GAB Decision 676
July 31, 1985
Missouri Department of Social Services;
Ballard, Judith A.; Teitz, Alexander G. Garrett, Donald F.
Docket No. 84-160
DECISION
The Missouri Department of Social Services appealed a decision by the
Health Care Financing Administration (HCFA or Agency) disallowing
$874,083 in federal funds claimed under title XIX (Medicaid) of the
Social Security Act. The disallowed funds represented claims for
services provided by five State intermediate care facilities for the
mentally retarded for the period October 1, 1981 through June 30, 1983.
The claims were computed under a prospective rate system which limits
provider reimbursement to a base year rate adjusted by an inflation
factor. During the base year (October 1, 1980 through September 30,
1981 or FY 1981), Missouri made a change in accounting methods that
allowed it to charge the unused vacation leave of employees of the
facilities on an accrual basis. As a result of the accounting change,
Missouri made a one-time adjustment to the base year costs for vacation
leave that had accrued during fiscal years 1976-1980, in addition to the
costs of leave accruing during FY 1981. Missouri also included the
amount of this adjustment in the base year rate computation for purposes
of claims under its prospective reimbursement system for the period of
the disallowance. *
(2)
The Agency here concluded that while the costs resulting from the
accounting change would be allowable as a one-time charge for FY 1981
under the reimbursement system then in effect, only the balance of leave
that accumulated during FY 1981 could be included as a 1981 base year
cost for purposes of determining prospective per diem rates in
succeeding years. Accordingly, the Agency disallowed that part of the
prospective rate for the period October 1, 1981 through June 30, 1983
that resulted from the inclusion in the base year rate of leave that had
accumulated in fiscal years 1976-1980. The Agency cited in support of
the disallowance the cost principles applicable to the State under the
Medicaid program as well as provisions of the State's own plan for
administering the Medicaid program in long-term care facilities.
For the reasons discussed below, we agree that the costs from the
accounting change should not have been included in the base year rate
and uphold the disallowance in full.
The Medicaid statute and regulations give states a certain degree of
flexibility in setting up reimbursement systems for services provided in
long-term care facilities including intermediate care facilities for the
mentally retarded. Nevertheless, federal funding under title XIX of the
Social Security Act is available only for payments to facilities that
are consistent with reimbursement systems that have been identified in
an approved state plan. Furthermore, the cost principles that apply to
states participating in the Medicaid program require that costs
reimbursed under the program be necessary and reasonable.
The two questions raised by this appeal are whether the State's
inclusion of the costs from its accounting change in the base year
computation for its prospective rate system was consistent with the
applicable state plan and whether the resulting rate is consistent with
the cost principles.
The State Plan
The State plan in effect for the period of the disallowance provided
that the per diem rate under the prospective reimbursement system would
be the lowest of three rates.(3)
The applicable rate for the facilities in question here, according to
the State, was the "prospective reimbursement rate." That rate was
defined as "the facility's per diem rate in effect on June 30th of the
preceding state fiscal year multipied by a negotiated trend factor." 13
CSR 40-81.081, page 7 of 43. Thus, the base rate under the prospective
rate system was the rate authorized and in effect under the preceding or
"base" year's plan. The base year's plan authorized a retrospective
rate system under which a facility ultimately received reimbursement for
its actual costs for any given year. The plan did not expressly
authorize reimbursement for uncompensated vacation leave, much less
leave accruing outside the year covered by the per diem rate. On the
contrary, the plan permitted reimbursement for services of employees
"only to the extent actually compensated." 13 CSR 40-81.080, page
19 of
44.
The State argued nevertheless that the full costs of the accounting
change were allowable in the base year (and hence part of the base year
rate) because the base year plan gave the Director of the Department of
Social Services discretion to determine the allowability of costs not
specifically addressed by the plan, using criteria such as the Medicare
Provider Reimbursement Manual (HIM-15). Even though the base year plan
authorized reimbursement of employee services only when "actually
compensated," the State suggested that the Director had determined that
the costs of the accounting change (representing a charge for accrued
vacation leave for five previous years and for the base year) would be
allowable as a base year cost. The Agency conceded that there was no
question of the allowability of the costs for the base year itself
(presumably because the recognition of this accounting change in a
single year would have been an allowable cost under the Medicare
program).
The Agency nevertheless argued that the plan implementing the
prospective rate system permitted adjustment in the rates in the event
of extraordinary circumstances. The plan provided:
When the facility experiences extraordinary circumstances including
an Act of God, war or civil disturbance, adjustments to reimbursement
rates may be made in these circumstances. 13 CSR 40-81.081, page 8 of
43.
The Agency argued that the full recognition of six years of accrued
vacation leave during the base year because of an accounting change was
an extraordinary circumstance and that the prospective rates should be
adjusted by means of an(4) adjustment in the base year rate to exclude
any leave that did not accrue in the base year itself. The State argued
in response that the examples cited by the provision establish that an
extraordinary occurrence may not be an accounting change.
We agree that the rates must be adjusted under the plan provision for
the following reasons.
* In the context here, the recognition of the costs of the accounting
change is clearly an extraordinary circumstance and fits the common
sense meaning of the term. Charging the Medicaid program for vacation
leave that accrued during five fiscal years prior to the base year is
extraordinary in that these charges bear no relationship to actual base
year expenses nor to any possible recurring expenses of providing
medical care in the facilities in question. Further, the charge applies
to six fiscal years (including the base year) rather than one as would
ordinarily be the case under provider reimbursement systems and because
the costs are not even specifically authorized under the State plan in
effect, which recognized only a facility's actual costs for a given
year.
* The only standard cited by either the Agency or the State to
support the allowability of the costs of the accounting change during FY
1981 was that such costs would be allowable under Medicare principles.
The Medicare program has subsequently clarified that when an accounting
change occurs during a base year for a prospective reimbursement system,
only costs under the new accounting method relating to the base year may
be included in the base year computation. While the Medicare rules were
not in effect during the time period in question here and could not have
been made applicable here by cross-reference, they do serve as a guide
as to how the costs considered here would be treated in a related
program.
* While the plan provided three examples of extraordinary
circumstances, the plan did not restrict the definition to the three
examples or even to the type of circumstances represented by the
examples.
* The failure to permit an adjustment in the base year rate in
determining prospective rates would indefinitely skew the equities of
the prospective rate system, and thus would have an even greater impact
than adjustments for circumstances occurring in years after the base
year. While our decision only directly affects facility claims for the
21 months involved here, reversal of the disallowance would set(5) a
precedent for computation of the base year rate that would enable the
facilities to receive indefinite reimbursement of these charges along
with an added inflation factor.
* The State could point to no persuasive reason why its position
concerning adjustments would further the purposes of a prospective rate
system. For example, the State was unable to point to any equivalent
offsetting "extraordinary" expense during the base year for these
facilities that would not be recognized by the base year rate. The
provision also would permit adjustments in subsequent years if, for
example, an extraordinary circumstance should increase expenses of a
facility.
* At the time the State made its proposal to change accounting
methods, it advised the Agency that the recognition of accrued leave
from several previous years would occur only once. The State's auditor
described the change as follows:
This would only be a one-time infusion of extra dollars because each
succeeding year the amount would be the difference between the beginning
balance and the ending balance (of unused vacation leave). Agency
Appeal File, Tab 4, p. 3.
This earlier statement conflicts with the State's position on the
adjustment of prospective rates under its prospective reimbursement
system. That position allows the one-time infusion to be recognized
year after year.
* Insofar as plan interpretations are concerned, the State here seems
to want to "have its cake and eat it, too." The State wants to derive
the benefit of a broad interpretation of the director's discretion in
the base year plan to include the full costs of the accounting change as
an allowable charge for the base year and then the State wants to very
narrowly interpret what is an "extraordinary circumstance" requiring
an
adjustment in the rate. The State, which is also owner of the
facilities, is effectively applying the plan in such a way so as to lead
to augmented federal funding without any corresponding increase in State
costs. Under these circumstances, we do not feel compelled to adopt the
State's own interpretation of its plan.
* We question whether the Agency had any reasonable notice that the
charge would be included in the base year rate to begin with since the
base year rate is derived generally from a facility's actual costs and
since the State described the charge to the rate in question as a
one-time infusion.(6)
Accordingly, we conclude that proper application of the State plan
requires an adjustment for the accounting change to exclude accrued
vacation leave for fiscal years 1976-1980 in FY 1981 base year
computations for the State's prospective reimbursement system.
The Cost Principles
Even if the State plan had in fact authorized the inclusion of these
costs in base year computations, we would still conclude that
prospective rates reflecting these costs were not reasonable charges to
the Medicaid program. OMB Circular A-87, Part I, C.1.a. imposes a
"necessary and reasonable" standard for costs claimed under grant
programs and is made specifically applicable here by 45 CFR 74.171(a).
The Board has on several previous occasions applied this standard in
reviewing claimed costs; see, for example, North Carolina Department of
Human Resources, Decision No. 329, June 30, 1982, pp. 6-9 and State of
Oregon Mass Transit Assessment, Decision No. 402 - Supplementary
Decision, August 31, 1982. Here, as we have already stated, the
recognition of five prior years accrued vacation leave in the FY 1981
base year rate does not further any conceivable purpose other than
giving the State facilities involved a windfall from Federal funds.
These charges do not bear any relationship to actual base year expenses
nor to any possible recurring expenses of providing medical care in the
facilities in question. Moreover, there were no equivalent offsetting
"extraordinary" expenses identified by the State that might not have
been recognized by the base year rate. Finally we are concerned that
inclusion of the five years of leave in the base year rate would be
claimed by the State indefinitely into the future, with an added
inflation factor for each year.
On the basis of the foregoing analysis, we uphold the disallowance in
full. * Prior to the accounting change the facilities in question were
reimbursed for vacation leave only on a cash basis -- that is, when the
employee was compensated during the year for any leave taken. If, for
example, an employee earned leave but did not use it and was permitted
to carry it forward to subsequent years, the facility would receive no
reimbursement for the unused leave in the year the employee earned it.
Under the accrual method, the facilities could receive reimbursement for
the balance of any unused leave that may have been earned during a
particular year even though the employee had not been compensated for
that leave during the year. Also, when a state decides to change to an
accrual method, the facilities may also be able to make a one-time
charge for all unused leave that had accrued in any previous years in
addition to any increase in accrued leave that may have occurred during
the year of the change.
JANUARY 14, 1986