DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Service
SUBJECT: New York State Department of Social Services
Docket No. 87-69
Decision No. 905
DATE: October 7, 1987
DECISION
The New York State Department of Social Services (State) appealed
a
decision by the Health Care Financing Administration (HCFA,
Agency)
disallowing federal financial participation (FFP) in the amount
of
$2,489,194 claimed by the State under title XIX (Medicaid) of the
Social
Security Act (Act) for the period July 1 through December 31,
1985. The
costs represented supplemental malpractice insurance
purchased by
hospitals for their affiliated physicians and dentists pursuant
to a
State law which became effective July 1, 1985. The costs were
included
in calculating the rates paid to the hospitals.
The disallowance was taken on the ground that the costs were not
allowable
under the terms of a demonstration project approved by HCFA
for the
three-year period ending December 31, 1985. This demonstration
project
was authorized by 42 U.S.C. 1395b-1, which gives the Secretary
authority to
conduct experiments relating to the administration of the
Medicare program,
and, in conjunction with such experiments, to waive
compliance with certain
requirements of titles XVIII (Medicare) and XIX
relating to
reimbursement. The major feature of the State's project was
the setting
of Medicare rates on a prospective rather than a
retrospective basis in order
to bring Medicare into conformity with the
rest of the State reimbursement
system. The project also modified the
prospective reimbursement system
then in place. The project affected
Medicaid reimbursement since the State
apparently used the Medicare
principles of reimbursement to determine
Medicaid per diem rates.
The State took the position that the costs were allowable under
the
demonstration project. It did not argue that the costs were
ordinarily
allowable under its Medicaid program. 1/
For the reasons discussed below, we conclude that the costs were
not
authorized under the demonstration project. Accordingly, we sustain
the
disallowance.
Changes in Project Methodology
The State's application for a waiver under 42 U.S.C. 1395b-1 was
entitled
"A Proposal for the Development of Hospital Reimbursement
Methodology for New
York State for the 1980's." This proposal was
approved by HCFA subject to
terms and conditions in a letter from HCFA
to the State dated December 14,
1982. The letter stated in pertinent
part that--
Any changes in the demonstration
methodology shall be subject to
approval
by the Health Care Financing Administration
(HCFA)
Project Officer prior
to implementation of the changes.
(State's appeal file, Ex. 1, p. 1)
The Agency argued that the inclusion of the supplemental
malpractice
insurance costs in determining the rates paid to hospitals
constituted a
change in the demonstration methodology for which prior
approval was
required. The Agency advised the State in letters dated
August 29 and
September 13, 1985 that the costs would not be allowed if
claimed.
(Agency's appeal file, Exs. 1 and 2) (The letters indicated
that they
were in response to inquiries concerning the allowability of the
costs.
There is no request for prior approval in the record,
however.) In its
appeal of the disallowance, the State took the
position that there was
no change in methodology involved. We conclude
that the addition of the
supplemental malpractice insurance costs in
determining the rates was a
change in methodology. The approved project
proposal identifies certain
generally unallowable costs which are to be
reimbursable under the
project. The proposal states:
The reimbursement system attempts to
provide
sufficient operating funds based upon allowable
costs which are
supplemented with
allowances
for
discretionary funds, bad
debts and charity
care. (Proposal, pp. 2-3) Significantly,
the
references to the allowability of these additional costs
frequently
appear in the context of discussions of project
methodology. The
"Executive Summary" includes a section
headed "Proposed Methodology"
which states in part:
The hospital's fiscal base is strengthened
with allowances
for
bad debt, charity care
and discretionary purposes. . . .
This
methodology
will produce a predictable revenue base for
both
providers and payors over three years.
(Proposal, p. vi) Chapter III of the proposal, captioned "Research
and
Demonstration Methodology," states in part:
Institutional and systemwide fiscal viability will
be strengthened
under a uniform
reimbursement methodology that recognizes the
costs of bad debt and charity
care and that provides hospitals with a
discretionary and working capital
allowance.
(Proposal, p. 48) Elsewhere, the proposal states:
These savings, however, are offset by
other changes to Medicare's
current
methodology: These would be two allowances added
to
third party rates--an annual
average of 3.23 percent for bad
debt/charity care and 2 percent for discretionary purposes. . . .
(Proposal, p. 43) Furthermore, the use of the term "methodology" in
the
proposal's title indicates that all elements of the
proposal--including
the provisions quoted above--were considered part of the
demonstration
methodology within the meaning of the prior approval
requirement.
Thus, the methodology for the demonstration project provided
for
reimbursement of some generally unallowable costs, i.e., bad
debts,
charity, working capital and costs paid out of the discretionary
fund.
Supplemental malpractice insurance costs were not among these costs
(and
could not have been, since the law requiring hospitals to pay such
costs
was not effective until July 1, 1985, long after the January 1,
1983
beginning date of the demonstration project). Accordingly,
the
inclusion of such costs in calculating the hospitals' per diem rates
was
a change in methodology for which prior approval was required.
Since
the State did not obtain prior approval, the costs are unallowable.
Rate Increases to Meet State Requirements
The State also argued that the supplemental malpractice insurance
costs
were allowable under a provision of State law, incorporated in
the
approved project proposal, allowing rate increases based on
"additional
costs to be incurred in meeting state or federal requirements. .
. ."
(Public Health Law, section 2807- a(5)(b)(iii)) The State noted
that
another State law required that hospitals have qualified
physicians
available for emergency service, and argued that the
malpractice
insurance legislation assured the availability of physicians
in
accordance with this law. The malpractice insurance
legislation
provided in effect for a rate increase on the basis stated in
section
2807- a(5)(b)(iii).
Even assuming that the increased rates resulting from the inclusion
of
supplemental malpractice insurance costs were permitted by the terms
of
section 2807-a(5)(b)(iii), we conclude that the costs were not
allowable
under the demonstration project. To allow the costs under
this
provision would violate the requirement for prior approval of changes
in
the project methodology. Under the State's reading of section
2807-
a(5)(b)(iii), the State could add new costs to its Medicaid
program
virtually without limitation, as long as it found that they
were
incurred to meet the requirements of State law. This would make
the
prior approval requirement meaningless. Thus, where the addition
of
costs involves a change in project methodology,
section
2807-a(5)(b)(iii) must be read to allow rate increases only where
the
additional costs have been approved by the Agency.
In any event, it is not clear that the supplemental malpractice
insurance
costs were allowable under section 2807-a(5)(b)(iii) since the
State did not
provide any support for its allegation that these costs
assured the
availability of qualified physicians for emergency service.
Other Arguments
The State also asserted that language in the approved project
proposal
providing for "a payment level reflecting allowable, reasonable
and
justifiable costs of the efficient production of necessary
inpatient
services" (Proposal, p. 25) governed here. The State argued
that
limitations on reimbursable costs were specified in the
approved
proposal, and that any costs not specified--including the
supplemental
malpractice insurance costs--were thus allowable within the
meaning of
the quoted provision. As discussed previously, however,
rather than
allowing any costs not specifically prohibited, the proposal
identifies
those costs ordinarily not allowable which will be
reimbursed. The
supplemental malpractice insurance costs are not among
them and are
therefore not allowable. The State further argued that the
costs were
reasonable within the meaning of this provision since they
assured
compliance with the requirement of section 1902(a)(13)(A) of the Act
to
"assure. . . reasonable access to. . . inpatient hospital services. .
.
." We need not address this argument, however, since we find that
the
quoted language does not render the costs allowable.
The State asserted in addition that the approval of the
demonstration
project "gave the State additional discretion in its
administration of
the hospital reimbursement portion of the Medicaid program
by removing
the restrictions imposed by Section 1902 of the Act. . .
." (State's
brief, p. 4) The State identified neither the
alleged restrictions in
section 1902 nor the language in the approved project
proposal waiving
the restriction, however.
The State also argued that the allowance for a discretionary fund
was
evidence of the State's "increased autonomy" under the
demonstration
project. (State's brief, p. 5) The hospitals were
free to use this
fund to support a range of activities. The
supplemental malpractice
insurance costs were not paid out of this fund,
however. The State's
point appears to be that the existence of the
discretionary fund was
evidence that it was intended to have a sufficiently
broad range of
discretion under the project to treat the supplemental
malpractice
insurance costs as allowable. This argument has no
merit. We see no
basis for inferring from the fact that hospitals were
given a limited
amount of funds to pay any costs they deemed necessary that
the payment
of any costs from sources outside of this fund was within
their
discretion.
The State further contended that the cap on Medicare liability included
in
the approved project proposal was not exceeded by amounts claimed
for
supplemental malpractice insurance. The provision referred to
requires
that costs under the waiver not exceed expenditures that would
otherwise
have been incurred under the Medicare program. This point
is
irrelevant, however, since even costs which do not exceed the cap may
be
unallowable on some other basis.
The State also asserted that the provision of supplemental
malpractice
insurance was in keeping with the stated purpose of the project
to
contain costs. It asserted that the malpractice legislation as
a
whole--which included certain reforms in addition to requiring
the
purchase of supplemental malpractice insurance--was intended to
reduce
overall malpractice costs (although the supplemental
malpractice
insurance itself represented an increased cost). However,
this does not
change the fact that the costs were unallowable absent prior
approval.
Finally, the State argued that the supplemental malpractice
insurance
costs were allocated using the same methodology required by the
approved
project proposal for allocating hospitals' malpractice
insurance.
However, the allowability of the costs, and not their
allocability, is
at issue here. 2/
.Conclusion
For the foregoing reasons, we sustain the disallowance in the amount
of
$2,489,194.
________________________________ Donald
F.
Garrett
________________________________
Alexander
G. Teitz
________________________________ Norval
D.
(John) Settle Presiding Board Member
1. The Agency asserted that the supplemental
malpractice insurance
costs were personal costs of physicians and dentists
and, as such, were
not reasonable and necessary costs under either the
generally applicable
cost principles in OMB Circular A-87 or the
demonstration project. The
State asserted that the costs in question
were hospital costs, not
personal costs. However, it did not dispute the
statement in HCFA's
brief that the State "does not maintain that . . . [the
costs] were ever
approved under its prior state plan(s) or that they are
allowable under
generally applicable cost principles." (Agency's brief,
p. 6, n. 4)
Furthermore, the State did not claim the costs beyond the
end date of
the demonstration project.
2. The Agency stated, however, that the supplemental
malpractice
insurance covered "medical and dental malpractice occurrences
from the
entirety of the physician's or dentist's practice, not solely
his
hospital practice," and that "if these costs were finally determined
to
be Medicaid-allowable, they would include. . . costs clearly
not
allocable to Medicaid, and which the Federal government would have
to
refuse to pay." (Agency's brief, p. 2 and p. 9, n.