Effect of DEFRA Amendments on Utilization Control Disallowances, DAB No. 655 (1985)

GAB Decision 655

June 7, 1985

Effect of DEFRA Amendments on Utilization Control Disallowances;
Ballard, Judith A.; Ford, Cecilia Sparks; Garrett, Donald F.; Settle, Norval D. (John) Teitz, Alexander G.
Docket Nos. 84-145, 84-204, 84-213, 84-214, 84-219, 84-221, 84-224, 85-8, 85-27

Eight States appealed disallowances taken by the Health Care
Financing Administration (HCFA) reducing the States' Medicaid funding
for long-stay inpatient services provided by institutions in calendar
quarters ending September 30, 1983 through September 30, 1984. /1/
Section 1903(g) of the Social Security Act provided, generally, that the
rate of Medicaid funding for long-stay inpatient services would be
reduced unless a State made a satisfactory showing that it had an
effective program of control over utilization of such services. The
showing had to include evidence that the patients' need for the services
was being certified and recertified in a timely manner and that each
patient had a plan of care. HCFA found, based on surveys to validate
the States' showings, that each of these States had violated one or more
of these utilization control requirements.

The States argued, generally, that HCFA lacked authority to take these
disallowances because of amendments to section 1903(g) made by the
Deficit Reduction Act of 1984 (DEFRA), which eliminated (2) the
provisions requiring States' showings to include evidence of
certifications, recertifications, and plans of care. The Board issued
an Invitation To Brief to the parties, seeking further development on
the effect of the DEFRA amendments, and subsequently informed the
parties that the Board would issue a joint decision addressing all of
the parties' arguments on the DEFRA question. For the reasons discussed
below, we conclude that disallowances taken for services provided in
quarters prior to July 1, 1984 are not precluded by the DEFRA
amendments. Remaining issues for each State will be covered in
subsequent decisions. Below, we first provide a summary of the parties'
major arguments and our conclusions. We then provide a more detailed
analysis of section 1903(g), the DEFRA amendments, and questions related
to how Congress intended those amendments to apply. Summary of Arguments
and Conclusions Essentially, the States argued that this Board should
apply section 1903(g) as amended by DEFRA, rather than section 1903(g)
as in effect prior to amendment. HCFA argued that, since section
2363(c) of DEFRA says that the amendments "apply to calendar quarters
beginning on or after the date of enactment" of DEFRA (July 18, 1984),
this plainly meant that the DEFRA amendments were effective to eliminate
funding reductions only with respect to quarters beginning on or after
October 1, 1984. The States responded that this wording was ambiguous.
Therefore, the States argued, a statement in the Conference Report on
the amendments ("Effective July 1, 1984, the current penalty would not
apply to the physician recertification requirement . . . ) controls and
section 1903(g) disallowances pending on or after July 1, 1984 are
governed by the amended provisions. The States pointed to a statement
in a HCFA Legislative Summary, similar to that in the Conference Report,
and said that this statement was binding on HCFA. The States also
contended that it is significant that there is no clause in DEFRA
specifically saving actions pending under section 1903(g). The States
said that HCFA could not rely on a general savings provision at 1 U.S.C.
109 (providing that repeal of a statute does not extinguish any penalty
or liability incurred under the statute). Noting that courts have found
this provision inapplicable where a statutory change is remedial or
procedural, the States argued that the DEFRA amendments fit this
description. Most of the States argued that section 1903(g) reductions
were not a true penalty (although one State said section 1903(g) was a
penalty which should be strictly construed). One State said that (3)
section 1903(g) was a liquidated damages clause in the federal/state
agreement and therefore constituted a remedy, lost through amendment.
Another said that section 1903(g) was an incentives provision and should
no longer be applied since it could no longer have any future effect.
Finally, the States argued generally that the purpose of the DEFRA
amendments was to remedy problems caused by HCFA imposing the reductions
on states whose utilization control failings were merely "paper
deficiencies" and that continuing to take reductions based on the
unrevised provisions was directly contrary to what Congress intended.
Based on our analysis of section 1903(g), we conclude that it
established a condition (i.e., a satisfactory and valid utilization
control showing) which states had to meet in order to be entitled to
Medicaid funding at the full FMAP rate for long-stay inpatient services.
This conclusion is significant in light of a recent decision by the
United States Supreme Court indicating that reliance on the usual rule
that a court or administrative agency should apply the law in effect at
the time it renders its decision is inappropriate in the context of
federal grant programs. Bennett v. New Jersey, 53 U.S.L.W. 4337 (March
19, 1985). After discussing the nature of the obligations arising under
a grant, as well as practical considerations related to administering
grant programs, the Supreme Court concluded that -- absent a clear
indication to the contrary in the relevant statutes or legislative
history, changes in the substantive standards governing federal grant
programs do not alter obligations and liabilities arising under earlier
grants.

53 U.S.L.W. at 4340. Applying this rule, we conclude that there is no
clear indication in DEFRA or its legislative history that Congress
intended to retroactively alter the States' obligations to make a
satisfactory and valid utilization control showing under the
requirements in effect during any given quarter. Rather, the wording of
section 2363(c) of DEFRA indicates that Congress intended the amendments
to apply to quarters beginning on or after October 1, 1984 and implies
that the pre-amendment provisions would continue to apply to previous
quarters. We further conclude: * The DEFRA amendments altered the
parties' substantive obligations and liabilities and were not primarily
procedural or remedial.(4) * Since the States' substantive obligation to
make a showing with respect to the quarter beginning July 1, 1984, did
not arise until after that date, however, the showing for that quarter
did not have to include evidence of proper certifications,
recertifications, and plans of care. This conclusion is compelled by
the nature of the revisions made by DEFRA. In addition, it is
consistent with the language in the Conference Report and the HCFA
Legislative Summary. * Although a section 1903(g) reduction may not be a
true penalty within the meaning of the general savings provision at 1
U.S.C. 109, this does not mean that that provision does not apply. To
the extent a state received a higher rate of federal funding than what
it was entitled to under section 1903(g), the state incurred a liability
which amendment of that section would not alter. * Although Congress
acted through the DEFRA amendments to provide a more liberal schedule
for recertifications (and a grace period for late recertifications in
some circumstances) and to change the requirements to which the section
1903(g) reductions would apply, Congress reaffirmed its intention that
utilization control requirements be met. Nothing in the amendments
indicates that Congress thought that HCFA had misinterpreted the
previous requirements. Thus, we conclude that these reductions are
within HCFA's authority, with the exception of the reduction taken for
the quarter beginning July 1 and ending September 30, 1984. What section
1903(g) does

General background Title XIX of the Social Security Act (Act)
establishes a grant program under which states which have an approved
Medicaid state plan receive federal financial participation (FFP) in
expenditures for medical services to needy individuals. Section 1902 of
the Act sets out what state plans must provide, including that states
must have methods and procedures for control of utilization of all
Medicaid services; a utilization review program; and a program of
medical review. Sections 1902(a) (26), (30), and (31). Section 1905(
a) defines "medical assistance," indicating what types of services must
or may be covered under a state plan and who is eligible to receive the
services. Section 1903 of the Act is called "Payments to States."
Section 1903(a) establishes the amounts which the Secretary pays to each
(5) state which has an approved Medicaid state plan. For state
expenditures for "medical assistance," a state receives "an amount equal
to the Federal medical assistance percentage (as defined in section
1905(b), subject to subsections (g), (h), and (j) of (section 1903))."
Section 1903(a) (1). The federal medical assistance percentage (FMAP)
is a reimbursement rate calculated separately for each state based on
per capita income (but is never less than 50 percent). Section 1905(b).
The states receive advance funding for each quarter, based on estimated
expenditures for that quarter, and then adjustments are made based on a
Quarterly Statement of Expenditures reporting actual expenditures for
each quarter. Section 1903(d); see also 45 CFR 201.5. Prior to
amendment, section 1903(g) (1) provided that, with respect to amounts
paid for certain "long-stay services," the FMAP "shall be decreased . .
. unless the State . . . makes a showing satisfactory to the Secretary
that, with respect to each calendar quarter for which the State submits
a request for payment at the full (FMAP) for amounts paid for (long-stay
services), there is in operation in the State an effective program of
control over utilization services . . . ." /2/ The showing had to
include evidence that certification, recertification, and plan of care
requirements were met, as well as evidence about utilization review and
medical review programs. The showing for any quarter had to be
submitted within 30 days after the end of that quarter, unless the time
period was extended for good cause. Section 1903(g) (4) (A). The
Secretary was to review the validity of the states' showings, sometimes
performing on-site surveys of institutions. Section 1903(g) (2); see
also 1902(g) (6) (B). If a state's showing was found to be
unsatisfactory or invalid, the reduction was to be taken based on the
formula set out at section 1903(g) (5).

The nature of the reduction In our view, section 1903(g) establishes
a condition for federal funding at the FMAP rate for long-stay services.
The provision in section 1903(a) (1) for reimbursing medical assistance
at the FMAP rate is "subject to" subsection (g), and the Secretary is
(6) directed to decrease the FMAP with respect to long-stay services
unless the state makes a satisfactory showing that it has an effective
utilization control program. Thus, the States clearly knew, during each
of the quarters prior to the DEFRA amendments, that, if they could not
validly show they met the requirements imposed by section 1903(g), they
would receive funding for long-stay services provided during that
quarter at the reduced rate, rather than the full FMAP. Cf. Pennhurst
State School and Hospital v. Halderman, 451 U.S. 1 (1981). Thus, we
conclude that the rationale expressed by the Supreme Court in Bennett,
supra, applies here as well, and that, absent a clear indication from
Congress, the DEFRA amendments should be given prospective effect only.
In Bennett, the State of New Jersey had given assurances that it met
requirements under Title I of the Elementary and Secondary Education
Act, and was found to have violated those assurances. Similarly, where
a state certified as part of its section 1903(g) showing that it met
utilization control requirements, HCFA has the authority to evaluate the
showing based on the requirements which applied to the showing at the
time it was made. If HCFA finds that the showing is invalid, and these
findings are upheld, HCFA can disallow the difference between funds
awarded at the full FMAP rate, based on the state's certification, and
amounts payable at the reduced rate. This view of section 1903(g) is
consistent with the legislative history of that section. Section 1903(g)
was originally enacted as part of the Social Security Amendments of
1972, Pub. L. No. 92-603. The administration originally proposed an
automatic reduction in the FMAP rate for all long-stay services.
Instead, Congress determined that states which could show that they had
an effective utilization control program should be entitled to funding
at the full FMAP rate. See S.REP. No. 298, 95th Cong., 1st Sess. 4
(1977). The corresponding conclusion is that states which have not made
a satisfactory utilization control showing, in quarters where this was
clearly required, simply are not entitled to the additional funds. We
also note that, although the legislative history of section 1903(g)
refers to the required reduction as a "penalty," and so do the HCFA
regulations, the Act itself does not use this term. The practical
effect of the provision is no different from other provisions
establishing what rates of FFP apply to what expenditures. As the
Supreme Court noted in Bennett, a demand for repayment of grant funds
"is more in the nature of an effort to collect upon a debt than a penal
sanction." 53 U.S.L.W. at 4334.(7) How DEFRA amended section 1903(g)

Summary of DEFRA amendments The relevant provisions of section 2363
of DEFRA, Public Law 98-369, July 18, 1984, may be summarized as
follows: * Section 2363(a) (1) amended section 1902(a) of the Act to,
among other things, insert a new paragraph (44) requiring state Medicaid
plans to provide for patient certifications and recertifications for
long-stay services, and for plans of care. * Section 2363(a) (2) amended
section 1903(g) (1) of the Act, deleting the paragraphs describing
utilization control requirements, and substituting new language
indicating that a state's quarterly showing need include evidence only
that medical review program requirements were met. * Section 2363(a) (4)
deleted certain provisions requiring the Secretary to report on
utilization control actions and substituted a new section 1903(g) (6) of
the Act, specifying how often recertifications had to be conducted for
patients receiving various types of long-term care, and allowing a grace
period of 10 days if a state establishes good cause why the
recertification schedule was not met. * Section 2363(c) provided: The
amendments made by subsection (a) apply to calendar quarters beginning
on or after the date of the enactment of this Act, except that, in the
case of individuals admitted to skilled nursing facilities before such
date, the amendments made by this section shall not require
recertifications sooner or more frequently than were required under the
law in effect before such date. /3/

Amendments to section 1903(g) (1) The key substantive changes were
those to section 1903(g)(1), which the States describe as removing the
Secretary's authority to take reductions based on violations of the
certification, (8) recertification, and plan of care requirements. A
comparison of the section prior to and after amendment reveals how a
state's showing under the revised provision differs from that under the
unamended provision. Prior to amendment, section 1903(g)(1) read in
pertinent part:

(A) in each case for which payment is made under the State plan, a
physician certifies at the time of admission . . . (and . . .
recertifies, . . . at least every 60 days . . .) that such services are
or were required . . . ; and

(B) in each such case, such services were furnished under a plan . .
. ;

(D) such State has an effective program of medical review . . .
pursuant to section 1902(a)(26) and (31) whereby the professional
management of each case is reviewed and evaluated at least annually by
independent professional review teams. As amended, section 1903(g)(1)
reads in pertinent part:

. . . the Federal medical assistance percentage with respect to
amounts paid for (long-stay inpatient services) shall be decreased . .
. unless the State . . . makes a showing satisfactory to the Secretary
that, with respect to each calendar quarter for which the State submits
a request for payment at the full Federal medical assistance percentage
for amounts paid for (such services), such State has an effective
program of medical review . . . pursuant to paragraphs (26) and (31) of
section 1902(a) whereby (9) the professional management of each case is
reviewed and evaluated at least annually by independent professional
review teams. In several of the briefs submitted by HCFA in these
appeals, HCFA argued that the statement in the Conference Report on
DEFRA about the "current penalty" no longer applying to recertifications
was irrelevant because Congress did not alter the penalty in section
1903(g)(5). This assumes that the only way Congress could alter the
"penalty" was by amending section 1903(g)(5), which contains the formula
for calculating the penalty, a misimpression apparently arising because
both Houses of Congress had originally proposed merely applying a lesser
penalty to utilization control violations based on failure to recertify.
While the Conference Committee chose to take a different approach, the
Conference Committee action, ratified by the full Congress, accomplished
through the amendments to section 1903(g)(1) shown above a change in the
requirements which could be a basis for a section 1903(g) reduction.
Thus, it does not matter that section 1903(g)(5) was not amended. The
question here is whether we should evaluate the States' showings for the
quarters in question here based on section 1903(g)(1) as amended. To
examine this question we next analyze section 2363(c) of the DEFRA.
What section 2363(c) of DEFRA means

The parties' arguments As mentioned above, section 2363(c) of DEFRA
provided that the amendments made by subsection (a) of that section
(including the amendments to section 1903(g) discussed above) "apply to
calendar quarters beginning on or after the date of the enactment of
this Act . . . ." HCFA said that this unambiguously means that the
pre-amendment provisions of section 1903(g)(1) are to be used to
evaluate states' showings for any quarter prior to the quarter beginning
October 1, 1984, since the President signed DEFRA on July 18, 1984, and
the first calendar quarter beginning on or after this date is the
quarter beginning October 1, 1984. The States argued that section
2363(c) is ambiguous since it does not answer the question of how the
new provisions apply after the date of enactment. In the States' view,
the fact that section 2363(c) does not specifically address the question
of what effect the amendments have on reductions which were not final
before DEFRA undercuts HCFA's reliance on the "plain meaning" rule.(10)
The States also said that section 2363(c) is ambiguous because the last
part of that section, which provides an exception for when
recertifications are required for patients admitted to skilled nursing
facilities, refers to the "law in effect" before the date of enactment.
/4/ This implies, the States argued, that the prior provisions are no
longer in effect after the date of enactment and gives rise to an
internal inconsistency within section 2363(c).

Given these ambiguities, the States argued, the Board should look to the
legislative history of section 2363. Specifically, the States relied on
the statement in the Conference Report mentioned above. In discussing
section 2363, the Conference Report on DEFRA explained that, under the
conference agreement, the physician recertification requirements would
become state plan requirements, and that a grace period would be
permitted for good cause. H.R. REP. No. 861, 98th Cong., 2d Sess. 1362
(1984). Under the heading "Penalty," the Conference Report explains how
the House bill and Senate amendment would have altered the formula for
calculating a utilization control reduction. See also H.R. REP. No.
442, 98th Cong., 1st Sess. 52-53 (1983). The conference agreement is
then explained as follows: The conference agreement follows the Senate
amendment with modifications as follows. Effective July 1, 1984, the
current penalty would not apply to the physician recertification
requirement with respect to SNF or ICF patients. However, the current
penalty would continue to apply to the requirement that States have an
effective program of medical review. The Conferees intend that the
Secretary ensure that the States continue to comply with (11) the
physician recertification requirements, as revised by this agreement.

H.R. REP. No. 861, 98th Cong., 2d Sess. 1363 (1984). /5/

The States said that this statement showed that Congress intended that,
effective July 1, 1984, no further reductions would be imposed on the
States for utilization control violations of the type here and this was
intended to eliminate HCFA's authority to take any reductions which had
not been finally established prior to July 1, 1984. The States said
that this interpretation could be reconciled with the language of
section 2363 (c) because, given the timing of the passage of DEFRA,
Congress could have reasonably thought that the quarter beginning July
1, 1984 would be the first quarter beginning after enactment. /6/ In
light of this, the States argued, it would be reasonable to consider
July 1, 1984 as the date of enactment of DEFRA, even though the
President did not sign the bill until July 18. HCFA used the same
circumstances to explain the statement in the Conference Report
referring to the July 1, 1984 date, arguing that it did not really mean
that Congress intended any effective date other than that specified in
section 2363 (c), i.e., the quarter beginning on or after the date of
enactment.

The States also supported their position that July 1, 1984 was intended
as the effective date by pointing to a statement in a (12) HCFA
Legislative Summary, issued August 4, 1984 by the Director of the HCFA
Office of Legislation and Policy. This Summary explains the provisions
of section 2363 of DEFRA and then states: Effective Date: Beginning
July 1, 1984, the current law penalty would not apply to the physician
recertification requirements with respect to SNF or ICF patients. The
revised certification provisions are effective with calendar quarters
beginning on or after enactment, except that no admission occurring
before that date will be required to be recertified more frequently than
under prior law. HCFA replied that this Summary was not an official
policy statement.

The wording of section 2363 (c) The States are correct that section
2363 (c) is not entirely free from ambiguity with respect to how the
amendments affect evaluation of States' showings made prior to October
1, 1984, for previous quarters. Although the section implies that the
revised provisions would apply only to subsequent quarters, nothing in
the section specifically addresses this point. The difficulty is that
this factor simply does not avail the States in the context of this
case. As the Supreme Court indicated in Bennett, the States'
entitlement to funds under a federal grant program is determined by the
law in effect when the grant award is made, absent any clear indication
in the amending statute or legislative history that amendments to
substantive provisions were intended to retroactively alter the parties'
obligations and liabilities. Nothing in section 2363 (c) indicates
clearly that Congress intended to retroactively change the standards for
determining if the States' showings were satisfactory and valid. /7/ Nor
does the statement in the Conference Report clearly indicate that
Congress intended the result the States advocate. The Conference Report
says that the current penalty would not apply to the recertification
requirement effective July 1, 1984. This could be read as meaning
merely that a failure to meet a recertification requirement after that
date will no longer give rise to a section 1903 (g) reduction. It does
not (13) necessarily mean that a failure to meet the recertification
requirement prior to that date could no longer give rise to a reduction,
under the provisions in effect when the failure occurred.

Moreover, we think that HCFA's reading of section 2363 as having
prospective effect only is more consistent with the wording of section
2363(c). The States' position is not supported by the wording of
section 2363(c). We do not agree that that section is internally
inconsistent merely because the exception speaks of the law in effect
prior to the date of enactment, as well as referring to the quarter
beginning on or after the date of enactment. The "law in effect prior
to the date of enactment" could simply be a shorthand way of referring
to the "law in effect prior to the quarter beginning on or after the
date of enactment." This wording does not necessarily mean that section
1903(g) as unamended did not remain in effect until October 1, 1984. We
also think that the States' interpretation of July 1, 1984 as the
effective date of the DEFRA amendments ignores an important factor: the
amendments made by section 2363(a) included amendments to the states'
substantive obligations to have state plan provisions and to perform
recertifications on a new time schedule. We doubt that Congress would
have intended these provisions to be applied retroactively, yet Congress
did not differentiate in section 2363(c) among the various amendments
made (except with respect to the shorter time period for the first
recertification in a skilled nursing facility). The States also fail to
persuade us that the term "date of enactment" should have a different
meaning than its usual meaning under the circumstances present here. We
hardly think that Congress would read the words "quarters beginning on
or after the date of enactment" as equivalent to July 1, 1984, simply
because there was a chance the bill would be passed and signed before
that date. Moreover, even if we agreed that Congress meant July 1, 1984
to be the effective date for the change made to section 1903(g) (1), we
do not think it would necessarily follow that Congress intended to
preclude reductions for earlier quarters. /8/

(14) Finally, while we agree with the States that a reading which
reconciles the statement in the Conference Report with the wording of
section 2363(c) should be preferred, we think that the States' position
goes beyond what is necessary to accomplish this. As we explain next,
there is an alternative explanation of the Conference Report statement
(and HCFA's statement in its Legislative Summary). How the DEFRA
amendments have prospective effect Having concluded that the wording of
section 2363(c) supports a result that Congress intended the DEFRA
amendments to have prospective effect only, we still must address the
question how the amendments have prospective effect. As we have stated,
we do not think that the amendments alter how the States' showings made
prior to the October 1, 1984 effective date should be evaluated.
States' showings prior to that date had to certify that the
pre-amendment utilization control requirements were met. A reduction
based on a finding that this showing was invalid is therefore still
authorized. Moreover, during the quarter covered by these showings, the
States clearly knew that, if they did not meet the utilization control
requirements, and make a satisfactory showing that they had met the
requirements, their FMAPs would be reduced for long-stay services
provided during the quarter. In the absence of any clear indication to
the contrary, we do not think that the DEFRA amendments alter the
States' substantive obligations for these earlier quarters. We still
must consider, however, how the states' substantive obligations are
changed as of October 1, 1984. We think that HCFA's interpretation that
the amendments preclude reductions only with respect to showings with
respect to quarters beginning on or after October 1, 1984 ignores the
timing of the showings and is inconsistent with HCFA's position that
October 1, 1984 is the "effective date" of the section 2363 amendments.
/9/

(15) There are two types of substantive obligations that were imposed by
pre-amendment section 1903(g) (1) on states requesting FFP at the full
FMAP rate for long-stay services: the obligation to have an effective
utilization control program during the quarter in which the services
were provided and the obligation to make a timely, satisfactory and
valid showing after the end of that quarter. The states were not
required to submit their showings for the quarter beginning July 1,
1984, until 30 days after the end of that quarter, in other words, after
October 1, 1984. The provisions of section 1903(g) in effect after that
date do not require that a showing include evidence that the
certification, recertification, and plan of care requirements were met.
The practical result of this is that no penalty can be taken for the
quarter beginning July 1, 1984, based on failure to meet these
requirements. There are several additional reasons for determining that
the new provisions apply to the showing made after October 1, 1984, with
respect to the quarter beginning July 1, 1984: * This reading makes
further sense because long-stay services are measured according to
whether a patient had been in a facility for more than 60 days (90 days
in a mental hospital) in "any fiscal year," and section 1903(g) (1)
defined "fiscal year" for this purpose as the year ending June 30, 1984.
Since the DEFRA amendments deleted this definition, Congress was surely
aware that the July 1 date had an independent significance for section
1903(g). * Section 2363(c) did not explicitly inform states that the
showing submitted after October 1, 1984 for the previous quarter would
have to meet the original recertification requirements. Thus, states
might have begun to implement the new (and generally more liberal)
recertification schedule after the date of enactment of DEFRA and would
be prejudiced if the showing for the July 1 quarter had to meet the old
standards. (On the other hand, during the quarters prior to July 1,
1984, the states had no basis on which to think that they could obtain
the full FMAP rate for long-stay services even if they did not meet the
utilization control requirements as in effect at that time.) * Section
2368 of DEFRA amended the medical review provisions at sections 1902 (a)
(26) and (31), which are incorporated into section 1903(g) (1). These
amendments were effective "on the date of enactment" of DEFRA. Section
2368(c). It would be anomalous to evaluate the states' showing for the
medical review requirement based on the amended provisions but still
require the showing to include evidence of the (16) other utilization
control requirements, under the pre-amendment provisions. * As noted
above, giving this effect to the DEFRA amendments is consistent with the
statement in the Conference Report and in the HCFA Legislative Summary.
Indeed, it is suggested by the Legislative Summary which distinguished
the date significant for the change in application of the penalty (July
1, 1984) from the date significant for the change in the utilization
control requirements themselves (October 1, 1984). /10/

Thus, we conclude that showing with respect to quarters beginning on or
after July 1, 1984 do not need to include evidence of proper
certifications, recertifications, and plans of care, but that showings
for prior quarters do. The purposes of section 1903(g) and the DEFRA
amendments The States also made various arguments which focused on the
purpose of section 1903(g) or the purpose of the DEFRA amendments to
that section. Some of these arguments were disigned to establish a broad
policy context in which we should consider how to apply the DEFRA
amendments; others were more specifically addressed to the issue of
whether the general savings provision at 1 U.S.C. 109 was inapplicable
because the amendments to section 1903(g) altered a remedy or were
primarily procedural or remedial in nature. The latter question arises
because of a series of cases holding that the general savings provision
does not apply where statutory amendments make changes which are
primarily procedural or remedial. See, e.g., Warden, Lewisburg
Penitentiary v. Marrero, (17) 417 U.S. 653 (1974); United States v.
Blue Sea Line, 553 F.2d 445, 448 (5th Cir. 1977); United States v.
Mechem, 509 F.2d 1193, 1196 (10th Cir. 1975). We address these specific
arguments below and then provide a more general discussion of the
applicability of the general savings provision.

Section 1903(g) as an incentives provision Based on the legislative
history of section 1903(g) and amendments to it, Missouri argued that
Congress intended section 1903(g) to be an incentive to any state whose
funding was reduced to improve its utilization control performance in
order to avoid a similar reduction in the future. Thus, Missouri
contended, since there is no longer any future threat of section 1903(
g) reductions for failure to meet the requirements allegedly violated
here, Congress could not have intended that any reductions be taken
based on such failures subsequent to the DEFRA amendments.
Specifically, Missouri relied on the following legislative history:

* The House Report on the Social Security Amendments of 1972 referred to
the provisions which ultimately became section 1903(g) as establishing
"disincentives for extended use of inpatient facilities." H.R. REP. No.
231, 92d Cong., 2d Sess., reprinted in U.S. Code Cong. & Ad. News 4989,
5284.

* In 1977, Congress became concerned that proposed reductions under
section 1903(g) (imposed after a time period when that section was not
aggressively enforced) would have a severe impact on state Medicaid
programs. Congress amended section 1903(g) to require that no reduction
be taken for any quarter beginning before January 1, 1977, and that no
reduction be taken for any quarter ending after January 1, and before
October 1, 1977 for any state which made a satisfactory and valid
showing for the quarter ending December 31, 1977. Pub. L. No. 95-142.
The House Report on these amendments stated that "Congress intended this
program to be an incentives program to be validated on a current basis .
. . ." H.R. REP. No. 393, 95th Cong., 1st Sess. 84, reprinted in 1977
U.S. Code Cong. & Ad. News 3039, 3087.

* In the Omnibus Reconciliation Act of 1980, Congress directed HCFA to
waive reductions with respect to certain quarters prior to January 1,
1978, if a state could make a satisfactory showing with respect to the
quarter ending December 31, 1978. Pub. L. No. 96-499. The amendment
was designed to provide (18) relief for the State of Colorado, which had
implemented new medical review procedures during October 1977, but
which, for technical reasons, would remain in violation of medical
review program requirements for the fourth quarter of 1977. See H.R.
REP. No. 1167, 96th Cong., 2d Sess., reprinted in U.S. Code Cong. & Ad.
News 5526, 5603; see also Colorado Dep't of Social Services v. Dep't of
Health and Human Services, 558 F. Supp. 337, 345-46 (D. Colo. 1983).
Missouri argued that in this action "Congress once again evinced its
intent that section 1903(g) provide incentives for prospective efforts
at effective utilization control rather than penalties for past
deficiencies." Supplemental Brief of the Missouri Department of Social
Services, p. 9. Missouri contended that this "broader legislative
history clearly supports the State's view that Congress did not intend
that HCFA have authority to impose prior period FFP reductions after the
effective date of Section 2363" because "such an interpretation could
result only in improper punitive reductions in FFP." Id., p. 21
(emphasis in original). There is some logic to this position if one
assumes that Congress intended that imposition of a reduction after the
fact would act only as a prospective incentive to avoid future
reductions. But clearly the threat of a reduction (or the hope of
avoiding a reduction and thereby receiving greater funding) for any
quarter can act as an incentive for the state to comply during that
quarter. In that sense, the section 1903(g) provisions are similar to
any other funding provisions where Congress offers an increased matching
rate in order to induce the states to operate their programs in a
particular way. Denying a state the increased rate will not have the
same future effect in any instance where requirements have changed, but
to permit any state to retain the increased rate simply because the
reduction could no longer have any future effect would ignore the fact
that the state did not during that quarter earn the incentive payment.
Taking away the potential future effect of a section 1903(g) reduction
does not necessarily transform a reduction into a "punitive" measure as
the State suggests. Rather, one could determine that, under the States'
interpretation, they would receive a windfall of funding at a higher
rate than they were entitled to expect if they failed to make a
satisfactory or valid showing for the quarters in question. We also
note that, while Congress changed the means for encouraging the states
to control utilization of services, utilization control remains a goal
of the program. Indeed, the Conference Report on the DEFRA amendments
specifically states: "The Conferees intend that the (19) Secretary
ensure that the States continue to comply with the physician
recertification requirements, as revised by this agreement." H.R. REP.
No. 861, 98th Cong., 2d Sess. 1363 (1984).

Section 1903(g) as a liquidated damages clause California argued that
Congress did not have the authority to impose a true penalty -- i. e.,
a punitive measure -- on the States. Rather, California said, the
section 1903(g) formula was intended to be a rough estimate of the cost
to the Federal Government of overutilization of institutional services
under Medicaid and, therefore, is tantamount to a liquidated damages
clause in the federal/state agreement. A liquidated damages clause,
California concluded, is a remedy so that the amendments to section
1903(g) should be viewed as repeal of a remedy. As we discussed above,
we agree that the reduction is not a penalty intended to punish the
states. But we disagree with California that it is within Congress's
power to impose a reduction only if it is tantamount to liquidated
damages. While California may be correct that the formula was intended
to approximate the cost of overutilization of services (although we
could find no specific evidence of this in the legislative history of
section 1903(g)), the provision can be viewed simply as establishing the
conditions under which the full FMAP rate will be available for
long-stay services, a matter clearly within Congress's spending
authority. Thus, we do not think that section 1903(g) should be treated
as a remedy for breach of contract which is no longer available. /11/

For similar reasons, we reject Wyoming's argument that the reduction
constitutes a remedy intended to compensate the Federal Government for
injuries sustained because of states' utilization control deficiencies.
Indeed, Wyoming's analysis relies on a line of cases following Bradley
v. School Board of City of Richmond, 416 U.S. 696 (1970), which the
Supreme Court in the Bennett v. New Jersey case, 53 U.S.L.W. at 4339,
said announces a presumption that does apply to changes in grant
obligations.(20) The amendments as remedial changes Several of the
States viewed the question of whether the amendments to section 1903(g)
were "remedial" changes differently from California. They argued that
the purpose of the amendments was to remedy problems caused by how HCFA
applied the requirements. Therefore, they said, Congress could not have
intended HCFA to continue imposing the reductions. In support of this
position, the States cited the following language from the House Report
on the proposed provision to modify how the reduction would be
calculated for failure to meet the recertification requirement:

While the Committee continues to believe that effective utilization
controls on Medicaid SNF and ICF services are needed for the protection
of both the patients and the taxpayer dollar, the Committee is concerned
that the 60-day recertification requirement with respect to ICF patients
is unnecessarily rigid, and that the current penalty for noncompliance
with these recertification requirements is too stringent.

H.R. REP. No. 442, 98th Cong., 1st Sess. 52-53 (1983). The States
focused on the words "unnecessarily rigid" and "too stringent," arguing
that the purpose of the amendments was to correct for HCFA's overzealous
administration of the requirements. The States' arguments ignore the
wording of the statement from the House Report which speaks of the
requirements being unnecessarily rigid and the penalty being too
stringent. Nothing in the legislative history suggests that the problem
was with HCFA's interpretation of the requirements, rather than with the
statutory requirements themselves. Thus, we do not think that this can
be viewed as a situation where Congress was clarifying an earlier intent
and repudiating application of a requirement by an administering agency.
See Bennett v. New Jersey, supra, 53 U.S.L.W. at 4341-4344 (dissenting
opinion); see also Bennett v. Kentucky, 53 U.S. L.W. 4332, 4334, n. 2,
March 19, 1985. /12/

(21)$%The Board has decided numerous cases involving disputes between
various states and HCFA about HCFA's interpretation of the
recertification requirement and what documentation was necessary to show
compliance. In some instances, we have agreed with states that their
documentation was sufficient to show compliance. The main argument over
interpretation, however, was with respect to HCFA's position that it had
no authority to validate a recertification not performed within 60 days.
We upheld this position and so has the only court which has addressed
it. Colorado, supra. While Congress in DEFRA permitted a grace period
for late recertifications, the grace period applies only to the revised
recertification schedule in section 1903(g) (6), and nothing in the
legislative history indicates Congress thought HCFA's position that no
grace period was permitted under the previous provisions was contrary to
statutory intent. We also think that Virginia has misplaced its reliance
on a statement by Senator Dole in arguing that Congress intended to
remove the financial burden of disallowances based on the pre-DEFRA
requirements. This statement describes the intent of all of the DEFRA
amendments to Medicare and Medicaid as achieving a "more effective
sharing of health care costs among providers of health care services,
physicians, beneficiaries and the government." Statement of Senator
Dole, reprinted in 1984 U.S. Code Cong. & Adm. News 1459. This
statement is far too vague and general to justify the conclusion the
States advocate here.

The amendments as changes to procedure States also argued that the
changes made by the DEFRA amendments were primarily procedural in nature
and, therefore, HCFA could not impose the reductions in the absence of a
specific savings clause. Several States said simply that the amendments
changed the process under which a state had to make a satisfactory
showing, and, therefore, should be applied to pending cases. One State
said that Congress "repealed the procedures under which HCFA could
collect the penalties." New Hampshire Response to Invitation to Brief,
p. 5. Another State focused on the fact that Congress removed the
provisions regarding certifications, recertifications, and plans of care
from section 1903(g) and made them state plan requirements under section
1902(a). This change, the State argued, means that HCFA can no longer
impose section 1903(g) reductions but must now use the state plan
compliance mechanism established at section 1904. This change affects
what procedures will be used to resolve disputes and to appeal agency
decisions to court under section 1116 of the Social Security Act and,
thus, the State argued, the predominant purpose of the DEFRA amendments
was procedural. Missouri Supplemental Brief, pp. 31-33. (22) We think
that the statutory language and legislative history indicate that the
primary purpose of the amendments was to alter the states' substantive
obligations concerning how often recertifications had to be performed
and concerning what a showing had to include in order to be
satisfactory. Nothing in that history suggests that Congress thought
the procedures involved needed adjusting. The amendments had some
incidental procedural implications but not of the nature or to the
extent that the States suggest. First, we do not agree that Congress
amended the procedures by which the State must make a showing and the
Secretary validate it. The content of the showing has been altered, but
not the procedures for making or evaluating it. Nor did the amendments
change the procedure for collection of section 1903(g) reductions. No
amendment was made by DEFRA to the procedural provisions under which
HCFA disallows FFP claimed at the full FMAP rate for long-stay services
(when the reduced rate should have applied), provides an appeal to this
Board, and then, if upheld, adjusts a subsequent grant award. Moreover,
we do not think that making the certification, recertification, and plan
of care provisions state plan requirements under section 1902 has quite
the procedural significance the States would give it. Since the other
utilization control requirements -- for a utilization review program and
a medical review program -- were already state plan requirements, we do
not think that Congress views use of the state plan compliance mechanism
as a procedural alternative to section 1903(g) disallowances. Moreover,
simply because the state plan compliance mechanism is available does not
preclude a disallowance action. Many provisions establishing state plan
requirements have corresponding provisions to the effect that FFP is not
available in payments where the state plan requirement is not met.
Indeed, under Title XIX, FFP is available only in payments made in
accordance with the state plan. Thus, making the certification,
recertification, and plan of care requirements state plan provisions
does not necessarily mean that there will never be a disallowance
pursuant to those provisions for which the disallowance appeals
procedure would be available. The way the disallowance would be
calculated would be different -- rather than applying the section
1903(g) (5) formula, the disallowance would be calculated as the federal
share of payments made for services which were unallowable because
utilization control requirements had not been met -- but this is not a
procedural difference. Accordingly, we cannot agree that the changes
made by DEFRA are predominantly procedural.(23)

The general savings provision As mentioned above, some of the States'
arguments concerning the purposes of section 1903(g) and the DEFRA
amendments to it were made in the context of considering whether the
general savings provision at 1 U.S.C. 109 applied. That section
provides: The repeal of any statute shall not have the effect to
release or extinguish any penalty, forfeiture, or liability incurred
under such statute, unless the repealing Act shall so expressly provide,
and such statute shall be treated as still remaining in force for the
purpose of sustaining any proper action or prosecution for the
enforcement of such penalty, forfeiture, or liability. In addition to
arguing that this section did not apply because of the nature of the
amendments made by DEFRA, the States also said that it was inapplicable
because the section 1903(g) reduction is not a "true penalty." We think
that an action to recover the difference between payment at the full
FMAP rate and payment at the reduced rate is more in the nature of
collection of a debt than a penal sanction. But this conclusion does
not ineluctably lead to the further conclusion that the general savings
provision does not apply; the provision also preserves an action for
enforcement of a "liability." If a state has received FFP at the full
FMAP rate, but was entitled to FFP only at the reduced rate, it is fair
to say that the state is liable to the Federal Government for the
difference. Thus, we have no basis on which to conclude that the
general savings provision is inapplicable. /13/

(24)$%Conclusion For the reasons stated above, we conclude that the
DEFRA amendments do not preclude those disallowances taken with respect
to quarters prior to the quarter beginning July 1, 1984. Issues
concerning whether the States in fact violated utilization control
requirements under section 1903(g) as unamended will be addressed in a
separate decision for each State. /1/ The appellants are: Arkansas
Department of Human Services (Docket No. 84-145); Wyoming
Department of Health and Social Services (Docket Nos. 84-204, 85-8);
New Hampshire Division of Welfare (Docket No. 84-213); Virginia
Department of Health (Docket No. 84-214); California Department of
Health (Docket No. 84-219); Missouri Department of Social Services
(Docket No. 84-221); Oklahoma Department of Human Services (Docket No.
84-224); and Indiana Department of Public Welfare (Docket No. 85-27).
In addition, Medical Facilities of America, Inc., requested and received
permission to submit a brief in Docket No. 84-214. /2/
"Long-stay services" means services provided to a recipient after a
total of 60 days of inpatient stay in a hospital, skilled nursing
facility (SNF), or intermediate care facility (ICF) (90 days in the case
of a mental hospital) during a 12-month period beginning July 1, not
counting days paid for by Medicare. Section 1903(g) (1); 42 CFR
456.651. /3/ Section 2363 appears in Title III of DEFRA. Title
III may also be cited as the "Medicare and Medicaid Budget
Reconciliation Amendments of 1984." /4/ Although, in general,
the DEFRA amendments extended the time periods for recertifications for
patients receiving long-stay services, the time period for the first
recertification for patients in skilled nursing facilities was shortened
from 60 days to 30 days. Section 2363(a) (4) of DEFRA. The exception
avoids the result of the states being held to the more stringent
standard without adequate notice. Although the exception applies to
patients admitted "before such date" and could mean the "date of
enactment," HCFA in its briefs said the exception applied to patients
admitted before October 1, 1984. This interpretation gives the states
more time to implement the substantive changes made by the amendments,
and is not inconsistent with the wording of section 2363(c). /5/
As discussed above, HCFA argued in several of its briefs that this
statement was meaningless since it referred to the House and Senate
provisions which would have altered the "penalty" calculation at section
1903 (g) (5) and these provisions were not adopted. We reject this
argument since the conference agreement (adopted in DEFRA) amended
section 1903 (g) (1) so that the then current reduction no longer
applies to the recertification requirement. /6/ One of the
States explained the circumstances as follows: Congress had labored to
pass DEFRA before the Independence Day recess, which was to begin on
June 29. House and Senate conferees agreed on the bill on June 23,
1984, and approval of both Houses was expected by June 29. DEFRA was
passed in both the House and the Senate on June 27, 1984. The bill
enjoyed the support of the President, who therefore reasonably could
have been expected to sign the legislation shortly after June 27.
Supplemental Brief of the Missouri Department of Social Services, p. 26
(footnotes omitted). /7/ We note that Congress has in the past
specifically provided that no reductions would be taken under section
1903 (g) in certain circumstances. See section 1903(g) (3) (A). The
States pointed out that the amendments adopting these provisions were
merely precluding reductions for specific quarters, not eliminating them
altogether as DEFRA did. We think that, in spite of this difference,
there is some significance to the fact that Congress has previously
adopted language specifically precluding section 1903(g) reductions, but
did not adopt such language here. /8/ The States themselves disagreed
about the significance of the July 1 date: some said that the
relevant question was whether HCFA had issued a disallowance notice
prior to that date; others said that the issue was whether the
disallowance action was final prior to that date. On the whole, we think
that applying the amendments on the basis of the quarter involved is
less apt to lead to arbitrary results than applying them based on the
procedural status of a disallowance action. /9/ HCFA did not point to
any official policy statement regarding how the amendments
affected the quarter beginning July 1, 1984, but simply took the
position in its briefs that the amendments applied to showings made
"with respect to" quarters beginning on or after October 1, 1984. This
position appears to adopt language from section 1903(g) (1) that a
showing must be made "with respect to" each quarter. We note, however,
that section 2363(c) of DEFRA does not refer to showings with respect to
quarters but merely says that the amendments "apply to" quarters
beginning on or after the date of enactment. /10/ While we do
not consider this Summary to be a binding policy statement, we do
consider it support for the position that section 2363(c) does not
plainly mean that the reduction should apply to the showing for the
quarter beginning July 1, 1984, based on the pre-amendment provisions.
We also think that our analysis is consistent with a summary of the
provisions by the Joint Committee on Taxation, Committee on Ways and
Means and Committee on Finance, dated June 30, 1984, relied on by
Wyoming. While this summary adopted the language from the Conference
Report concerning when the current penalty would cease to apply to the
recertification requirement (i.e., July 1, 1984), it also states that
the section 2363 provisions are generally "effective for calender
quarters on or after enactment." /11/ In Bennett v. kentucky, 53
U.S.L.W. at 4336, the Supreme Court indicated that, while a grant
agreement has contractual aspects, it is distinguishable from a normal
contractual undertaking. Federal grant programs originate in and remain
governed by statutory provisions expressing the judgment of Congress
about desirable public policy. See R. Capalli, Rights and Remedies
Under Federal Grants, 53-55 (1979). /12/ The Inspector General of HHS
had recommended deleting the recertification requirement
altogether. Audit Report ACN 03-30150, CCH Medicare and Medicaid Guide,
P 32, 438. The Inspector General's report indicates that HCFA had
previously proposed this to Congress and was exploring alternatives to
the 60-day recertification requirement. /13/ We note that, although
this provision has been primarily been applied in the criminal
area, it has also been applied in other contexts. See, e.g., United
States v. Commonwealth of Pennsylvania, 220 F. Supp. 144 (M.D.Pa. 1963).
In Bennett v. New Jersey, supra, the Supreme Court cited the following
cases for the proposition that courts have consistently applied the
legal requirements in effect when the grants were made. Indiana v.
Bell, 728 F. 2d 938, 941, n. 6 (7th Cir. 1984); North Carolina Comm'n
of Indian Affairs v. Dep't of Labor, 725 F. 2d 238, 239 (4th Cir. 1984);
Woods v. United States, 724 F. 2d 1444, 1446 (9th Cir. 1984); West
Virginia v. Secretary of Education, 667 F. 2d 417, 420 (4th Cir. 1981).
None of these cases specifically address the applicability of the
general savings clause, however. The rationale could be simply that a
grant has certain contractual aspects and that the statute in effect
when the grant is awarded establishes the terms under which to judge
whether the funds can be properly retained.

AUGUST 08, 1985