Pennsylvania Department of Public Welfare, DAB No. 1014 (1989)

DEPARTMENTAL APPEALS BOARD

Department of Health and Human Services

SUBJECT: Pennsylvania Department DATE: February 1, 1989 of Public
Welfare Docket No. 88-171 Decision No. 1014

DECISION

This decision is the result of a court-ordered remand in Commonwealth of
Pennsylvania Dept. of Public Welfare v. U.S. Dept. of Health and Human
Services, C.A. No. 86-1608, (M.D. Pa., September 8, 1988). The district
court reviewed two Board decisions--Pennsylvania Dept. of Public
Welfare, DAB No. 746 (1986) and DAB No. 840 (1987). Those decisions
were based on determinations by the Health Care Financing Administration
(HCFA/Agency) disallowing in excess of $500,000 in federal funds claimed
by Pennsylvania under the Medicaid program of the Social Security Act
(Act). Specifically, HCFA found that the Commonwealth did not make a
satisfactory and valid showing that it had an effective program of
annual medical reviews of the care of Medicaid recipients in long-term
care facilities, as required by section 1903(g)(1) of the Act.

This Board, with some modification, sustained both disallowances. In
doing so, we rejected Pennsylvania's position that the inadequate
reviews cited by HCFA could be excused under an exception to the annual
review requirement for technical failings. See section 1903(g)(B)(4) of
the Act. The district court sustained the Board's decision in DAB No.
746. However, the court remanded DAB No. 840 and directed the Board to
consider whether the statutory exception for "good faith and due
diligence" excused Pennsylvania's failure, even though Pennsylvania had
not asserted, either before the Board or the court, that this exception
applied. The remand was based on the court's conclusion that, under the
Secretary's regulations, the technical failings exception is available
only to excuse a failure to meet a threshold requirement (the 98%/200
bed standard explained below) but could not be used to excuse an overall
failure to make a satisfactory showing.

Below, we first provide background on the annual review requirements,
the exceptions to those requirements, our previous decision, and the
district court opinion. We then explain why we conclude that the "good
faith and due diligence" exception does not apply here.

In concluding that the "good faith and due diligence" exception does not
apply, we find that the Commonwealth did not provide acceptable reasons
to show that its failure was attributable to circumstances beyond its
control which it could not reasonably anticipate. Instead,
Pennsylvania's failure to include all Medicaid recipients in the annual
on-site reviews was explained only by the failure of the facilities to
identify for the review team all recipients who should have been
reviewed. This problem could have been reasonably anticipated and
overcome by the Commonwealth if it had acted with the diligence due in
order to ensure quality care for Medicaid recipients and to control
unnecessary utilization of costly services. We also address below the
district court's interpretation of the regulations pertaining to the
technical failings exception because that interpretation is a novel one,
which is narrower than the Department's longstanding interpretation, and
may unfairly limit the availability to a state of an exception for
failings of a technical nature.

What the statute and regulations provide

Section 1903(g)(1) of the Act requires a state to make a quarterly
showing that it has an effective program of medical review of the care
of Medicaid recipients in intermediate care facilities (ICFs) pursuant
to section 1902(a)(31) of the Act, whereby the professional management
of each case is reviewed and evaluated at least annually. Section
1902(a)(31)(b) of the Act requires periodic on-site inspection of the
care being provided each Medicaid recipient in an ICF. These
requirements are implemented by regulations at 42 C.F.R. Part 456,
Subpart I and section 456.652. Under these regulations, a review team
must personally contact and observe each Medicaid recipient, review that
recipient's medical records, and evaluate whether the services provided
are adequate and necessary to meet the recipient's needs or whether a
less costly alternative care is feasible.

If the Secretary determines that a state's quarterly showing is
unsatisfactory or invalid, the state's funding for long-stay services in
ICFs is reduced in accordance with the formula at section 1903(g)(5).

Section 1903(g)(4)(B) sets out circumstances in which the Secretary
shall find a state's showing satisfactory, notwithstanding the state's
failure to conduct all required reviews. Specifically--

[t]he Secretary shall find a showing of a State . . . to be
satisfactory . . . if the showing demonstrates that the State has
conducted such an onsite inspection during the 12-month period
ending on the last date of the calendar quarter--

(i) in each of not less than 98 per centum of the number
of such hospitals and facilities requiring such inspection,
and

(ii) in every such hospital or facility which has 200 or
more beds,

and that, with respect to such hospitals and facilities not
inspected within such period, the State has exercised good faith
and due diligence in attempting to conduct such inspection, or if
the State demonstrates to the satisfaction of the Secretary that it
would have made such a showing but for failings of a technical
nature only.

This section of the Act is implemented by the regulations at 42 C.F.R.
456.653, which provide in pertinent part--

The Administrator [of HCFA] will find an agency's showing
satisfactory, even if it failed to meet the annual review
requirements of section 456.652(a)(4), if--

(a) The agency demonstrates that--

(1) It completed reviews by the end of the quarter in at least 98
percent of all facilities requiring review by the end of the
quarter;

(2) It completed reviews by the end of the quarter in all
facilities with 200 or more certified Medicaid beds requiring
review by the end of the quarter; and

(3) With respect to all unreviewed facilities, the agency
exercised good faith and due diligence by attempting to review
those facilities and would have succeeded but for events beyond its
control which it could not have reasonably anticipated; or

(b) The agency demonstrates that it failed to meet the standard
in paragraph (a)(1) and (2) of this section by the close of the
quarter for technical reasons, but met the standard within 30
days after the close of the quarter. Technical reasons are
circumstances within the agency's control.


What we held in DAB No. 840

In DAB No. 840, the Board found that Pennsylvania's showings for the
quarters ending September 30 and December 31, 1985 were unsatisfactory
because the State failed to conduct the required annual reviews at two
ICFs, Valley Manor Nursing Home (Valley Manor) and Camp Hill Nursing
Home (Camp Hill). Specifically, the on-site inspection in each facility
omitted one recipient who the State admitted ought to have been
included.

Pennsylvania had a computer system containing Medicaid recipient
eligibility information. However, Pennsylvania relied on the accuracy
of the billing and eligibility information produced by facilities at the
beginning of a review to identify recipients due for review. DAB No.
840, pp. 3-4. Pennsylvania provided some information during the prior
Board proceeding about the circumstances of the two patients who were
not identified by the facilities as Medicaid recipients. However,
Pennsylvania provided no evidence to show why the facilities did not
identify these recipients. In DAB No. 840, we found that the
explanations offered by the State did no more than confirm that these
individuals should have been readily identifiable and, therefore,
reviewed.

The State argued that its showing should nonetheless be found
satisfactory because its failings were of a technical nature only. In
support of its position, the State attempted to categorize a small
number of missed reviews as mere technicalities. We noted that the
exception focused on the reasons for missing reviews, not on the number
of reviews missed. We examined the circumstances pertaining to each
patient and found that there was no acceptable reason that would excuse
as technical the State's failure to meet applicable requirements.


The district court opinion

The district court determined:

Because the "good faith and due diligence" exception should have
been applied to . . . [Pennsylvania's] failures in the 1985
quarters, the [Board's] decision . . . was not "in accordance with
law," . . . and was not based on "relevant factors." (Citation
omitted)

Pennsylvania, p. 16.

This conclusion was based on the court's reading of the technical
failings exception as available "solely to explain a failure to meet the
98%/200-bed standard." Id. Consequently, the court found the "good
faith and due diligence" exception would apply to determine if the
failure to review the remaining 2% of facilities could be excused.
Further, the court concluded that the Agency (through this Board)
applied the wrong exception to the circumstances present in DAB No. 840
and, therefore, a remand was warranted. Id. at 17 (emphasis added).
The court directed the Board to decide whether Pennsylvania had
attempted in "good faith and due diligence" to conduct the required
reviews.

The "good faith and due diligence" exception

Section 1903(g)(4)(B) was added to the Act by Public Law 95-142, enacted
October 25, 1977. On November 11, 1977, HCFA issued Action Transmittal
HCFA-AT-77-106 (AT-77-106) to state agencies administering the Medicaid
program. AT-77-106 discussed the legislative history and effect of
section 1904(g)(4)(B). Regarding the "good faith and due diligence"
standard, the Action Transmittal noted that House committee reports
clearly indicated that Congress did not intend to permit states to aim
for less than 100% performance of the review requirement. Rather, the
"good faith and due diligence" exception was "intended to permit an
exception to the 100% requirement in situations clearly beyond the
State's control." In reaching this conclusion, HCFA relied on its view
that the exception was intended to formalize existing HCFA practice.
HCFA provided examples of circumstances beyond a state's control and
specifically noted that the exception would not excuse disorderly record
keeping. AT-77-106, pp. 6-7.

Approximately one year after publishing AT-77-106, HCFA issued a Notice
of Proposed Rulemaking (NPRM) setting out for comment a draft of the
regulations implementing Public Law 95-142. HCFA provided the following
guidance regarding "good faith and due diligence"--

We propose to excuse under the good faith and due diligence
exception only those failures to perform reviews which are due to
situations clearly beyond the State agency's control. Under this
exception, failures to perform reviews due to recurring or
predictable weather conditions would not be excused. Furthermore,
if a State employee strike or severe blizzard or other situation
beyond a State's control resulted in less than 98 percent
performance, a State would be subject to a reduction for all missed
reviews.

43 Fed. Reg. 50925 (November 1, 1978).

In the preamble to the final rule, HCFA indicated that the "good faith
and due diligence" exception would apply--

. . . if the 98 percent and 200 bed adherence level was achieved by
the close of the showing quarter, and the failure to achieve 100
percent compliance was clearly beyond the agency's control and
could not have been reasonably anticipated.

44 Fed. Reg. 56335 (October 1, 1979).

After some discussion of the comments, and the genesis of the exception,
HCFA noted that it would retain the "good faith and due diligence"
exception "as published in the NPRM." Id. at 56335-56336.

On remand, the State argued both that the Agency's conditioning the
"good faith and due diligence" standard on factors beyond a state's
control was contrary to law and that the omissions here were due to
circumstances not within its control. Below, we first examine why we
conclude that HCFA's interpretation is reasonable. We next examine
whether the exception is available under the circumstances here.

Why HCFA's interpretation is reasonable

We first note that HCFA's interpretation is a longstanding one, adopted
almost immediately after enactment of the provision. As we noted
earlier, HCFA viewed the good faith and due diligence exception as
formalizing its prior practice of not finding a state's showing
unsatisfactory where reasons entirely beyond a state's control made it
impossible for the state to meet review requirements. HCFA's view was
consistent with language in the Senate bill, which would have authorized
waiver of a section 1903(g) disallowance "in any case in which the
Secretary determines that the unsatisfactory or invalid showing made by
the State is of a technical nature only, or is due to circumstances
beyond the control of the State." In explaining this provision, the
Senate Finance Committee report stated that the bill would waive a
disallowance--

if the State's noncompliance is technical or due to circumstances
beyond its control. The committee intends, however, that this
waiver authority is to be invoked only when reasonably appropriate
and not as a generalized routine exception. Circumstances
considered outside of a State's control are those which could not
reasonably be anticipated and provided for in advance.

S.REP. NO. 453, 95th Cong., 1st Sess. 40 (1977).

HCFA examined the legislative history of section 1903(g)(4)(B) in the
preambles to its proposed and final regulations and concluded that the
"good faith and due diligence" language combined the Senate and the
House versions of this exception. HCFA's regulations, adopted in light
of this conclusion, provide that this exception applies where there are
"circumstances beyond [a state's] control which it could not have
reasonably anticipated." 42 C.F.R. 456.653.

One court which has examined this exception concluded that it was a
"subjective" standard, calling for an evaluation of a state's intent
rather than consideration of objective factors. Delaware Div. of Health
and Social Services v. U.S. Dept. of Health and Human Services, 665
F.Supp. 1104, 1128 (D.Del. 1987), appeal dismissed (as untimely filed),
C.A. No. 87-3602 (3rd Cir., October 6, 1987). In our view this is an
error. While the conference report states that there must be no
evidence that a state deliberately did not review a facility, we think
that the legislative history as a whole shows that mere subjective
intent to review all facilities is not sufficient to qualify for the
exception. Moreover, the Delaware court focused on the concept of "good
faith," without considering the concept of "due diligence." In our
view, HCFA's regulatory standard embodies its programmatic judgment that
a state exercising the diligence which a state should exercise in
medical reviews would be able to meet the annual review requirements
unless prevented from doing so due to circumstances beyond the state's
control which the state could not reasonably anticipate. While HCFA's
regulation sets a high standard, in our view this reflects the
importance of the annual review requirements in ensuring quality care
for each Medicaid recipient in a long-term care facility and in reducing
costly expenditures for such care if it is not needed.

In sum, HCFA's regulation is a reasonable implementation of the
statutory provision. It contains a longstanding interpretation,
consistent with the statutory language and history and with the purposes
of the annual review requirement.

Does the "good faith and due diligence" exception apply

Here, Pennsylvania's failure to review two recipients is attributable to
an inherent weakness in its established system for recipient
identification, rather than any circumstances outside of its control
which prevented the reviews from taking place. Pennsylvania conceded
that both patients were within the universe of recipients requiring
reviews. Pennsylvania provided no evidence of why these patients were
unreviewed, but merely alleged that they were simply not included as
recipients on the facility lists. Pennsylvania chose to rely solely
upon the information provided by each facility and employed no mechanism
whatsoever to double check the accuracy of that information.

During the course of Board proceedings for DAB No. 840, Pennsylvania
contended that its computerized information system, while containing
information on each Medicaid recipient, could not generate lists on a
facility-by-facility basis for the use of its review teams.
Pennsylvania did not explain, however, why it could not have had some
other back-up system, nor even explain why it would be reasonable to
rely on the facilities. Pennsylvania pointed to no instructions
provided either to the facilities or the review teams to provide even a
minimal assurance that all recipients in a facility would be identified.
Our experience with other states indicates that even minimal steps might
have avoided missing the patients here. For example, a state review
team could review all patients whose Medicaid applications were
identified by the facility as "pending" or do a patient-by-patient
status check during the review. See generally Oregon Dept. of Human
Resources, DAB No. 895 (1987) ("pending" Medicaid recipients reviewed);
and Utah Dept. of Health, DAB No. 843 (1987) (review team conducted
room-by-room review as a back-up for accuracy of recipient list).

In a November 20, 1986 telephone conference, Pennsylvania argued that
its patient identification system should not be faulted as inadequate
since the Agency had conceded that states with better systems had also
been subject to utilization control disallowances. On remand,
Pennsylvania reiterated this point and noted that the Agency had
conceded that it had not recommended procedures for identifying patients
subject to review. Pennsylvania Br., p. 2. Pennsylvania argued that
this "concession," together with the district court's finding that
Pennsylvania "made a sincere effort to inspect every Medicaid patient,"
made the factual posture of this case materially different on remand.

We do not regard HCFA's "concession" to have any significance in this
case. While HCFA permitted the states discretion in how to identify
recipients to be reviewed, the absence of a mandated system does not
relieve a state of the obligation to review each recipient. It is clear
from the regulations that a state must have some means designed to
identify Medicaid recipients, and thus it is fair to evaluate the
adequacy of any system a state may establish in determining whether the
state has exercised "good faith and due diligence" in attempting to
review all patients. The mere fact that states with better systems have
been subject to section 1903(g) disallowances is not a reason to excuse
Pennsylvania.

We also do not agree that there is a material change in the factual
posture of this case simply because the district court stated that
Pennsylvania made a sincere effort to inspect every patient. As
explained above, "good faith and due diligence" has been consistently
interpreted as requiring more than a subjective intent. The
Commonwealth did not show that the failure to review the recipients here
was due to circumstances beyond its control which it could not have
reasonably anticipated. In fact, Pennsylvania provided no evidence to
establish why the facilities did not include these recipients on their
lists, but merely explained the recipients' circumstances. We think
that the Commonwealth could have reasonably anticipated that, if it
relied on the facilities' lists without taking any steps to ensure the
accuracy of those lists, recipients would likely be missed. Thus, we
conclude that Pennsylvania did not meet the objective standard for the
application of this exception, as required by the statutory and
regulatory provisions.

In a telephone conference held in this proceeding (December 7, 1988),
Pennsylvania asserted that the fact that it had not "intended" to miss
reviews evidenced its good faith and due diligence. However, the focus
of the exception is not on the absence of an intent not to review. If
the focus of the exceptions were on intent, any state could escape a
disallowance merely by asserting a lack of intent to not review.
Consequently, anything shy of maladministration would be forgiven.
Under such a broad interpretation, the purpose of the statutory
reduction would be negated.

Finally, we reject Pennsylvania's argument that it exercised "good faith
and due diligence" because it was present at these facilities and
inspected all the other patients. The regulation clearly requires that
a state show that any failure is due to circumstances beyond the state's
control which it could not reasonably anticipate. We cannot infer that
Pennsylvania exercised "good faith and due diligence" merely because
only a few patients were missed since this exception is related to the
reasons underlying the failure to conduct required reviews, not to the
extent of the failure, i.e., the number of recipients unreviewed.

What the "technical failings" exception means

The district court's remand was prompted by its conclusion that the
technical failings exception was available only to excuse the failure to
meet the threshold 98%/200 bed requirement by the close of the showing
quarter. In our view, the court misread HCFA's regulations and
construed this exception too narrowly. Since the court's more narrow
interpretation potentially disadvantages the states, we are bringing
this matter to the court's attention. We discuss below why this
Department had previously determined that a state's showing may be found
satisfactory if the 98%/200 bed standard is met within 30 days after the
end of the quarter and there are acceptable reasons of a technical
nature which prevented the state from completing 100% of the required
reviews during the quarter.

In its opinion, the court stated that it was apparent from 42 C.F.R
456.653 --

. . . that in the Secretary's opinion the technical failings
exception is available to show that the State failed to meet the
98%/200 bed standard by the close of a particular calendar quarter
but cannot be used as an excuse for failing to meet that standard
within 30 days after the close of the calendar [quarter].

Pennsylvania, at 13-14.

Later in its opinion, the court explained its decision to remand for our
consideration the "good faith and due diligence" exception by concluding
that 42 C.F.R 456.653 ". . . permits the use of 'failings of a technical
nature' solely to explain a failure to meet the 98%/200 bed standard."
Id. at 16. To the best of our knowledge, this interpretation of the
technical failings exception has never been adopted by any state or
HCFA. Both Pennsylvania and HCFA have agreed that the court's
interpretation of this exception is at odds with their understanding of
those exceptions. (Telephone Conference - December 7, 1988).

In our view, the statutory language, the legislative history, and HCFA's
guidance in AT-77-106 and preambles implementing the statute compel the
reading that section 1903(g)(4)(B) establishes two independent
exceptions, each of which is available to mandate a finding that a
showing is satisfactory. The factors which lead us to this conclusion
are:

o The wording and structure of the statutory section, which places the
technical failings language after the words "or if," making it an
alternative to the good faith and due diligence standard which follows
the first "if."

o The legislative history which indicates that the final bill combined
as "good faith and due diligence" language derived from differing House
and Senate bills (good faith and circumstances beyond a state's control)
but left intact an alternative technical failings exception stated in
the Senate bill.

o HCFA's statement, after considering this legislative history and
comments on its proposed regulation implementing the technical failings
exception (which provided that a state must complete 100% of the reviews
within 30 days of the close of the quarter), that--

Under this exception, we will find a State's showing satisfactory,
if, despite the fact that a State fails to meet 100 percent
compliance by the end of the showing quarter, the State is,
nevertheless, able to meet the 98 percent, 200-bed standard by the
date of submittal of the state's showing to HCFA (30 days past the
close of the showing quarter). (emphasis added)

44 Fed. Reg. 56336 (October 1, 1979).

While we thus conclude that the technical failings exception was
available to Pennsylvania here, we affirm our previous conclusion in DAB
No. 840 that the Commonwealth did not advance acceptable reasons
mandating that Pennsylvania's showing be found satisfactory based on
this exception.

Conclusion

Based on the foregoing analysis, we conclude that the "good faith and
due diligence" exception cannot be applied to excuse Pennsylvania's
failure to review recipients at the Camp Hill and Valley Manor
facilities.


________________________________ Judith A. Ballard


________________________________ Norval D. (John) Settle


________________________________ Cecilia Sparks Ford Presiding
Board