DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: West Virginia Department of Human Services
Docket Nos. 87-64 and 87-126
Decision No. 956
DATE: May 19, 1988
DECISION
The West Virginia Department of Human Services (State or DHS) appealed
two
disallowances by the Health Care Financing Administration (Agency or
HCFA) of
a total of $60,459,469 in federal funding claimed under Title
XIX (Medicaid)
of the Social Security Act. HCFA had conducted a review
of DHS' use of
"donated funds" as the State's share of Medicaid
expenditures. HCFA
determined that funds contributed to DHS from West
Virginia hospitals
participating in the Medicaid program could not
qualify as the State's share
of financial participation under standards
set forth in 42 C.F.R.
433.45. HCFA concluded that the State had never
contributed its share
of funding ($22,829,509) for program expenditures
totalling approximately
$83,000,000, and disallowed the total amount of
federal funding that was made
available for those expenditures,
$60,459,469.
For the reasons described below, we uphold the Agency's finding that
the
funds received from the hospitals were not "donated funds" as
required
by the regulation, and therefore do not qualify as the State's
share.
We conclude that the funds were not "donated" because the
facts
surrounding their transfer were not consistent with the
commonly
accepted meaning of the term "donation" and because the State's
program
contained abusive and unauthorized practices that were inconsistent
with
the purpose of the regulation.
Since the transferred funds here do not qualify as a donation but
clearly
can be viewed as a discount in claims from the hospitals for
services
previously rendered, we find that they must be deducted from
the State's
program expenditures as an "applicable credit." Under the
applicable credit
regulation, the fund transfers from the hospitals are
viewed as reducing
overall program costs for the hospital services
involved and the federal and
state shares for these costs are reduced
proportionally. Under the
facts here, the overall costs of the
services, as reduced by the fund
transfers, would be $60,459,469. The
federal share would be $43,887,528
and the state share would be
$16,571,941. Since the Agency has already
paid the entire amount of
$60,459,469 in costs, it is entitled to be repaid
$16,571,941.
Accordingly we uphold $16,571,941 of the disallowance and
reverse the
remainder.1/
The Board had previously issued a draft decision in this appeal in
which
it proposed to find that the funds met the standards of 42
C.F.R.
433.45. The draft decision, as did the parties in their
initial
briefing, focused on whether the funds came under the
"administrative
control" of the State as required by section 433.45(a)(2),
and whether
funds from proprietary hospitals met the requirements of
section
433.45(a)(3). The Agency in its comments on the draft decision
argued
that the State failed to meet the threshold criterion of section
433.45
that funds must be "donated." Agency Comments on Draft Decision, p.
3.
The Agency asked the Board to find that the facts surrounding
the
transfers prevented them from qualifying as bona fide donations
and
requested an evidentiary hearing on factual issues. Although the
State
argued that a hearing was not necessary, it did not object to
the
Agency's request. The hearing was held on March 1 and 2,
1988. During
the hearing, several critical aspects concerning the
State's donation
program were clarified. Newly developed facts, not
available to us when
we developed the draft decision, convincingly support
the Agency's
position and compel us to conclude that our preliminary analysis
must be
modified. Among those critical facts are the following:
o The State unquestionably provided preferential
treatment for
hospitals participating in its
program. Contrary to allegations
made
repeatedly by the State in submissions preceding the
hearing,
there were no valid explanations for
payment irregularities. The
hearing testimony
demonstrated that the State paid only
participating
hospitals in the payment runs following the fund
transfers. Even hospitals that were late in making their
fund
transfers did not receive reimbursement until
they made a transfer.
o The State's increase in its interim reimbursement
rate to 95% did
not benefit nonparticipating
hospitals since the State
intentionally did not make
payments to them while the increase was
in
effect.
o The State did not consider individual cost
histories of
providers, as required, when it
increased the interim rate to 95%.
The State's
inflated interim payments were used as a means of
inducing fund transfers and subjected the program to
the
possibility of substantial overpayments.
o Probably a majority of the hospitals that made
fund transfers
hoped to recoup the transfers in some
form or other by claiming the
transfers as expense
items on their cost reports. This is clearly
inconsistent with a donative intent and, indeed, is
inconsistent
with viewing the transfer as the State
funding share.
o Contrary to its usual procedures, the State did
not process the
$83 million in claims payments
through its Medicaid Management
Information System
(MMIS), nor did it provide the hospitals with
payment vouchers that corresponded to the amount of the check
being
mailed to them. In many instances, the
State inexplicably paid
more than 100% of the amount
of the claims purportedly covered by a
particular
payment run. The State's actions caused
considerable
confusion concerning which claims were
actually being paid and
considerably increased the
administrative efforts necessary to
trace whether
the payments made were proper. In some
instances,
the State apparently paid at the higher
interim rate claims that
had already been settled at
a lower rate.
Factual Background
During the early fall of 1986, the State had a backlog of
approximately
$44 million in unpaid claims filed by West Virginia hospitals
for
services the hospitals had rendered to Medicaid beneficiaries. (By
the
end of January 1987, the pending claims had increased to $83
million.)
The backlog existed because the State had insufficient funds to pay
its
share of the claims, and without State funds the State was unable
to
draw down federal funding for these claims.2/
In October 1986, the Governor of West Virginia held a meeting with
the
West Virginia Hospital Association (WVHA). HCFA Exhibit (Ex.)
7. The
Governor proposed that each WVHA member hospital could make
a
contribution to West Virginia's Indigent Care Fund to help reduce
the
backlog of unpaid hospital claims.3/ At approximately the same
time,
discussions and meetings occurred between DHS and HCFA personnel on
the
Governor's proposal. In September 1986, Phillip A. Lynch,
Assistant
Director of the State Medicaid agency, telephoned Ted Gallagher, of
the
regional HCFA financial staff, and discussed regulations governing
the
use of voluntary donations in the West Virginia Medicaid
program.
Agency brief, p. 3; State brief, p. 8. HCFA regional staff and
State
representatives met on November 18, 1986, to discuss various
Medicaid
issues, including hospital donations. Agency brief, p. 3;
State brief,
p. 10. HCFA representatives advised the State that the
only Agency
regulation applicable to the State's use of funds derived through
the
proposed contribution program was 42 C.F.R. 433.45. However,
they also
indicated that they were unsure of the meaning of certain sections
of
the regulation. At the conclusion of the November 18, 1986 meeting,
the
HCFA regional representatives indicated that they would take steps
to
have the federal matching funds requested by the State as a result
of
its hospital program placed in the State's account.4/
While the discussions were proceeding, the hospitals began sending
funds
to the Indigent Care Fund on November 24 and 25, 1986. The
amounts of
the hospitals' transfers were determined by WVHA, possibly
in
conjunction with the State.5/ The President of WVHA confirmed that
the
amounts of the November contributions were related to
"legislatively
mandated hospitals assessments which occurred in late
September, 1986."
State Ex. AA. Each hospital's donation amount in fact
did equal the
amount of the October 1, 1986 check the hospital received
following the
1986 assessment. The hospital contributions made on
December 22, 1986
and January 12, 1987 "were based on each hospital's level
of outstanding
net Medicaid receivables on those respective dates." Id.6/
Following each fund transfer from the hospitals (which took place on
or
about November 24, 25, December 8, 22, and January 12), the State
made
"payment runs" within one or two days of receiving a transfer.
During
each payment run, it implemented across-the-board increases in
its
interim rates for the hospitals. Under the State's Medicaid
program,
hospitals are reimbursed initially at an interim rate, and only
receive
final reimbursement after a final cost settlement. Prior to
the
donation program, the interim rates for hospitals were
determined
individually for each hospital by looking at how closely a
hospital's
previous claims approximated its actual costs during a given
period.
Tr. I-184. The interim rates varied in a range between 60% and
90%.
The State increased the interim rate for every hospital to 95% for
three
payment runs. State letter to the Board dated March 16, 1988, p.
2.
This increase applied to checks dated November 24 and 25, 1986 and
was
applied a third time to the payment run producing checks dated
December
9, 1986. A fourth payment run paid hospitals at their
previously
established rate plus $500. The percentage increases from
the
additional $500, therefore, varied from provider to provider. The
fifth
and final payment run during the program paid the providers at a
5%
higher rate than their previously established rate. Id.
By the end of December 1986, 62 hospitals in West Virginia had
contributed
$17,394,311 to the Indigent Care Fund, which was used to
generate $46,065,415
in federal funding. In January 1987, an additional
$5,435,198 was
contributed to the fund, which was used to generate an
additional $14,394,054
in federal funding. The practical effect of the
program was that it
enabled the State to generate its share to reimburse
its outstanding Medicaid
claims and to receive matching federal funds
for the claims. Almost
immediately after receiving contributions from
the hospitals, the State was
in a position to pay its backlogged claims
at an increased interim rate with
hospital and federal funds.
HCFA issued two separate disallowances, on April 2, 1987 and July 6,
1987,
in the total amount of $60,459,469 in federal funding, finding
that the
hospital contributions failed to "meet the regulatory
definition of donated
funds which may constitute the state share
eligible for federal
matching."
Applicable Regulation
The Medicaid program was designed as a cooperative
federal-state
venture. Each state participating in the program shares
in its costs
along with the federal government. The federal
contribution is an
amount equal to a state's federal medical assistance
percentage of the
total amount expended by the state as medical assistance
under the state
Medicaid plan. Section 1903(a) (1). In West
Virginia the federal
percentage is 72.59 percent. The State's share of
financial
participation, therefore, is 27.41 percent.
The only Medicaid regulation that contains the conditions for
determining
which funds may qualify as a state's share of Medicaid
expenditures is 42
C.F.R. 433.45. This regulation provides:
Sources of State share of financial participation.
(a) Public funds as the State's share. (1)
Public funds may be
considered as the State's share
in claiming FFP [federal financial
participation] if
they meet the conditions specified in paragraphs
(a)(2) and (3) of this section.
(2) The public funds are appropriated directly to
the State or
local Medicaid agency, or transferred
from other public agencies
(including Indian tribes)
to the State or local agency and under
its
administrative control, or certified by the contributing
public
agency as representing expenditures eligible
for FFP under this
section.
(3) The public funds are not Federal funds, or are
Federal funds
authorized by Federal law to be used
to match other Federal funds.
(b) Private donated funds as the State's
share. (1) Funds donated
from private sources
may be considered as the State's share in
claiming
FFP only if they meet the conditions specified in
paragraphs (b)(2) and (3) of this section.
(2) The private funds are transferred to the State
or local
Medicaid agency and are under its
administrative control.
(3) The private funds do not revert to the donor's
facility or use
unless the donor is a non-profit
organization, and the Medicaid
agency, of its own
volition, decides to use the donor's facility.
This regulation was promulgated on November 12, 1985 and replaced
42
C.F.R. 432.60, which authorized the use of donated funds as a
state's
Medicaid share for training expenditures. The new regulation
made two
significant changes. It expanded the use of donated funds as a
state's
share to cover all types of Medicaid expenditures and it eliminated
the
old condition on private donations that the funds be donated
"without
any restriction which would require their use for. .
.particular
individuals or at particular facilities or institutions."
In the preamble to section 433.45, HCFA explained its reasons
for
expanding the allowability of donated funds as a state's share for
all
Medicaid expenditures. Noting that states' budgets had become
more
austere, HCFA declared that "State legislatures have looked
increasingly
to alternative sources for funding a larger portion of the
Medicaid
program." 50 Fed. Reg. 46652, 46657 (November 12, 1985). HCFA
stated
that its previous regulation, section 432.60, had placed
an
administrative burden on states in terms of cost allocation.
Id.
Section 433.45, permitting donations to be used for all
Medicaid
expenditures, would allow the states more flexibility in
administering
their Medicaid programs and would reduce record keeping.
Id.
HCFA also stated that in formulating the previous version of
the
regulation, it had been concerned about potential for abuse.
HCFA
specifically wanted to prevent donations that could be conditioned
on
some benefit to the donor. For example, HCFA was concerned that
a
"kickback" situation could result from private donations made by
a
proprietary organization. HCFA noted, however, that up until
then:
Experience has shown no abuse of public and private
funds through
conditional donations or
kickbacks. Generally donated funds are
commingled with all other Medicaid funds under the State
agency's
administrative control. Id.
Furthermore, in response to one commenter's concern that opportunities
for
abuse would result under the amended regulations, HCFA stated that
it would
be able to identify any major violations of the regulation
through the HCFA
financial management review.
We conclude that the State's "donation" program does not meet
the
foregoing regulatory standards because the facts surrounding the
fund
transfers are plainly inconsistent with the commonly accepted
definition
of "donation" and because, contrary to the expressed purpose of
the
regulations, the fund transfers result from abusive or
unauthorized
practices on the part of the State.
The transfers were not "donated" under the commonly accepted meaning
of
the term.
The case law meaning, and indeed, the commonly accepted dictionary
meaning
of a "donation" is a voluntary gift without payment or
consideration from the
party receiving the gift.7/ Here, however, the
hospital fund transfers were
induced or coerced by the State, and thus
lacked the requisite voluntariness
of a bona fide donation.
The State has a unique relationship with the provider community in
the
Medicaid program. As the program administrator, it is responsible
for
many aspects of program implementation, including the formulation
of
interim rates and other critical program policies relating to
claims
reimbursement. Here, not only were the hospitals vulnerable
because
they had to deal with the State on ongoing matters relating to
program
reimbursement, but also because the State owed them approximately
$83
million in pending claims. The State's unauthorized modification of
key
features of its reimbursement practices, under these
circumstances,
eliminated the voluntariness that is implicit in the term
"donation."8/
The record indicates that the State made it clear from the outset
that
hospitals participating in the "donation" program would
receive
preferential treatment in claims reimbursement. Agency Ex.
21. And, in
fact, the State offered testimony at the hearing that it
intentionally
did not reimburse any non-participating hospitals in the
payment runs
following the donations.9/ The State's payment records also
demonstrate
that hospitals that did not participate initially in the
State's
program, such as Ohio Valley, did not receive any claims
reimbursement
until they had made their first fund transfer. Ohio
Valley had
$1,250,244 in claims ready for payment as of November 15,
1986. During
the November payment runs, at least 58 hospitals that made
fund
transfers received payments on their claims when Ohio Valley did
not.
Tr. II-298; Agency Hearing Ex. 1. Obviously this hospital was
under
considerable pressure to contribute by December 8, the next
projected
round of "donations." As it turned out, Ohio Valley contributed
$422,459
on December 8, reaping the benefit of the last payment run in which
the
State paid hospitals at the 95% interim rate.
The State's increase in interim rates, which was not authorized by
the
State plan, also had the effect of coercing or inducing hospitals
to
participate. The State increased the interim rates to 95% during
the
first three payment runs and then implemented smaller increases
for
subsequent runs. The hospitals were aware that after they made
their
fund transfers, they were to receive immediate reimbursement for
pending
claims and that this reimbursement was to be made at a higher
interim
rate than their existing rate.10/ It stands to reason that the
increase
in the interim rate was an inducement in their decision to
participate
in the State's donation program. This rate increase
provided immediate
reimbursement for a significant portion of a hospital's
transfer.ll/
While the interim rate increase would not permanently compensate
the
hospital for its fund transfer, a hospital would likely retain
the
benefits of the interim rate increase until final cost settlement
for
particular service claims, which typically occurred approximately two
or
three years after services were rendered. Moreover, probably a
majority
of the hospitals made claims for their transfers as an allowable
cost on
their cost reports. Tr. I-217, I-214; I-104. While such a
claim would
clearly be unallowable, the possibility existed that the claim
might be
overlooked and paid. If that happened, the hospital would not
only have
the benefit of the increased interim rate, but also would
receive
compensation for its fund transfer as well.
Aside from testimony from one hospital official at the hearing, the
State
presented no direct evidence concerning what motivated hospitals
to
participate. The sole hospital official (representing
Wheeling
Hospital, which contributed $204,000) testified that he did not
feel
intimidated or coerced into participating. Tr. I-96. On the
other
hand, his favorable reactions to the program appeared to be
influenced
by the very features that were designed to induce providers
to
participate, such as the 95% interim rates and the very
rapid
"turnaround" on pending claims. As he stated, "You have got to
bear in
mind, we were so desperate to receive Medicaid funds that we felt it
was
a good investment." Tr. I-lOl. It is also noteworthy that very few
of
the hospitals expressly
identified their transfers as "donations" on documents accompanying
their
transfers and elsewhere. Instead, they referred to the transfers
as
"loans," "rollovers," "Medicaid program advances," "voluntary
assessments,"
"deposits," "payments," and "remittances." A State
official testified that
probably a majority of the participating
hospitals treated the transfers as
an allowable expense on their cost
reports, which is inconsistent with
viewing the transfers as a donation
or as a source of the State share for
program funding.12/
Thus, we find that the State's program effectively combined elements
that
could be expected either to coerce or induce hospitals to
participate in the
program, and the transfers therefore can not
reasonably be viewed as falling
within the commonly accepted definition
of a "donation." All of the Medicaid
hospitals in the State had aging
claims for services rendered up to two years
previously. The record
suggests, moreover, that many of the hospitals
were in such straitened
financial circumstances that they had to cash in
bonds or take out loans
in order to make their fund transfers. Tr.
I-45; see also Agency Ex.
19. The threat of not receiving immediate
reimbursement of pending
claims at higher interim rates and instead having to
endure further,
possibly lengthy, delays in receiving reimbursement at
previous interim
rates could be expected to have a coercive effect on the
hospitals, and
is inconsistent with the voluntary intent required for a
donation.
The State's program contained abusive and unauthorized practices that
were
inconsistent with the purpose of the regulation.
Although the Agency liberalized its regulations in 1985 by deleting
the
restriction on conditional donations, it reaffirmed the
position,
consistently taken in previous versions, that the regulations did
not
authorize "abusive" donations. Indeed, the Agency indicated that
it
would be able to identify major violations of the regulations
through
financial management reviews. 50 F.R. 46661 (November 12,
1985). We
find that the State's program here was abusive in its
treatment of
federal funding and in its treatment of hospital
reimbursement. Some of
the abusive elements overlap with factors
already considered in our
discussion of a donative intent.
o The State's reimbursement procedures did not authorize
any
form of preferential treatment in the payment of pending
claims.
The State described its system as being basically a
first
in--first out or FIFO system. See Tamplin affidavit, State
Ex.
M; State comments on Board draft decision, p. 14; State Ex.
U.
The State at the hearing, however, admitted that it
withheld
payments to any hospital that did not participate in its
program
regardless of whether that hospital's claims had priority
under
its FIFO system. Tr. I-137. This unauthorized
preference was
clearly an abuse of the State's own procedures.
The State's
preferential treatment was not authorized by the
statute,
regulations or its Medicaid State plan.
o The State argued nevertheless that preferential treatment
was
authorized by 42 C.F.R. 433.45 since the regulation does
not
preclude "conditional" donations and the preferential
treatment
was given in response to conditions imposed by the
hospitals.
The State, however, has not established through
credible
evidence that any of the fund transfers at issue here were
made
with the condition that subsequent reimbursement of
backlogged
claims would only be provided to participating
hospitals. Even
if the State were able to establish that this
particular
condition applied in each case, we would still conclude
that
such a conditional transfer was not authorized by
the
regulation. While the regulation was revised in 1985 to
delete
the prohibition on conditions as to use of donated funds,
the
Agency did not thereby authorize or sanction donations
with
abusive conditions.
In revising the regulations, the Agency indicated that experience had
not
shown that conditional donations were per se abusive, and that
therefore the
requirement on conditional donations could be deleted.
The preamble, however,
clearly did not disavow the Agency's abiding
concern about abusive donations
nor suggest that donations with abusive
conditions would now be
authorized. We find that conditioning a
donation on preferential
payment for long pending program claims would,
in fact, be an abusive
condition. At the time that the hospitals
provided the services in
question, they reasonably expected
reimbursement without any form of
preference or favoritism. Any
after-the-fact change in reimbursement
procedures designed to show
preference to donating providers would be abusive
in our view.13/
o The West Virginia State plan provides that interim payments
be
made on a percentage of charge or per diem rate, reconciled
to
cost using the individual provider's cost reports. Agency
Ex.
14. The existing rates applicable to hospitals had ranged
from
60% to 90%. The State witness in charge of developing
interim
rates testified that interim rates are set on an
individual
basis by looking at each hospital's ratio of costs to
charges as
reflected in cost reports. Tr. I-184. In the
three payment
runs that followed fund transfers in November, the
State
authorized an across-the-board increase to 95% for every
claim
covered in the payment run, regardless of the hospital
making
the claim and regardless of the time period covered by
the
claim. The State has never provided the Board with
any
demonstration of how cost histories of individual
providers
could justify an across-the-board increase in this
manner. The
official that had the responsibility for making the
decision
testified that he was concerned about the financial plight
of
hospitals caused by declining revenues, declining patient
loads
and other factors. Tr. I-48. The State plan and
indeed its
practice, however, requires the State to reconcile any
change of
rate to individual provider cost reports. Here, that
clearly
was not done. Tr. II-394; I-188. Indeed, the State
official
who had the responsibility to calculate the rate for
each
hospital testified at the hearing that he was not aware of
the
interim rate changes until February or March of 1987.
Tr.
I-193. While the State testified that it may have lowered
all
interim rates by a set percentage amount, such as 3%, in
the
past, such a change was arguably still consistent with its
plan
requirements since the 3% was subtracted from the existing
rate
that had been reconciled to a hospital's cost experience.
Tr.
I-195, 196. In the instant case, every hospital received a
95%
rate, and this 95% rate obviously did not bear any
particular
relationship to the hospital's existing rate.14/
o The unauthorized rate increases served in effect as
an
interest free loan to the provider (by means of federal
funding)
until the claims were resolved through final cost
settlement.
While the providers benefited from having the funding
during
this period, the Agency, as the primary, if not the
only,
funding source, effectively lost the use of the funds for
the
same time period. Since time does equal money, this
represented
a considerable loss to the Medicaid program.
Moreover, the
State's actions greatly increased the possibility
of
overpayments, which also weaken the program. Tr. I-73.
(In
this regard, states customarily employ protracted
repayment
schedules for financially distressed providers which could
also
increase the Medicaid program's recovery cost. Tr. II-336.)
The
interim rate methodology the State was required to use served
to
prevent overpayments by basing the interim rate on
the
provider's prior cost experience as compared to its
charges.
Obviously, when the State implemented its
across-the-board
increase to 95%, these considerations were
disregarded. The
State attempted to justify what it did by
suggesting that the
interim rate change covered only a very short
period of time,
and that under the State's cost settlement experience
following
the change, the State has owed money to providers,
not
vice-versa. The State's 95% interim rate change,
however,
involved over $40 million in backlogged claims spanning
two
years. The fact that it was implemented during a short
time
period cannot diminish its substantial impact nor lessen
the
possibility of overpayments. Moreover, while certain
initial
settlements may not have resulted in overpayments (see
State
letter to the Board dated March 16, 1988), the point
remains
that at the time the change was made, the State was
needlessly
subjecting the program to the possibility of
substantial
overpayments by not following the usual and
required
procedures.15/ In fact, it appears that the State's
higher
interim rate may have caused it to overpay certain hospitals
for
claims stemming from 1984 because the claims had already
been
settled and were based on a final rate that was not subject
to
further modification.
o The State's decision to provide virtually
instantaneous
payment of claims following the fund transfers, and its
decision
to make three different across-the-board changes in the
interim
rates during a two month period, made it impossible for
the
State to provide accurate remittance advices with its checks
or
even to process its payments through its MMIS system
before
making them. The State's actions necessitated
considerable
administrative efforts in tracing the payments against
existing
claims and caused confusion in the provider community.
Tr.
I-194, I-97, I-112. According to the Agency, it also caused
the
State to pay contributing hospitals an amount higher than
the
actual claims included in the payment runs. The State,
however,
provided a series of exhibits, Exhibits FF and GG, to
refute
that it provided to any hospital more than 100% of
the
provider's total outstanding clean claims. See State's
Letter
to the Board dated March 16, 1988. Nevertheless, these
exhibits
do not conclusively refute the Agency's proposition that
the
State paid more than 100% on claims actually covered by
any
given payment run. See Agency letter to the Board dated
April
4, 1988. Thus, it is clear that the State's program
needlessly
placed federal funding in jeopardy, caused long
lasting
confusion concerning the precise amount of claims that were
paid
and considerably increased the administrative efforts
necessary
to trace whether payments made were proper.
Thus, we conclude that the State's donation scheme contained
substantial
abuses from the State's failure to follow program rules and
practices
and that these abuses were clearly inconsistent with a bona
fide
donation and with the intent of the regulations.
The Agency's application of its regulation here furthers the
overall
purposes of the Medicaid program.
The Agency's application of its regulation to require a voluntary act
that
is not induced by abusive or unauthorized practices furthers the
purposes of
the Medicaid program. The State here, by its donation
program,
effectively substituted the Medicaid service providers for
itself as the
Federal Government's partner in funding the Medicaid
program. (The fund
transfers here amounted to a very substantial
percentage of the State's
annual Medicaid budget.) There is clearly no
indication from either the
language of the regulation or the preamble
that the donation regulation was
intended to bring about a change in a
state's Medicaid program of this
magnitude.16/
Prior donations considered by the Board involved only
experimental
projects or donations from educational institutions that
provided
training to State officials. See our discussion on prior Board
cases
below.
The Agency, moreover, may rightfully be concerned that the State
Agency
could be perpetually in the driver's seat through a "donation"
program
of this type in its ability to extract concessions from the
provider
community at large and that many other states might attempt to
implement
similar programs to meet their particular fiscal needs.
Moreover, the
statute, regulations and State plan all contemplate that the
providers
will receive full reimbursement for the services they provide,
not
discounted reimbursement. See. e.g., section 1902 (a)(13)(A).
Any
program that has the effect of inducing a discount for pending
claims
would violate the intent of these provisions. Finally, the many
abusive
or unauthorized features of the State's scheme previously
identified
were all contrary to broader program purposes, such as
fiscal
accountability and equal treatment of providers in program
dealings.
The Agency's policy was consistent with previous Board decisions
on
donations.
The Board previously considered three cases involving donations
in
Department programs.17/ Although the Board upheld the use of
donations
as the state share in the previous cases, the instant case
is
distinguishable on several critical grounds. In all three
previous
cases, the donors had an actual choice whether to participate or not
and
thus, were not effectively coerced or induced into making a donation
so
that they could be paid what they were already entitled to be paid
under
the program. Here, the hospitals were coerced or induced to
make
transfers under the cloud of $83 million in pending claims. Thus,
the
instant case, in contrast with the earlier cases, lacks the element
of
voluntariness that is inherent in the concept of a donation.
Moreover,
while the previous cases involved elements of benefit for both
the
donating institutions and the states concerned, they did not
involve
practices on the part of the state Medicaid agency that were
clearly
unauthorized and abusive under the program rules. Finally, the
Texas
case, the only previous Medicaid case, can be specifically
distinguished
on the grounds that the program involved was experimental and
small in
scale, the Agency had given informal approval for the program during
its
early stages and the preferential treatment afforded the
donating
hospitals was negligible, if any. (See pages 9-10 of the
Texas
decision.)
Thus, contrary to the State,s arguments, our prior decisions do
not
support the State's position here.
The State had notice of the Agency's policy and, even if it did not,
the
policy can be retroactively applied.
Having concluded that the Agency's policy is consistent with the
commonly
accepted meaning of the term "donated funds" in the regulations
and with the
expressed purpose of the regulations of sanctioning
donations that are not
induced by abusive or unauthorized practices, we
address the State's
arguments that it lacked notice of the Agency's
policy and that the policy
may not be retroactively applied.
As is evident from our preceding analysis, we find that the State did
have
notice of the Agency's policy from the regulation. Our analysis
is
based on the regulatory language and its purpose as expressed in
the
preamble. The State argued that the Agency's delay in notifying
the
State about the effect of the regulation demonstrated the lack of
an
actual policy. On the contrary, we find that any delay on the
Agency's
part can be directly attributed to the State's delay in disclosing
all
relevant aspects of its program. Many facts concerning the
State's
program were not fully revealed until the hearing held in this appeal
on
March 1 and 2, 1988. As late as December 23, 1987, the State, in
its
comments on the Board's draft decision, responded to the
Agency's
charges of preferential payment by alleging that the Agency
had
misinterpreted the State's payment system and claims data supplied
by
the State. These allegations were supported, in part, by affidavits
by
the Division Director of the Division of Medical Claims Processing,
DHS.
State Exs. M and U. Yet at the hearing on March 1, this
official
testified that he was aware all along that nonparticipating
hospitals
would not be paid at the same time as participating hospitals, and
that
the payment runs following the fund transfers were for
participating
hospitals only. Tr. I-137. Other facts revealed for
the first time at
the hearing included the State's failure during its program
to process
its payments through its MMIS system and provide accurate
remittance
advices consistent with the amount of the check to the
hospitals. Even
facts revealed to the Agency prior to the hearing, such
as the State's
95% interim rate increase, were revealed after the completion
of the
donation program itself.18/
Moreover, the record demonstrates that the Agency never gave the State
any
form of approval for its program. (Binding approval would not have
been
possible in any event due to the State's failure to disclose all
relevant
facts concerning the program in discussions with the Agency
that preceded the
State's program.) There is no basis in Title XIX or in
the Medicaid
regulations to conclude that the Agency has approved the
allowability of
federal funds merely because it permits those funds to
be drawn down on the
State's declaration that it has available to it the
matching State share of
funding. As the Agency argued, even at the
point that the Agency had
determined that the funds in question here
should be disallowed, the Agency
was precluded by a federal court from
withholding any subsequent funding
based on the Agency's view of the
invalidity of the State's program.
See Agency letter to the Board dated
March 8, 1988 and accompanying court
documents.
Finally, even if the Agency was applying a retroactive interpretation
of
its regulation, we would still find that case law does not preclude
such
an interpretation under the circumstances here. See, e.g., New
York
State Department of Social Services v. Bowen, 835 F.2d 360 (D.C.
Cir.
1987), where the court permitted retroactive application of a policy
the
court found was first established after the period covered by
the
disallowance. The Agency here has a compelling interest in
preventing a
"donation" program of this type in which the providers were
effectively
substituted for the State as the Federal Government's partner in
the
funding of the Medicaid program. This interest would outweigh
the
State's interest in receiving prior notice. Moreover, the Agency
should
not be placed in the position of having to accept a donation program
as
qualifying merely because the regulations did not identify ahead of
time
every specific type of abusive practice that might be employed by
a
provider or a state. The preamble clearly indicated that the Agency
was
concerned about the potential for abuse even if experience under
the
previously existing version had generally suggested the absence
of
abuse. Finally, if the State needed more explicit notice of
the
Agency's policy, the State should have been forthright in revealing
all
facts concerning its program and should have delayed
implementation
until the federal program official with the authority to do so
had given
specific approval.
The applicable credit regulations apply here.
Our prior Texas decision recognized that if transferred funds did
not
qualify as a state's matching share, they potentially would be
subject
to the applicable credit provisions in the cost principles (OMB
Circular
A-87, Att. A, sections C.3.a. and C.l.g.) made applicable in
the
Medicaid program by 45 C.F.R. 74.171(a). DGAB No. 381 Amended, p.
4.
Applicable credits are defined as:
receipts or reduction of expenditure-type
transactions which offset
or reduce expense items
allocable to grants as direct . . . costs.
Examples
of such transactions are: purchase discounts; rebates
or
allowances . . . . (Section C.3.a.)
Section C.l.g. of Att. A, OMB (Office of Management and Budget)
Circular
A-87 requires that for a cost to be allowable under a grant program,
it
must "be net of all applicable credits."
For many of the same reasons we concluded that the transferred funds
here
could not qualify as donations, we conclude that they do qualify as
an
"applicable credit." In exchange for immediate reimbursement on $83
million
in pending claims, along with several other inducements
including increased
interim rates, the hospitals effectively discounted
their pending claims by
the amount of their transferred funds. The
transfers were definitely
made in contemplation of receiving payment on
specific pending claims.
(As we explained in our Background Section,
the amount of the transfers in
some payment rounds equalled the State
percentage share of the claims (27.41
percent); in other payment rounds,
the providers used a formula based on
State payments made following a
prior year's assessment.) This form of
discount is in our view clearly
within the scope of the transactions
contemplated by the applicable
credit regulations. The State here
through its "donation" program
effectively engineered this discount in its
Medicaid claims. Although
the State ostensibly acted to generate its
own funding share and thus to
draw down the federal funding to pay the
providers, the net effect of
its action was to decrease the overall cost to
the program for the
providers' services. The $83 million in claims from
the providers was
reduced by their transfers of $22,829,509 to
$60,459,469. The Federal
Government is accordingly entitled to a
proportional reduction in its
funding share for these services. For
this level of expenditures, the
federal share (72.59 percent) is $43,887,528
and the State share (27.41
percent) is $16,571,941. Since the Agency
has up to this point paid the
full $60,459,469, it is entitled to be repaid
$16,571,941.
In a letter to the Board dated March 16, 1988, the Agency stated that
it
"would not object if the Board applied the applicable credit or
discount
theory to create an equitable remedy for resolution of this appeal."
The
Agency noted, however, that the Board had not previously considered
the
applicable credit provisions in situations involving abuse and that
the
Agency did not wish the application of these provisions "to be
construed
. . . as an expedient, after-the-fact cure-all for systemic
program
failures, such as a missing state share." While the Agency concerns
are
indeed pertinent, and while the Agency seemed to view the
applicable
credit provisions as an "equitable remedy" for resolution of the
appeal,
we think there is a sound legal basis for applying these provisions
in
instances where provider transfers have not qualified as the state
share
and instead function as discounts on claims for services rendered
under
the program.
Conclusion
Based on the foregoing analysis, we uphold $16,571,941 of
the
disallowance, and reverse the remainder. We find that the hospital
fund
transfers under the State's program do not qualify as "donated
funds"
under the regulations and instead are "applicable credits" which must
be
deducted from the overall costs claimed for the hospital services
in
question.
________________________________ Norval D. (John) Settle
________________________________ Alexander G. Teitz
________________________________ Donald F. Garrett
Presiding
Board Member
1/ The Agency in its letter to the Board dated March 16, 1988
indicated
that it would not object to a reversal of the remaining part of
the
disallowance through the application of the applicable credit
provisions
in this manner.
2/ With the submission of a HCFA-25 form, a state indicates the
amount
of funds it has available as the state share. HCFA then approves
the
transmittal of matching federal funds.
3/ The West Virginia State legislature had established the
Indigent
Care Fund as an account in the general treasury to be used to
supplement
the general appropriation to the West Virginia Medicaid
program. The
Indigent Care Fund account was held under the name of the
Health Care
Cost Review Authority (HCCRA), an autonomous division of the
West
Virginia Department of Health that acts as West Virginia's
health
planning and development agency.
4/ On December 15, 1986, HCFA requested further information from
the
State concerning the operation of its program. HCFA stated:
We understand your problems and concerns regarding
the necessity of
raising sufficient state funding to
match federal funding.
However, our concerns revolve
around the appropriateness of this
procedure and its
compliance with federal requirements. In order
for us to properly assess this area we asked [on November 18]
that
you provide us in writing an accurate
description of these
assessments and donations so
that we could review it for compliance
with the
regulations. I ask that this be provided by December
31,
1986. Agency Ex. 3, p. 1.
Although the State's response dated December 29, 1986 suggested that
the
State had taken precautions to comply with the requirements of
the
regulation, it did not provide any specific details about the
program
itself.
5/ The Agency alleges that WHVA received the
raw data used in
determining contribution amounts from the State Medicaid
Agency and
questioned whether the State, rather than the WHVA, determined
the
donation amounts. The State conceded it had "ballpark" figures in
mind.
Transcript (Tr.) I-86.
6/ The December 22, 1986 donation amounts
correspond to amounts
listed on the DHS Accounts Payable file dated December
13, 1986, and the
January 12, 1987 donation amounts correspond to amounts
listed on the
DHS Accounts Payable file dated January 3, 1987. State
Letter to the
Board dated March 16, 1988, p. 2.
7/ The description of "donation" in Corpus Juris Secundum is as follows:
The term. . .has been defined as an act by which the
owner of a
thing voluntarily transfers the title and
possession of the same
from himself to another
without any consideration; a gift. . . or
voluntary
alienation of property. 28 C.J.S. Donation.
Virtually the same definition is contained in Black's Law Dictionary.
5th
ed., 1979 and Webster's Third New International Dictionary, 1976.
8/ Cf. the federal regulations at 5 C.F.R. Part 950 cited by
the
Agency at the hearing, which deal with combined federal
campaign
donations. These regulations specifically exclude attempts to
solicit
contributions by offering inducements to employees or by
exerting
pressure. 5 C.F.R. 950.107.
9/ The payment records themselves substantiate this
conclusion.
Beckley Hospital had a backlog of claims totaling $142,752 on
November
15. It did not participate at all in the State's
program. Twenty-six
other providers that did participate, all of whom
had a lower backlog
than Beckley, received payments on November 24 and
25. Agency Hearing
Ex. 1. Beckley only received reimbursement on
pending claims at the end
of January 1987. Tr. II-298; State letter to
the Board dated March 16,
1988, p. 4. There is no evidence in the
record that during the pendency
of the program, Beckley received any
assurance that its pending claims
would be paid.
10/ One hospital letter gives a complete outline of
the whole plan,
with its conditions. This is the letter from Jefferson
Memorial
Hospital forwarding its "donation." Agency Ex. 17. Although
the State
claims no knowledge of receiving this letter, no evidence was
offered to
show that the letter was not actually sent. The
hospital's
"understanding," from a telephone conversation originated by the
head of
WVHA, was that the remittance check from the hospital was to be
received
by the State by November 24, 1986. By November 26, the State
would
remit payment to the hospital of approximately the amount enclosed
with
the letter, to be applied against existing Medicaid claims. Within
a
short period of time thereafter, the hospital was to be paid
an
additional amount equal or exceeding twice the enclosed check,
these
payments to be applied against Medicaid claims presently
existing. In
addition, the interim reimbursement rate would then be
paid at 95% of
billed charges "rather than the 80% currently being paid until
the
amount of the enclosed check is recouped." (Emphasis added.) The
letter
went on to say that the Cost Report for the current fiscal year
"will
not be adjusted to negate the benefit which the hospital obtains
from
these transactions."
Also, in a letter to the HCCRA Chairman dated November 20, 1986 from
the
Administrator of Princeton Memorial Hospital, the Administrator
stated:
It is our understanding that payments to Princeton
Community
Hospital will be increased to 95% of
charges until such time as the
difference between
our present reimbursement rate and the 95%
recoups
the full amount of the deposit, that being $338,644.27.
It
is further understood that when the hospital
files its year-end
settlement report (June 30,
1987), the Department of Human
Resources auditors
will not adjust our reimbursement rate back to
the
present level. State Ex. D.
Although a HCCRA Board Member alleged that this letter was
subsequently
withdrawn by the Administrator, it clearly demonstrates that an
increase
in interim rates was under consideration at that time and that such
an
increase was known to the hospital.
11/ Suppose a hospital had pending claims of $1
million and an
existing interim rate of 75%, and that the hospital made a
fund transfer
of $270,000 based on the amount of the State share for its
pending
claims. If the hospital had been reimbursed at its existing
interim
rate, it would have received $750,000 minus its transfer of
$270,000,
netting only $480,000 on its $1 million in claims. If,
however, the
hospital had the benefit of the 95% interim rate, it would
receive
$950,000 minus its transfer of $270,000, netting $680,000. The
$680,000
in this example is only $70,000 less than the interim payment
the
hospital would have received without a donation program.
12/ In its closing statement at the hearing, the
State argued that
the question of coercion was a "non-issue" since the State
had
previously imposed an assessment against providers and an assessment
was
more coercive than the fund transfers here. Tr. II-403. The
validity
and effect of the assessment is not presently before the Board,
however,
so we make no finding in that regard. An assessment, moreover,
is
clearly distinguishable from the transfers here in that it is raised
by
the State legislature through its power to tax. The regulations
at
issue were specifically designed to address the effect of
private
"donated funds" that are received by states under circumstances that
are
distinct from a state's exercise of its power to raise revenues
through
taxation. We also find that the circumstances here are
clearly
distinguishable from the frequent flyer programs sponsored by
airlines
cited by the State because of the existence of the large backlog
in
claims for services already rendered by providers at the time of
the
fund transfers and because of the unauthorized and abusive
practices
used by the State to induce the transfers. See discussion in
the next
section of this decision.
13/ The State argued nevertheless that the nonparticipating
hospitals
were left in a more advantageous position since they ultimately
would
receive full payment for their claims and since the State could pay
them
more promptly from other funds. While the non-participating
hospitals
may ultimately be better off in this narrow sense, in the short
term
they were denied the same prompt reimbursement of their claims as
the
participating hospitals and the benefit of the 95% interim rate.
The
primary point, however, is that the preferential treatment served as
an
inducement for the other hospitals to participate in the State's
program
and that the nonparticipating hospitals were left with no guarantee
or
assurance as to when their pending claims would be paid.
14/ The change was also irregular in that it applied
only to claims
the State decided to pay during these three payment
runs. The increase
was not based on when the service was provided or
when the claim was
presented or when it became "clean" for payment. If,
for example,
certain priority "clean" claims were not included in these
payment runs
because the hospitals had not participated in the "donation"
program and
the State decided not to pay them, the hospitals would not
receive the
advantage of the 95% interim rate.
15/ The State argued that the amount of federal
funding represented
by the interim rate increase was approximately $4.7
million and that if
the Board concluded that the change in rates was an
abuse, only this
amount should be disallowed. State letter to the Board
dated March 24,
1988, p. 16, fn. 12; Tr. II-224. The increase in rates
is only one of
several features of the State program that lead us to conclude
that the
funds transfers.at issue cannot be viewed as "donated funds." There
is
no basis for singling out the interim rate increases and disallowing
for
them alone.
16/ A recent report from the House Committee on the
Budget to
accompany the Omnibus Budget Reconciliation Act of 1987 is relevant
in
this regard. The Omnibus Budget Reconciliation Act of 1987 would
have
included statutory authorization for the use of donations as the
state's
share in the Medicaid program. In commenting on that provision
(which
was deleted in the conference agreement), the Committee suggested
that
the provision would serve to pay the state share for expansion
of
Medicaid eligibility or services, or for the increased reimbursement
to
disproportionate share hospitals. The Committee noted, however, that
it
was:
troubled by reports that one State, having exhausted
its revenues
and unable to meet legitimate claims
already submitted for payment
by its Medicaid
program. induced one class of providers to "donate"
funds which the State used to draw down Federal Medicaid
matching
funds which were in turn used to make
payment on the claims that
had already been
submitted by those same providers. These
reports,
if accurate, represent a clear abuse of the
current regulations,
and the Committee does not
intend that its amendment legitimize
such conduct.
(Emphasis supplied.)
Agency Ex. 27.
17/ The only other Medicaid case considered by the Board was
Texas
Dept. of Human Services, DGAB No. 381 - Amended (1986).
There,
hospitals agreed to contribute one-half of the salaries of
state
eligibility workers in exchange for having the workers placed on site
in
the hospital buildings. The Board also previously considered
whether
donations from educational institutions that provided training to
state
agencies qualified as the state share under Title XX. See
Connecticut
Dept. of Human Resources, DGAB No. 406 (1983), and New Mexico
Human
Services Dept., DGAB No. 382 (1983).
18/ The Agency learned of the interim rate increases
through
conversations with the State in January 1987. Tr. II-260.
The State
official responsible for computing the interim rates for
individual
hospitals testified he did not learn of the changes until February
or
March 1987. An Agency official testified at the hearing that the
Agency
has never been able to get any background information on the
increase
from the State. Tr. II-276.
The Board received a description of the effective dates of the
increases
and the manner in which the increases were computed in response to
a
specific request at the hearing. See State's letter to the Board
dated
March 16,