South Carolina State Health and Human Services Finance, DAB No. 943(1988)

DEPARTMENTAL GRANT APPEALS BOARD

Department of Health and Human Services

SUBJECT:  South Carolina State Health  and Human  Services Finance Commission

Docket No. 87-176
Decision No. 943

DATE:  March 29, 1988

DECISION

The South Carolina State Health and Human Services Finance Commission
(SHHSFC, State) appealed a disallowance by the Health Care Financing
Administration (HCFA, Agency) of $1,043,092 in federal Medicaid funding
claimed by the State under title XIX of the Social Security Act (Act).
The disallowed claims were for expenditures paid by SHHSFC to the South
Carolina Department of Mental Health, based on amended cost reports for
the Crafts Farrow State Hospital, a state psychiatric hospital, for the
federal fiscal years 1979 through 1984.  The claims for increasing
adjustments for the prior periods were made on an expenditure report
dated April 30, 1987.

The primary basis for the disallowance was that the claims were not
timely filed, as required by statute and regulation, and were not within
the exception for adjustments to prior year costs.  A secondary basis
was that the claims were for services payable by Medicare, and since
Medicaid was the payor of last resort, the State did not comply with
legal requirements since it failed to bill Medicare; therefore the
claims did not reflect costs properly claimed under Medicaid.

For the reasons discussed below, we uphold the entire disallowance on
the ground that the claims were not timely filed, and did not come
within the exception for adjust- ments to prior year costs.  We
therefore need not reach the secondary question of whether the claims
were for services not payable by Medicaid, either in whole or in part.

The Facts

Crafts Farrow State Hospital (CFSH) is an inpatient mental health
facility operated by the South Carolina Department of Mental Health
(DMH); it participates in both Medicaid and Medicare.  CFSH uses the
Medicare principles of .reimbursement for determining its reimbursement
rates under Medicaid.  The facility uses a retrospective reimbursement
method, where interim billing is done on a per diem basis based on
historical costs, subject to annual cost report settlement based on
actual costs.  Any "over or under payment" between the interim billing
rate and reimbursable program cost is calculated and final settlement is
made.  Appellant's brief, p. 2.

During the years in issue here DMH never included in its Medicaid cost
reports the costs of ancillary services at CFSH and those costs were not
part of the rate calculation for Medicaid.  In 1986 DMH hired a
consulting firm to review its reimbursement procedures.  This firm
reported that the all-inclusive rate claimed for CFSH satisfied all the
requirements for interim billing, but the annual cost reports had
neglected to include ancillary and physician costs in the final
settlement.

DMH followed the consulting firm's recommendation to request the State
Medicaid agency to reopen the relevant prior year cost reports for
amendment, and to calculate reimbursable program costs for ancillary and
physician services on the basis of Medicaid inpatient days to total
facility inpatient days at CFSH.  In early 1987 the Medicaid agency
agreed to reopen the cost reports to allow DMH to include the amended
cost report settlements for ancillary services.  1/  The State Medicaid
agency thereafter executed an Interdepartmental Transfer (IDT) to DMH
for the Medicaid rate increase to reflect the costs of the ancillary
services during the relevant fiscal years.  2/  The Medicaid agency then
entered the amount of the rate increase on its HCFA-64 claim for FFP for
prior period adjustments.

The State's Arguments

The State first argued that the claims were timely because the
expenditures were made when the IDT was executed and DMH was paid on the
basis of its amended cost reports. The date of the expenditure,
according to the State, was the date of the IDT, which was within the
two-year claiming period.

In the alternative, the State argued that, if the expenditures were made
when the services were rendered, then the claim comes under the
exception to the timely claims requirements for "adjustment to prior
year costs."

Analysis

I.  The expenditures were made when DMH paid the facility for its
    services based on its interim per diem rate.

Section 1132(a) of the Act requires that a claim for FFP "with respect
to an expenditure made during any calendar quarter" by a State must be
filed within the two-year period which begins on the first day of the
calendar quarter immediately following such calendar quarter.  3/ The
regulation states that a state agency's expenditure .for services under
Medicaid is considered to have been made "in the quarter in which any
State agency made a payment to the service provider."  45 C.F.R.
95.13(b).  In the definitions section of the regulation, "State agency"
for the purposes of expenditures for Medicaid means "any agency of the
State, including the State Medicaid Agency, its fiscal agents, a State
health agency, or any other State or local organization which incurs
matchable expenses."  45 C.F.R. 95.4.

The service provider here was obviously the hospital.  The expenditures
for which matching FFP was claimed were the payments by the Medicaid
agency to DMH, which operated the hospital.  The situation is obscured,
both because we are dealing with a payment under a rate, and because we
have a state-owned provider here.  It may seem that the State is simply
paying itself.  That is why the State Medicaid Manual has a provision
that, in the case of a public provider, an expenditure, as far as timely
claiming is concerned, is made when the State agency actually pays over
funds or records the transaction on its books, whichever is earlier.
State Medicaid Manual section 2560.4, G.1.  This is to take care of the
situation where a state does not actually pay out any funds to a public
provider, but merely makes a bookkeeping entry.  There is no indication
here that only a bookkeeping entry was made, rather than outright
payment to DMH.

In any event, the expenditure was the payment to the service provider,
not of individual items of cost, but of a per diem rate multiplied by
the number of Medicaid patient days.  The rate is not necessarily the
sum of the individual items of cost which the hospital paid out, such as
salaries of employees and meals for the patients. Some of these
individual items may not be allowable in computing a reimbursement rate,
and some that are allowable may have a cap, where the Medicaid rate was
based on Medicare principles of reimbursement.

It is clear that when the State Medicaid agency paid DMH for x number of
patients at CFSH at an interim daily rate of y dollars per patient per
day, that was the expenditure which began the running of the time for
filing a claim for FFP in that expenditure.  Additional payments made
later on for the same period, no matter how computed, were not new
expenditures which started a new claiming period running.  They may come
under exceptions to the filing requirements, such as adjustments to
prior year costs, but they are not new expenditures which have .another
two-year period in which the State could claim them.  If this were not
so, then there would be no need for the exception; additional
expenditures could be claimed forever into the future.

The expenditures, in the sense we have described them here, were clearly
made more than two years before the claim for FFP was filed at the end
of April 1987.  Thus, the claim was not timely, and was barred by
claiming requirements unless it came within an exception to those
requirements.

II.  The claims were not an adjustment to prior year costs.

The State argued that, even if the claim was not filed timely, it came
within the exception to the claiming requirements for adjustments to
prior year costs.  The regulation defines an adjustment to prior year
costs as "an adjustment in the amount of a particular cost item that was
previously claimed under an interim rate concept," and it is later
determined that "the cost is greater or less than that originally
claimed." 45 C.F.R. 95.4.  The time limits for claiming do not apply to
"any claim for an adjustment to prior year costs."  45 C.F.R. 95.19(a).

It is undisputed that the rates in question here for CFSH were
originally claimed on an interim basis.  The Board has previously
recognized that adjustments to interim rates made during the normal cost
settlement process would come within the regulatory definition of
adjustments to prior year costs as an exception to the timely filing
requirement.

     The classic example of this exception is in paying providers of
     medical services on a retrospective rate reimbursement system.  A
     facility has an "interim" rate set for payment based on the prior
     year's costs.  During the year the cost of an item or items goes up
     sharply, whether due to inflation or because of a reason peculiar
     to this cost item.  At the end of the year adjustments of the rate
     are in order, based on changes in the cost of the particular items
     during the time period. However, it would be grossly unfair to the
     state not to allow it to claim for FFP based on the retrospective
     rate because it was now too late under the time limitation statute.
     . . .

New York State Department of Social Services, DGAB No. 521 (1984), p. 8.

In support of its position, the State relied on two prior Board
decisions where certain items of costs not included in an interim rate
were considered in finding an adjust- ment to prior year costs, even
though cost reports for those years had apparently been closed.  In
Pennsylvania Department of Public Welfare, DGAB No. 703 (1985), certain
items of provider costs (rentals and general obligation bond charges)
were not specifically included in calculat- ing the interim rates or the
"final cost settlements." The stated reason was a lack of communication
between Pennsylvania state agencies.  The analysis in that case centered
on the Agency's position that the claims could not qualify as
adjustments to prior year costs because the specific provider costs in
question were not claimed in the interim rate process.  The Board
pointed out, as we do above, that what is claimed in the interim rate is
not each individual divisible item accumulated on the provider's cost
report, but rather the per diem rate, based on those individual items,
used to reimburse the facility.

The Board in Pennsylvania further stated that "[a]s long as this type of
adjustment was contemplated by the rate- setting system in Pennsylvania
and was not prohibited by the State plan," it had no basis to find that
the claims were not adjustments to prior year costs.  p. 3. Similarly,
the State relied on Ohio Department of Public Welfare, DGAB No. 622
(1987), where amounts for deprecia- tion not included in computing the
interim rate were permitted as prior year adjustments when later used in
computing the per diem rate for institutional services.

However, the principle of these cases should not be extended any further
than their particular facts.  Where an interim per diem rate was claimed
within two years, and then a state later realized that it had mistakenly
not included costs of particular items in computing the final rate, the
state can properly recompute its final rate to include the omitted costs
only if the state's retrospective rate-setting process permits it to
re-open a final rate and the adjustment itself is one reasonably
encompassed by the state's retrospective system.  Without .this proviso,
the rationale underlying the timely claiming requirements would be
undercut so that any rate recalculation would be proper so long as a
state had a retrospective system.  As we pointed out in New York, the
purpose of the timely claims limitation was "to prevent the states from
coming in many years after expenditures were made and claiming FFP. . .
.  Such delayed claiming made it difficult for the Department of Health
and Human Services to plan its budget."  p. 8.  Here, even the State
acknowledged that the approach of opening closed cost report settlements
"seems to run counter to 42 U.S.C.  section 1320b-2(a) [section 1132(a)
of the Act] and the intent of that legislation."  Appellant's brief, p.
8.

We also said in New York that the exceptions to the time limitations
were intended to cover only extreme situations, where it would be
patently unfair to a state to outlaw its claim "merely because of the
passage of time."  p. 8.

The exception for adjustments to prior year costs is intended to give a
state a reasonable opportunity to adjust its interim rate, consistent
with the methods and procedures of its established rate-setting
methodology. As we said in Tennessee Dept. of Health and Environment,
DGAB No. 921 (1987), the interim rate exception is limited to the
"state's interim and final cost settlement process."  p. 4.  The two
cases cited in Tennessee in support of this principle are Pennsylvania
and Ohio, discussed above.  We recognized in Tennessee that the
exception for adjustments to prior year costs was not intended to permit
any adjustment whether or not related to the interim rate process.

Here the interim rate had been adjusted for the years in question, final
settlement had been made, and the cost reports had been closed for
several years.

In the cost reports (Exhibit B) submitted by the State as "an example"
(Appellant's brief, p. 3) the ancillary cost amount is entered on
Worksheet E-5, Calculation of Reimbursement Settlement for Title XIX, as
"0".  In other worksheets we find the flat statement that there was "No
Ancillary Cost."  (Exhibit B, Desk Review of Initial Cost Report,
Worksheet C and Worksheet D).

As the Agency stated in its disallowance letter, at the time it filed
its original cost reports the hospital deliberately did not report any
amount for ancillary services.  The State did not simply overlook or
mistakenly not include these costs, rather it chose not to include these
costs in its per diem rate calculation.  Thus there was no question of a
mistake or a lapse by the State in failing to include the ancillary
costs on its original cost reports, as would more closely parallel the
circumstances in Pennsylvania and Ohio.  Here, it was a conscious
decision by the State not to claim these costs.

The revision to the cost reports now proposed by the State is not, in
our opinion, the type of change reasonably contemplated by section 1132
of the Act as an adjustment to prior year costs, so that the exception
to the timely filing requirement would not apply.  Even if the State's
decision to initially exclude these costs resulted from some error about
what costs it ought to include in its Medicaid rate, the record reveals
no substantive reason such an error was not subject to correction within
the two-year limitation.  In essence, it is our view that it is merely
coincidental that this case arose in the context of a retrospective
system.  Retrospective rate-setting does not involve fundamental changes
in the assumptions underlying the rate as part of a normal adjustment
process.  To allow the State now to make amended claims based on the
reopened cost reports so as to include items once intentionally not
reflected in the Medicaid rate would render meaningless the requirement
of section 1132 that states finalize their claims in a timely fashion.

Conclusion

For the reasons stated above, we sustain the disallowance of $1,043,092.

 

                         ________________________________ Cecilia Sparks
                         Ford

 


                         ________________________________ Norval D.
                         (John) Settle

 


                         ________________________________ Alexander G.
                         Teitz Presiding Board Member

 

 

1.   The cost reports were not reopened for physician (ancillary)
services because of a Medicaid cap imposed by the State Legislature.
Appellant's brief, p. 10. The ancillary services for which claim was
made in the reopened cost reports included items such as laboratories,
x-rays, and physical therapy.  See Worksheet 13 attached to Exhibit C.

2.   In its opening brief (p. 4) the State said that the IDT was
executed in May 1987.  The Agency then pointed out that this was after
the HCFA-64 (the form submitted quarterly by states detailing their
Medicaid expenditures) for the prior period adjustments was filed, and
if the State argued that the expenditure was made when the funds were
transferred by the IDT, then the HCFA-64 claim was premature.  In its
reply brief the State stated that the May 22, 1987 date was that of a
corrected IDT, and submitted documentation to show that payment was
originally posted on March 26, 1987.  The date of the IDT is immaterial,
since we do not consider that the expenditure was made, as far as timely
filing, when the funds were transferred to DMH, but rather when the
Medicaid agency paid DMH at its interim rate for CFSH.

3.   While the majority of the State's claims are governed by the
two-year filing requirement, part of the State's claim concerns
expenditures made during fiscal year 1979. Expenditures made before
October 1, 1979 have a different filing deadline, originally January 1,
1981, later changed to May 15, 1981.  This distinction in filing
requirements has no effect, however, on our analysis of the State's