New York State Department of Social Services, DAB No. 905R (1988)

DEPARTMENTAL GRANT APPEALS BOARD

Department of Health and Human Services

SUBJECT:  New York State Dept. of Social Services

Docket No. 87-198
Reconsideration of DGAB No. 905

DATE:  April 11, 1988

RULING ON REQUEST FOR RECONSIDERATION

The New York State Dept. of Social Services (State) requested
reconsideration of New York State Dept. of Social Services, DGAB No. 905
(1987), in which the Board upheld the disallowance by the Health Care
Financing Administration (HCFA) of $2,489,194 claimed by the State under
title XIX (Medicaid) of the Social Security Act for the period July 1
through December 31, 1985.  The disallowed costs, which were included in
the per diem rates for hospitals, were incurred for supplemental
malpractice insurance purchased by the hospitals for their affiliated
physicians and dentists.  HCFA concluded, and the Board agreed, 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
which modified the hospital reimbursement methodology for both Medicare
and Medicaid.  DGAB No. 905 noted that the approved project proposal
identified certain generally unallowable costs-- bad debts, charity
care, and a discretionary fund--which were to be reimbursable under the
project.  Relying on an admission by the State that the supplemental
malpractice insurance costs disallowed by HCFA were not allowable under
generally applicable cost principles, the Board concluded that since the
project proposal did not provide for reimbursement of these costs, their
inclusion in the hospitals' per diem rates was a change in project
methodology which required HCFA approval.

The Board's regulations at 45 C.F.R. 16.13 state that the Board may
reconsider a decision where a party promptly alleges a clear error of
fact or law.  Upon review of the State's presentation, however, we find
that there is no basis for reversing the disallowance.

In its request for reconsideration, the State asserted that the Board
erred in interpreting the provision for reimbursement of bad debts,
charity care, and a discretionary fund as precluding reimbursement of
the supplemental malpractice insurance costs absent HCFA approval.  The
State argued that, because the normal reimbursement methodology was
based on actual costs, the project proposal had to specifically provide
for reimbursement of other types of costs, such as bad debts, charity
care, and a discretionary fund.  However, according to the State, this
provision of the project proposal would not be relevant in determining
the allowability of actual costs such as the supplemental malpractice
insurance costs.

For the sake of argument, we assume that the State is correct that the
allowances for bad debts, charity care, and a discretionary fund can be
distinguished from the supplemental malpractice insurance costs on the
basis that the latter, but not the former, were actual costs.  The
project proposal required each payor to add a factor to its rate which
was to be pooled and then distributed to hospitals which were
experiencing deficits caused by bad debts (losses from uncollectible
accounts) or through the provision of charity care (services provided to
patients free of charge); hence the allowance for bad debts and charity
care.  (Docket No. 87-69, State's appeal file, Exh. 1, pp. 34-37)  The
discretionary fund was a percentage of a hospital's reimbursable
inpatient costs paid to the hospital to use as it deemed appropriate.
(Id., pp. 31-32)   The project proposal did not require a hospital to
account for how it used these allowances.  Thus, the allowances
themselves were arguably not actual costs (although to the extent that
the hospitals expended the allowances, actual costs were incurred).
Accordingly, from the State's point of view, the Board erred in
concluding that the supplemental malpractice insurance costs were not
allowable because they were not included in the provision for these
allowances.

Nevertheless, even if the Board improperly relied on this provision, the
State still has not pointed to an affirmative basis for finding the
costs in question allowable.  Merely because the supplemental
malpractice insurance costs were actual costs does not mean that they
were allowable.  Section 447.253(g) of 42 C.F.R. (1983) requires that
per diem rates for hospitals be determined "in accordance with methods
and standards specified in an approved State plan."  Under the
demonstration project, which replaced the state plan for this purpose,
the State used a prospective reimbursement methodology based on the
Medicare principles of reimbursement (at 42 C.F.R. Part 405, Subpart D)
with certain modifications specified in the project proposal. The
Medicare principles do not provide for a per diem rate based on all
actual costs incurred by a hospital.  Thus, the State would have to
demonstrate that the costs were allowable under the Medicare principles,
or any modifications effected by the project proposal, not simply that
they were actual costs.

The State took the position, both in DGAB No. 905 and in its request for
reconsideration, that in determining the allowability of the
supplemental malpractice insurance costs, one must not look beyond the
four corners of the project proposal.  However, the State did not point
to anything in the proposal which indicated that costs like the
supplemental malpractice insurance costs would be allowable.  (Since the
law requiring hospitals to pay these costs was not effective until July
1, 1985, long after the January 1, 1983 beginning date of the
demonstration project, there could have been no provision specifically
allowing these costs.)  The State did argue in DGAB No. 905 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.  However, the fact
that the proposal identified certain limitations on reimbursable costs
(such as a prospective revenue cap) does not clearly imply that all
actual costs not mentioned were allowable.

The State also contended that the Board erred in considering whether the
supplemental malpractice insurance costs were generally unallowable
costs under Medicaid, asserting that the only issue before the Board was
the allowability of the costs under the demonstration project.  However,
whether the costs in question were generally unallowable was clearly a
threshold issue in this case.  If they were generally unallowable, then
something in the project proposal was required to render them allowable.
If they were generally allowable, they would remain allowable unless
something in the project proposal rendered them unallowable.  Thus, the
Board's consideration of this issue did not constitute error.

The State also asserted that the Board erred as a matter of fact in
stating that the State did not claim the supplemental malpractice
insurance costs beyond the end date of the demonstration project.  As is
apparent from another appeal filed with the Board (Docket No. 87-219),
the State claimed supplemental malpractice insurance costs for periods
beginning in 1986 under a proposed State plan amendment.  The Board's
statement is thus an error; however, the error is not material. The
Board made the statement in connection with its observation that the
State had not argued that the costs were ordinarily allowable under its
Medicaid program.  The implication was that if the costs had been
generally allowable, the State would have made a claim for any such
costs incurred after the demonstration project ended.  However, the fact
that the State claimed the later costs on the basis of a proposed plan
amendment may also be an indication that the State did not regard the
costs as generally allowable.  Moreover, as noted in DGAB No. 905, the
State 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."  DGAB No. 905, p. 2, n. 1.  Accordingly,
the Board was justified in concluding that the costs were generally
unallowable.

Finally, the State objected to the Board's conclusion that the
supplemental malpractice insurance costs were not allowable under a
provision in the project proposal allowing rate increases based on
"additional costs incurred in meeting state or federal requirements."
The Board stated that, in order to give meaning to a separate
requirement for prior approval of changes in the project methodology,
the quoted provision must be read to allow rate increases only where the
additional costs have been approved by HCFA.  Otherwise, the Board
stated, "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."  DGAB No. 905, p. 4.  The State asserted
that it had never used the provision in question to justify inclusion in
the per diem rate of a cost that was not a reasonable hospital cost, and
that it had consistently argued that the costs in question here were
reasonable.  Even if the costs in question are reasonable, an issue
which the Board did not reach in DGAB No.  905, the fact remains that
the requirement for prior approval by HCFA would be meaningless if the
State could increase rates without such approval under another provision
of the project proposal. Accordingly, there is no basis here for
reversal of DGAB No. 905..Conclusion

For the reasons discussed above, we affirm our decision in DGAB No. 905.

 

 

                            ____________________________ Donald F.
                            Garrett

 

                    ____________________________ Alexander G. Teitz


                            ____________________________ Norval D.
                            (John) Settle Presiding Board Member