GAB Decision 703
November 19, 1985
Pennsylvania Department of Public Welfare;
Garrett, Donald F.; Settle, Norval D. (John) Ballard, Judith A.
Docket No. 85-98
DECISION
The Pennsylvania Department of Public Welfare (State) appealed
a
disallowance made by the Health Care Financing Administration
(Agency)
of $2,973,208 claimed by the State under title XIX of the
Social
Security Act (Medicaid). The disallowed claims related to
rate
increases for Medicaid services provided by State facilities during
1979
- 1981 to reflect General State Authority (GSA) rentals and
General
Obligation Bond (GOB) charges for capital projects. The claims
appeared
as increasing adjustments on the State's quarterly expenditure
reports
for the quarters ending March 31, 1984 and September 30, 1984.
The
Agency disallowed the claims on the basis that they were not
timely
filed. The Agency did not allege that the claims were
otherwise
unallowable if the two-year time limit on the filing of claims had
been
met, or if the costs qualified under one of the exceptions to
that
limit.
For the reasons set forth below, we find that the claims met the
exception
for "adjustments to prior year costs;" we therefore overturn
the
disallowance.
Applicable Law and Policy
Section 1132(a) of the Social Security Act prohibits the payment
of
federal financial participation (FFP) for any expenditure that has
not
been claimed within two years after the calendar quarter in which
the
state made the expenditure. However, the time limit does not apply
to
any expenditure involving "adjustments to prior year costs."
Federal
regulations at 45 CFR Part 95 repeat the statutory rule and define
such
adjustments as:
an adjustment in the amount of a particular cost item that
was
previously claimed under an interim rate concept and for which it
is
later determined that the cost is greater or less than that
originally
claimed.
45 CFR 95.4.
This exception involves adjustments to interim rates "subsequently . .
.
determined to be higher or lower than originally claimed" during a
state's
interim and final cost settlement process (Preamble to final
rule, 46 Fed.
Reg. 3528, January 15, 1981). An adjustment is permitted
for any
expenditure(2) "provided that the interim rate is claimed within
two years
after the quarter in which the expenditure was made" (Section
2560.4(a)(2) of
the State Medicaid Manual as revised May 1983).
Analysis
1. Facts
In this case there is no dispute that:
(1) The State timely claimed for expenditures for services
provided
to patients in publicly-owned facilities during 1979 - 1981.
The claims
were based on a per diem rate reflecting a large number of
cost
categories including capital expenditures.
(2) The State's initial claim for an interim per diem rate was
based
on the provider institutions' historical costs, not the actual costs
in
providing the services. Later, cost reports were filed and a
cost
settlement process took place. The process involved adjustments in
the
rate as necessary, based on the actual costs incurred by the
facilities.
(3) The provider costs (GSA rentals and GOB charges) in question
were
incurred in 1979 - 1981.
(4) These costs were not specifically included in calculating
the
interim rates or the "final cost settlements." (The State said that
this
occurred because of a lack of communication between the
Pennsylvania
General State Authority, which was responsible for all
construction at
State facilities, and the Department of Public Welfare.)
(5) When the State discovered that not all the GSA and GOB costs
had
been included in the cost settlements, the State submitted claims
for
the amount of the omitted charges.
(6) These claims were not filed until 1984.
2. The Exception Applies
The Agency's main argument appeared to be that these claims do not
qualify
under the statute and regulation as adjustments to prior year
costs because
the specific provider costs in question were not claimed
in the interim rate
process. In effect, the Agency viewed "a particular
cost item" in the
regulatory definition to be the individual rental and
bond charges, the
smallest(3) divisable item accumulated on the
provider's cost report, rather
than the per diem rate for a given
service. The Agency's position not
only fails to consider the nature of
an interim rate system but also
conflicts with the State Medicaid Manual
provision and the statement from the
preamble to the Agency's
regulations.
Federal reimbursement of Medicaid expenditures is based on payment
rates
determined by methods set forth in state plans (see Section 1902(
a)(13)
of the Social Security Act and 42 CFR 447.301 (1979)). The
statute and
regulations allow for a variety of acceptable methods for
determining
these rates, including interim rate systems such as Pennsylvania
used
(generally referred to as retrospective reimbursement systems).
A retrospective reimbursement system is defined as:
(A) system in which payment is made on the basis of a
provisional
payment rate set prospectively for an accounting period, and in
which
payments may be retrospectively adjusted on the basis of the
cost
experience during the accounting period.
42 CFR 447.272 (1979).
When the State Medicaid agency submitted an expenditure report
for
services provided by the facilities, it was seeking FFP in the amount
of
the per diem rate paid for each patient day of service provided by
one
of the facilities to a Medicaid recipient. The rate was
calculated
using the provider's costs, but what was claimed as a
Medicaid
expenditure was the cost of the service as measured by the
rate. The
initial rates were not based on actual costs incurred by the
providers,
but on historical costs, and adjustments were not always
made
immediately.
The GSA rentals and GOB charges for the public facilities were
not
themselves reimbursable expenditures under the Medicaid program.
The
GSA rentals and GOB charges were relevant only to the extent that
they
were costs which could properly have been included in calculating
the
per diem rate used to reimburse the facilities. The State's
initial
claim, therefore, was for the interim per diem rate for services,
and
underlying costs were relevant only because they determined the
amount
chargeable. The particular cost items claimed were the
expenditures (at
the interim rate) for particular services provided by the
facilities;
these "cost items" were timely claimed. The State then
merely adjusted
the amount of that rate upward when the State determined that
the rate
claimed did not reflect all of the actual costs, and the rate
should
have been higher than what was originally claimed. As long as
this type
of adjustment was contemplated by the rate-setting system
in
Pennsylvania and was not prohibited by the State plan, we have
no
basis(4) to find that these claims were not adjustments to prior
year
costs. Rather, these adjustments fit the descriptions in
the
regulations, as interpreted in the preamble and the State
Medicaid
Manual which focus on a rate being claimed and adjusted, not on
the
underlying provider costs used to calculate the rate.
3. Prior Board Decisions
Although the analysis above disposes of the issue in this case, we
discuss
here two prior Board decisions which we think are relevant,
contrary to what
the Agency argued.
In Pennsylvania Department of Public Welfare, Decision No. 603,
December
12, 1984, the Board found that claims for understated cost
settlements
for rental costs incurred by a state facility were in fact
adjustments
to prior year costs. In an Order to Show Cause, the Board
tentatively
found that the claims were adjustments under the exception.
The Agency
chose not to respond substantively to the Order, and the
Board
overturned the disallowance.
In the present appeal, the State argued that the factual situation
is
exactly the same as the one in the prior Pennsylvania case. The
Agency
responded that there were two significant differences: (1) in
the prior
case, the Agency "conceded" that the claims were proper
adjustments;
(2) in the prior case, the "claimed expenditures
represented
underpayments to the facilities resulting from the fact that the
interim
rates were too low in prior years" (Agency Brief dated September
24,
1985, p. 1). In response, the State provided an internal
State
memorandum from 1982 pertaining to the prior case and argued that
the
costs in the prior case were also erroneously omitted from the
final
cost settlements due to the same kind of oversight as was present in
the
latter case. The State also asserted that the interim rates would
not
have reflected the costs. The memorandum does indicate that
the
specific costs had not been claimed as part of the interim rates or
as
part of the cost settlements. We see no basis to distinguish the
two
cases based on the facts presented in the current record. We would
not
place any importance on the prior Agency "concession" if it was
made
solely to avoid litigation costs or was based on incomplete knowledge
of
the facts, but there has been no showing by the Agency here that that
is
what occurred.
In Ohio Department of Public Welfare, Decision No. 622, February 7,
1985,
the Board found that costs for depreciation of capital assets
claimed as an
increasing adjustment on Ohio's quarterly expenditure
report were adjustments
to prior year costs.
The Agency argued that Decision No. 622 was not relevant here because
the
question there was when the claimed expenditures occurred, an issue
not
present in the Pennsylvania case.The Agency is correct that there is
no issue
here as to when the underlying costs were incurred, but it did
not respond to
the final part of the Board's analysis in Decision No.
622 (pp. 6 - 7).
There,(5) the Board found, as we do above, that the
per diem rate for a given
service is the "cost item," and, under 45 CFR
Part 95, that rate can be
adjusted for particular costs and the
increases can be claimed after the
two-year limit if a state's interim
rate system allows such
adjustments. We therefore find that the Ohio
appeal is in one critical
respect similar to this Pennsylvania appeal,
and we have no basis to
distinguish the two cases.
Conclusion
Based on the reasons stated above, we find that these claims were
not
barred by applicable time limits for filing and reverse the
disallowance
of $2,973,208. Nothing in this decision precludes the
Agency from
examining the allowability of the rate increases under the State
plan.
JANUARY 14, 1986