 14 indicates that some of the
allocation bases were ones listed in section 2156.2. In any event,
contrary to HCFA's assertion, nothing in the manual or elsewhere
specifically indicates that, if an institution is providing Medicaid
services, the allocation method must be approved by following OMB A-87
CAP procedures. /7/ HCFA commented on this statement by stating
conclusorily that "the Iowa reimbursement plan is silent on home-office,
parent company or governmental support costs." (HCFA Response, p. 5) Our
decision leaves open the question of whether, in fact, the costs claimed
were in accordance with the Iowa reimbursement plan. We note, however,
that the State cited part of its plan (Iowa Brief, p. 10) and submitted
an affidavit (Exhibit B) in support of its position on this matter.
Moreover, HCFA did not deny that the State Plan for the mental hospitals
uses Medicare principles, which do address these types of costs.
According to the State's affidavit, which was also uncontradicted,
Medicare principles are used as well to fill gaps in the principles for
ICF/MRs. /8/ Subpart E (47 Fed. Reg. 17506, April 23, 1982)
established requirements for preparation, submission and approval of
CAPs and guidelines for adherence to approved CAPs by public assistance
agencies in computing claims for FFP. Prior to publication of Subpart
E, cost allocation requirements for Medicaid were addressed at 42 CFR
433.34. This section provides that FFP is available in Medicaid
expenditures only if they are "in accord with" an approved CAP, but,
if
claims are disallowed because a plan is outdated or a proposed revision
has not been approved, the section permits reclaiming of the costs after
approval of a plan that supports the costs. /9/ We also note
that the preamble to Subpart E noted that "the development of a cost
allocation plan will not be required for those components or agencies of
an overall department that do not have any direct Federal awards." 47
Fed. Reg. 17507, April 23, 1982. It is certainly arguable that the
Division operating the six institutions was not receiving a "direct
Federal award," even though it ultimately may have received
reimbursement for providing services in which the state Medicaid agency
claimed FFP.
JUNE 06, 1985