Texas Dept. of Human Services, DAB No. 981 (1988)

DEPARTMENTAL GRANT APPEALS BOARD

Department of Health and Human Services

SUBJECT:  Texas Dept. of Human Services

Docket No. 88-53
Decision No. 981

DATE:  August 31, 1988

DECISION

The Texas Department of Human Services (State) appealed a determination
by the Health Care Financing Administration (HCFA, Agency) disallowing
$17,391,217 in federal financial participation claimed by the State
under title XIX (Medicaid) of the Social Security Act (Act).  HCFA
disallowed the costs of adjustments made in 1987 which retroactively
increased the per diem rates used to reimburse State-owned intermediate
care facilities for the mentally retarded (ICFs/MR) for services
provided during calendar years 1985 and 1986.  The disallowance was
based on HCFA's determination that the retroactive rate increases were
not made in accordance with the approved State title XIX plan provisions
applicable to the 1985 and 1986 rates.  Section 1902 of the Act and
implementing regulations require that a state include in its Medicaid
plan methods and standards for determining rates of reimbursement.
Federal funding for ICF/MR services is available under section 1903(a)
only for amounts expended "under the State plan. . . ."

For the reasons discussed below, we find that there was no authority for
the rate increases in the provisions of either State plan.  Accordingly,
we uphold the disallowance.

An additional basis for the disallowance of costs pertaining to the
quarter ending March 31, 1985 was that the State's claim was not filed
within two years after the end of the quarter in which the costs were
incurred, as required by section 1132 of the Act.  The State conceded
that the claim was not timely.  Letter from Leche to Kaufman dated
August 3, 1988.  Accordingly, we uphold the disallowance of the first
quarter costs on this basis as well.

Applicable Requirements

The calculation of per diem rates for ICFs/MR is governed by section
1902(a)(13) of the Act, which requires a state plan to provide--

     (A)  for payment . . . of the . . . intermediate care facility
     services provided under the plan through the use of rates
     (determined in accordance with methods and standards developed by
     the State. . .) which the State finds . . . are reasonable and
     adequate to meet the costs which must be incurred by efficiently
     and economically operated facilities. . . .

Section 1902(a)(30) requires the state plan to--

     provide such methods and procedures relating to . . .  the payment
     for . . . care and services available under the plan . . . as may
     be necessary . . . to assure that payments are consistent with
     efficiency, economy, and quality of care.

Implementing this provision, 42 C.F.R. 447.252 (1983-86) requires that
the state plan specify comprehensively the methods and standards used by
the state agency to set payment rates.  The regulations also require a
state Medicaid agency to pay for services "using rates determined in
accordance with methods and standards specified in an approved State
plan."  42 C.F.R. 447.253(g) (1983-86).

The methods for calculating the 1985 and 1986 rates were governed by
different versions of the State plan.  The plan in effect through
December 31, 1984 governed the calculation of the 1985 rate.  Attachment
4.19-D of that plan established a prospective rate-setting methodology
for ICFs/MR based on financial and statistical information submitted in
facility cost reports.  Section 4 of the Attachment, captioned "Rate
Setting Methodology," specifically provided for--

     selecting the projected per diem expense times 1.07   from each
     cost area within each class of services     which corresponds with
     the median Medicaid day of    service, and summing the cost area
     amounts to      determine the per diem reimbursement.

Respondent's appeal file, Ex. B.

The calculation of the 1986 rates was governed by the State plan as
amended effective January 1, 1985.  That plan required the same
calculation described above, but indicated that the per diem rate
determined in this manner was a "reference point" for the Department of
Human Services Board, which would--

     evaluate financial and statistical information      derived from
     the cost report and determine a      reimbursement rate which will
     reasonably reimburse    the cost of an economic and efficient
     provider.

Respondent's appeal file, Ex. C.

Background

Prior to (or at the beginning of) each rate year in question here, rates
for the ICFs/MR were calculated using costs and patient days from a base
year two years before the year to which the rate applied.  The base year
costs for each facility were divided into several cost areas, adjusted
for inflation and other "trending factors," and divided by base year
patient days.  The State then selected the projected per diem expense,
in each cost area, which was the median amount for all facilities in
each ICF/MR class, multiplied the median amount by an appropriate
percentage (specified as 1.07 in the first State plan), and summed up
the resulting amounts for each cost area to arrive at a per diem rate
for all facilities in that class.

On March 26, 1987, the Texas Board of Human Services approved
retroactive rate adjustments for 1985 and 1986 requested by the Texas
Department of Mental Health and Mental Retardation (TDMHMR), the State
agency which operated the ICFs/MR in question here.  In recalculating
the rates in 1987, the State substituted rate year (i.e., 1985 and 1986)
patient days for base year patient days in the rate calculations.

The Board of Human Services approved the rate increases on the ground
that, in originally setting the rates, it had failed to take into
account the impact of a federal district court order dated June 5, 1985.
That order required the State to "deinstitutionalize" a significant
number of residents of the ICFs/MR (i.e., move them out of the large
State facilities) while requiring increased staff-to-client ratios for
the remaining residents.  The State contended that patient days
decreased from the base years to 1985 and 1986 as a result of the court
order.  The State also contended that, since there was no corresponding
decrease in ICF/MR costs, the effect of the decrease in patient days was
that the facilities were reimbursed for less than their actual costs.
The rate increases closed the gap between actual costs and reimbursement
to some extent, but there was still a substantial deficit, according to
the State.

Parties' Arguments

HCFA took the position that the State could not properly revise its per
diem rates absent specific authority in the State plan, which HCFA
asserted was lacking.  It argued, moreover, that the amended State plan
in fact prohibited revision of the 1986 rate, citing the statement in
that plan that "[s]ince this is a prospective reimbursement system
without a provision for reconciliation, amended cost reports filed after
the actual rate determination have no effect on the rate and will not be
accepted."  Respondent's appeal file, Ex. C, Attachment 4.19-D, section
3 (emphasis added).  It also contended that, by definition, the per diem
rate "must be the result of a mathematical calculation which uses not
only the costs of the base year, but also the patient days of the base
year."  Respondent's brief, p. 13.

The State argued that its State plans were "purposefully silent
regarding the derivation of the patient day statistic [in order] to
provide DHS with sufficient discretion in establishing reasonable rates.
. . ." Appellant's reply brief, p. 8.  The State argued further that its
customary practice was to use an estimate of patient days which "closely
reflected" the anticipated patient days for the rate year.  Id.  The
State contended that, inasmuch as a good estimate would have taken into
account the deinstitutionalization required by the court order, the rate
increases merely represented the correction of an administrative error,
for which there was some precedent.  The State maintained that, despite
this "correction," it still had a prospective reimbursement system as
required by the State plans since its methodology included various
limits on costs and the facilities were not in fact reimbursed for their
actual costs.  Finally, the State argued that if the rate increases were
not permitted, it would be in violation of section 1902(a)(13) of the
Act since the providers would not be reimbursed their reasonable costs.

Discussion

We are not persuaded that the State plans can reasonably be read to
permit the use of a figure other than base year patient days in
calculating the ICF/MR per diem rates.  While a state's interpretation
of its own state plan is entitled to some deference, closer scrutiny is
required where, as here, the interpretation increases the rate paid to
public providers, since that increases FFP to the state without its
incurring any additional expense.  See Massachusetts Dept. of Public
Welfare, DGAB No. 730 (1986); DGAB No. 867 (1987).

The fact that neither State plan specifically states how the patient day
figure used in calculating the per diem rate is to be derived does not
mean that the State may use any figure it chooses.  The costs used in
the rate determination process come from provider cost reports for the
year designated as the base year.  Patient days from the base year must
also be reported.  The reported information is subject to audit and the
data is recast "to determine per diem allowed expense."  Respondent's
appeal file, Exs. B, C.  The logical means of determining this is to
divide actual allowed expenses from the base year by the patient days of
service actually provided that year, for each facility.

In addition, there are explicit provisions in both State plans for
projecting anticipated increases in costs, from the base year to the
rate year, prior to including them in the rate calculation.  There is no
mechanism in the plans, however, for projecting any anticipated change
in patient days from the base year to the rate year.  This indicates
that the use of the base year patient day figure throughout the rate
calculation was contemplated.  Moreover, the use of other than base year
patient days is inconsistent with the provision in the plans for taking
the median per diem expense from each cost area to determine the overall
rate.  If the rates for individual facilities were calculated in
different ways--using a figure lower than base year patient days for
those facilities experiencing a decline in patient days and a higher
figure for facilities in which patient days were increasing--there would
be no true median rate because the figures used for the facilities would
not be comparable and would not truly reflect how efficiently each
facility had operated in the base year.

Accordingly, we conclude that the operation of the State plan rate
provisions as a whole required the use of base year patient days in
calculating the rate.

Furthermore, the interpretation of the plan provisions which the State
advanced here is suspect since there is no evidence that the State
previously interpreted them in this manner.  An official of the Texas
Department of Human Services testified at the hearing in this case that,
to his knowledge, the State had never, except in this instance, used a
patient day figure other than base year patient days as reported or
actually billed.  Transcript of July 20, 1988 hearing (Tr.), pp. 59-60.
In addition, the State acknowledged that there were no written
interpretations of the plan provisions which might have supported its
view.  State's brief dated July 6, 1988, p. 11.  The State also failed
to provide any testimony from individuals involved in drafting the plan
provisions to show that their intent was to allow the use of other than
base year patient days.  Accordingly, we find that the State's
"interpretation" of the plan provisions is nothing more than an
after-the-fact attempt to justify increased payments to the ICFs/MR.

In view of our conclusion that the State plan provisions did not permit
the use of other than base year patient days in calculating the per diem
rates, we do not reach the question whether a per diem rate by
definition equals base year costs divided by base year patient days, as
contended by HCFA.  We note, however, that the use of base year patient
days is at least consistent with the concept of a prospective
rate-setting system, discussed further below, as one which sets rates in
advance.

Even if the State had been free to use other than base year patient days
in calculating the rates, we further find that it was not proper for the
State to recalculate the rates after they had been set, by substituting
rate year patient days for base year patient days.  The purpose of the
prospective rate-setting methodology which the State used is to set a
rate in advance which gives providers an incentive to keep costs down.
As the Board stated in Massachusetts Dept. of Public Welfare, DGAB No.
830 (1986), that purpose "is defeated if adjustments to reflect actual
costs are available in any case where the prospective rate does not
reimburse the provider for all costs incurred. . . ."  (p. 5)  Thus, in
that decision, the Board narrowly construed State plan provisions which
permitted rate adjustments.  Here, where there were no provisions in the
State plans which addressed the adjustment of rates, the better view is
that no adjustments were permitted, since that view is more consistent
with a prospective rate system than the State's view that it had
complete discretion to make adjustments.

That the providers in this case may not have been fully reimbursed for
actual costs even after the rate increases does not change the fact that
unbridled discretion to adjust rates undermines the purpose of a
prospective reimbursement system.  In any event, although the statute
provides for reasonable and adequate rates, it does not guarantee
reimbursement of actual costs.  Moreover, the State cannot complain that
its rate-setting methodology did not provide for full reimbursement
under the circumstances here since it could have adopted a system which
provided for reconciling estimated costs with actual costs.  See
Arkansas v. United States, No. 150-85C (Ct. Cl. February 20, 1986).
Finally, we note that the Agency's position that the language in the
amended plan to the effect that "this is a prospective reimbursement
system without a provision for reconciliation. . . ." prohibits
subsequent rate adjustments is not unreasonable in view of the
concession of a State official that this language was "a little bit
ambiguous."  Tr., p. 37.

The State took the position, however, that it was merely correcting an
administrative error in the calculation of the rate, comparable to
changing the inflation factor from 1% to 11% where a digit had
originally been dropped.  It is arguable that no explicit authority is
required for the correction of an essentially clerical error such as
this.  The failure to take into account the effect of
deinstitutionalization was not a clerical error with an obvious remedy,
however.  Instead, the State sought to take into account a new factor
which could not be readily quantified.  Accordingly, we reject the
State's argument that it was merely correcting an administrative error,
and find that its substantive revision of its prospective per diem rates
was not authorized by either State plan.

The State also cited as precedent for its action the revision of a
nursing home rate (which was established pursuant to State plan
provisions comparable to those in question here) to utilize a lower
inflation factor, following the Agency's determination that the factor
originally used was unreasonable.  The State argued that
deinstitutionalization was, like inflation, a "trending factor."   The
actual practice followed by a state in rate-making may be evidence of
its interpretation of relevant state plan provisions.  See South Dakota
Dept. of Social Services, DGAB No. 934 (1988).  However, it is not clear
that an action taken by the State at the Agency's behest is evidence of
the State's interpretation of its own plan.  In any event, we are not
persuaded that the nursing home rate revision, which was based on
objective cost measurements such as the Consumer Price Index, is a
precedent for the rate increases here.

The disallowance can also be supported on the ground that the record
does not clearly establish that there was a factual basis for the rate
increases.  The Agency questioned whether there was a net decrease in
1985 and 1986 patient days over base year patient days.  While the State
denied the Agency's suggestion that deinstitutionalized patients from
the ICFs/MR affected by the order entered other ICFs/MR, it failed to
document that there was a net decrease taking into account all ICFs/MR.
In addition, the State did not explain why it was unable to reduce any
ICF/MR costs prior to 1985 to take into account the decreased patient
population.  Thus, the rate increases might not have been necessary to
pay the "costs which must be incurred by efficiently and economically
operated facilities. . . ."  See Massachusetts Dept. of Public Welfare,
DGAB No. 853 (1987).

Finally, even assuming that the State was authorized to  adjust its
rates once set, we find that the State did not in fact adjust the 1986
rate in accordance with the methods specified in the amended State plan.
That plan required that the Human Services Board provide a process for
considering a proposed rate, evaluate the reported costs and statistics,
and approve "a reimbursement rate which will reasonably reimburse the
cost of an economic and efficient provider."  An official from the Texas
Department of Human Services testified that the rates were recalculated
using actual patient day figures provided by TDMHMR, and that there was
no analysis of what reimbursement would result.  Tr., pp. 54, 76-77.
Accordingly, even if recalculation of an already established rate were
permitted, we would be required to sustain the disallowance of the costs
relating to the 1986 rate on the ground that the State did not comply
with the method for determining the rate specified in the amended plan.

Conclusion

For the reasons discussed above, we sustain the disallowance in the
amount of $17,391,217.

 


 ________________________________ Cecilia Sparks Ford

 ________________________________ Alexander G. Teitz

 ________________________________ Judith A. Ballard Presiding
 Board