DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: North Carolina Department DATE: March 14, 1989 of Human
Resources Docket No. 88-85 Decision No. 1025
DECISION
The North Carolina Department of Human Resources (State) appealed a
determination by the Health Care Financing Administration (HCFA)
disallowing $10,775,230 in federal financial participation (FFP) the
State claimed under Title XIX (Medicaid) of the Social Security Act.
The disallowed claims were for payments made to the State Division of
Health Services for county health clinic and Developmental Evaluation
Center services, and for related administrative and laboratory expenses,
for the period October 1, 1984 through December 31, 1987. HCFA found
that the State did not have adequate documentation to support a finding
that these payments were in accordance with State plan requirements.
During Board proceedings, as a result of documentation submitted by the
State and negotiations between the parties, HCFA reduced the
disallowance amount to $674,893 in FFP, resolving issues related to all
of the types of payments except for clinic services. This amount
reflects HCFA's revised findings that (1) payments made for certain
specified county health clinic services for State fiscal years 1985-87
exceeded actual costs (as documented by a 1981 cost study), resulting in
an overpayment of $123,889 in FFP; (2) the cost estimates for family
planning services derived by the State from 1981 and 1988 cost studies
overstated costs for these services, resulting in an overpayment of
$345,686 in FFP for State fiscal years 1985-87 and $157,882 in FFP for
State fiscal year 1988; and (3) payment rates for certain new clinic
services added since the 1981 cost study were unsupported, resulting in
an overpayment of $47,436 in FFP.
The State challenged these revised findings, arguing generally that it
had followed its State plan and specifically that (1) the revised
disallowance improperly fails to offset overpayments for particular
services by underpayments for other services; (2) the revised
disallowance fails to make adjustments for inflation; and (3) HCFA
improperly revised the cost study rate for family planning services.
For the reasons stated below, we reject these arguments and uphold the
disallowance in the revised amount of $674,893.
Background
Title XIX of the Social Security Act (Act) provides federal funding for
part of the cost of medical assistance provided to needy individuals.
In order to receive such funding, a state must submit a state plan
meeting the requirements of section 1902(a) of the Act. Section
1903(a)(1) of the Act provides that "the Secretary . . . shall pay to
each State . . . an amount equal to the Federal medical assistance
percentage . . . of the total amount expended during such quarter as
medical assistance under the State plan . . . ."
Section 1902(a)(30) of the Act requires that a state plan "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 regulations require a plan to "describe
the policy and the methods to be used in setting payment rates for each
type of service included in the State's Medicaid program." 42 C.F.R.
447.201. The State Medicaid agency must "assure appropriate audit of
records if payment is based on costs of services," and must "maintain
documentation of payment rates." 42 C.F.R. 447.202 and 447.203; see
also 42 C.F.R. 431.17(b); 433.32(a).
During the time period in question here, the State plan stated with
respect to "clinic services": "Payment will be based on negotiated
fee
not to exceed reasonable cost." HCFA's Ex. D.
In 1987, HCFA examined payments made by the State for county health
clinic services. As part of this examination, HCFA reviewed two
memoranda of understanding between the State Medicaid agency -- the
Division of Medical Assistance (DMA) -- and the Division of Health
Services (DHS). Under these memoranda, DHS was to act as intermediary
for county health clinics, providing them assistance with claims
processing, reimbursement payments, cost analysis, quality control, and
other necessary procedures. The memorandum effective July 1, 1980
stated the following under "Arrangements for Payment or Reimbursement":
An agreement between the Division of Health Services and local
health departments . . . will be drawn in accordance with this
Memorandum of Understanding.
Interim rates as negotiated by the cooperating agencies are
reflected in Chart 1. The interim rates are statewide averages and
will be renegotiated based on an annual cost analysis in which all
. . . local health departments participate. Renegotiated rates
will be subject to roll forward/back adjustments to cost on a
statewide basis. For example, if a medical service is reimbursed
at $12.00 per service during this contract period, the new cost
analysis indicates the cost is now $11.00; then the reimbursement
rate for that service will be reduced to $10.00 until the next rate
adjustment. The converse is also true.
HCFA's Ex. B. Chart 1 to the memorandum listed various medical clinical
services by code number and type of service, giving a reimbursement rate
for each individual type of service. Billing rates ranged from $4.90
for blood pressure monitoring to $102.00 for intrapartum care.
The second memorandum of understanding, effective July 1, 1984 (and
still in effect at the time of HCFA's review), states: "Rates of
reimbursement are based on statewide averages and will be renegotiated
annually." HCFA's Ex. C. Unlike the 1980 memorandum, the 1984
memorandum does not specifically refer to adjustments to reasonable
cost; however, the 1984 memorandum contemplated agreements between DHS
and the local health departments which provided the services, with the
providers agreeing to participate in "cost determination activities"
and
DHS agreeing to serve as intermediary between DMA and the providers for
cost determination and cost settlement. HCFA's Ex. C.
HCFA found that, despite the wording in the State plan and the memoranda
of understanding, the State had paid DHS based on the interim rates set
in the 1980 memorandum of understanding, without making any adjustments
based on a comparison with reasonable costs (although the State did
several times adjust the rate by an inflation factor). The State did
not deny that it had not actually adjusted the fees to reasonable costs
(although it did perform cost analyses for fiscal years 1981 and 1988).
The State explained that the State General Assembly had imposed a freeze
on payments for such services in 1981 and stated that, since the period
was a generally inflationary period, this kept the rates low compared to
costs.
HCFA originally disallowed the State's entire claim for clinic services
for the years in question, based on the State's failure to document
through cost analyses that the rates paid did not exceed reasonable
costs. As noted above, HCFA revised the disallowance during Board
proceedings. The revised disallowance covers the amounts by which rates
paid for certain individual items of service in fiscal years 1985 and
1986 exceeded the costs for that type of service as documented in the
State's 1981 cost analysis. The revised disallowance also included the
full fees paid for "new services" not documented in the 1981 cost
analysis. (The State did not separately contest this finding.)
Finally, the revised disallowance included an adjustment which HCFA
found was necessary because the State had determined the unit costs for
family planning services using a methodology which was inconsistent with
the sampling methodology used in the cost studies for 1981 and 1988 to
determine costs for other services.
As indicated above, the State argued that (1) the revised disallowance
improperly fails to offset overpayments for particular services by
underpayments for other services; (2) the revised disallowance fails to
make adjustments for inflation; and (3) HCFA improperly revised the cost
study rate for family planning services. In response to a statement
made by HCFA that the State did not have a legitimate complaint, given
that the disallowance had been significantly reduced, the State took the
position that no disallowance is warranted because the State did follow
its State plan. Below, we first address the more general question of
what the State plan requires and how we should review HCFA's revised
disallowance. We then address the three specific issues listed above.
Whether the State did follow its State plan
The State argued essentially that there was no need to perform cost
studies after 1981 because in October 1981 the State legislature had
imposed a freeze on Medicaid rates and that further legislative caps
limited the increases to less than the inflation rate. The State
alleged that, because the payment rates were kept low, there was
adequate assurance that the negotiated fees did not exceed reasonable
costs. The State also said that estimates of costs derived from cost
studies "conclusively show that the negotiated fees did not, in fact,
exceed reasonable costs." State's reply brief, unnumbered p. 2. HCFA's
position was based on its view that the State had failed to meet its
burden to maintain contemporaneous documentation that the fees did not
exceed reasonable costs, and to make appropriate adjustments, and that
HCFA had granted the State the benefit of the doubt in many areas.
We note at the outset that the State's argument that it did follow its
plan is based on several assumptions: first, that rates were "kept
low"; second, that the plan requires only an "adequate assurance"
that
the negotiated fees did not exceed reasonable costs; and, third, that in
determining whether the negotiated fees in fact exceeded reasonable
costs, the comparison should be between the total fees paid DHS and the
total costs of the services provided. We do not think that these
assumptions are warranted.
While the State did not make any inflation adjustments to the fees after
1984, the record indicates that some of the rates were not low compared
to actual costs to begin with, so we can hardly conclude that they were
"kept low." See State's Ex. 3; HCFA's Ex. B. (For example, the 1980
rate for intrapartum care was $102.00, but the 1981 cost study
substantiated a cost of only $56.92. The State had nonetheless raised
the rate to $122.50 by 1984.)
Even for those rates that started low in comparison to actual costs,
however, we do not think that the mere fact that increases were not made
every year can reasonably be considered sufficient to satisfy the State
plan requirement that negotiated fees not exceed reasonable costs. For
one thing, the record shows that, for some items of service, costs
actually decreased between 1981 and 1988. State's Ex. 3.
More important, the State's own interpretation of the plan language (as
evidenced by the 1980 memorandum of understanding) and the federal
requirement for audit of records where payment is based on costs,
contemplate an actual comparison of the rates paid with the costs the
provider incurs in providing the services. The State provided no
evidence that its failure to perform the annual cost studies was based
on any formal interpretation that no comparison to actual costs was
required. The fact that the State did not perform such a comparison,
and has no documentation of what actual costs were during the fiscal
years in question here, means that the State did not follow its State
plan. This failure establishes a context in which this case must be
viewed. As HCFA pointed out, the State has the burden of documenting
the allowability of its claims under applicable program regulations.
See e.g., 42 C.F.R. 431.17(b), 433.32(a); 45 C.F.R. 74.62. If a state,
as here, has not maintained the type of documentation required, but HCFA
has nonetheless considered other documentation in reducing the
disallowance, this Board will not substitute its judgment for HCFA's
reasonable evaluation of what amount that documentation supports.
As we discuss next, we reject the State's specific challenges to HCFA's
revised disallowance, finding that HCFA reasonably declined to accept
the State's 1981 and 1988 cost studies as establishing the allowability
of the State's entire claim.
Whether HCFA was required to offset underpayments against overpayments
In calculating the revised disallowance amount, HCFA compared the cost
amounts it found were sufficiently substantiated by the cost studies to
the fees paid for each type of service, and multiplied the difference by
the corresponding number of units of service provided to Medicaid
recipients during each year. HCFA then disallowed the federal share of
the overpayments made, totalling the amounts for each item of service
where the fee paid exceeded the amount established by the cost study.
The State argued that the overpayment amounts should be offset by
underpayment amounts for items of service where the costs exceeded the
fees paid.
HCFA responded that the State had set up a system for reimbursing DHS on
a "fee for individual service basis," and therefore could not complain
that HCFA did not look at the total amount paid to DHS. HCFA's brief,
p. 14. HCFA said that it could not recognize the underpayments as a
program expenditure because the State had not actually reimbursed DHS
for the clinic service underpayments and because adjustments to federal
funds must be based on the amount the State actually paid for a
particular service. The State replied that it was not claiming that it
was entitled to FFP for payments it did not make; rather, the State
said, it was "arguing that it is entitled to full FFP for all payments
made for county health clinic services since it is clear that, in the
aggregate, the payments made for those services did not exceed the
reasonable costs of providing those services." State's reply brief,
unnumbered p. 2. According to the State, there is no federal or State
law requiring that the health services be reimbursed individually,
rather than in the aggregate. The State asserted that it --
could have negotiated a set fee with DHS to secure all required
health clinic services from county health departments and, so long
as any subsequent audit did not show that the set fee exceeded the
reasonable costs of providing the services, the fee would be
consistent with federal and State law. The fact that [the State]
chose to assign negotiated rates to each service rather than to pay
a set fee for all health clinic services does not alter the fact
that the reimbursement paid was consistent with the State plan;
that is, the negotiated fees did not exceed (in fact did not even
approach) the reasonable cost of providing the services.
State's reply brief, unnumbered p. 2.
While federal regulations do not explicitly require separate fees for
each type of clinic service, the Medicaid regulations when read as a
whole clearly contemplate billing for particular items of service
provided to individual Medicaid recipients. For instance, Medicaid
recipients are sometimes required to pay part of the costs of services
they receive or third parties such as insurance companies may be liable
for the costs of some services. 42 C.F.R. 447.50; 42 C.F.R. Part 433,
Subpart D. These requirements could not be met if the State simply made
an aggregate payment for all clinic health services to a state agency
like DHS (which is not itself a provider of services, but simply an
intermediary through which the State pays the county health clinics).
Also, the memoranda indicate that the State Medicaid program did not
cover all clinic health services but only certain approved types of
service, some of which were subject to limitations such as a finding of
medical necessity. Thus, paying separate fees for various items of
service serves program purposes.
Even if the State could have negotiated an "aggregate" fee with DHS,
that is not what the State did. The State implemented its State plan by
negotiating separate fees for individual types of service, assigning
each type of service a separate procedure code, and describing
requirements and limitations for each type of service. We view this
implementation as a contemporaneous interpretation of the plan, which
the State cannot now ignore simply because it would benefit the State to
focus instead on what it "could have" done.
As a consequence of how the State implemented the plan, the State's
claims were for particular types of service in the amounts of the rates
actually paid to the county health clinics which provided those services
to specified Medicaid recipients. While the total amount paid through
DHS may not have exceeded the total amount which the providers could
support based on the cost studies, we find that HCFA may reasonably
require the State to make an adjustment to account for any underpayments
separate from the disallowance adjustment for overpayments. First, HCFA
here was focusing on overpayments made and should have the opportunity
to examine separately if it wishes the issue of whether certain services
were reimbursed at less than cost, and, if so, whether the State plan
authorizes payments over the negotiated fees (in other words, whether
the so-called "underpayments" were correctly calculated and represent
allowable Medicaid expenditures). Moreover, treating payments to DHS in
the aggregate would not ensure that each provider has received the
appropriate payment for services; the provider records should reflect
the appropriate reimbursement since other questions may arise concerning
the allowability of the services. Finally, this Board has previously
upheld HCFA's position that it is not required to offset overpayments
and underpayments in one adjustment because permitting such offset may
allow a state to circumvent requirements establishing a two-year time
limit in which claims can be submitted. New York Dept. of Social
Services, DAB No. 752 (1986).
In sum, HCFA reasonably determined that it would not offset alleged
underpayments against overpayments simply because the total paid to DHS
did not exceed the total costs incurred by the providers in providing
the services.
Whether HCFA had to adjust the 1981 costs to account for inflation
The State argued that HCFA should not have determined the overpayments
for State fiscal years 1986 and 1987 by simply comparing the costs shown
in the 1981 cost study with the fees paid, with no allowance for
inflation. HCFA justified its position that it would not give a credit
for inflation as follows:
[The 1981] actual cost figures are the only ones that have been
documented. The Agency is certainly cognizant that inflation has
occurred in the interim, and that salient fact is substantiated by
the increased costs shown by the 1988 study. The problem is that
the State has been unable to quantify the amount of inflation that
should apply to each year in the interim. The burden on the State
was to regularly maintain contemporaneous . . . documentation that
would show in any given fiscal period its expenditures for clinic
services did not exceed the reasonable, i.e., actual, cost of
providing them. After-the-fact assumptions, based on a study which
came about only after the Federal agency had discerned a problem,
are wholly inadequate.
HCFA's brief, p. 13.
The State replied that HCFA did not have standing to complain that an
annual cost study was not completed for each year since HCFA was not a
party to the agreements between DMA and DHS. The State also argued that
inflation during a given period could be established in numerous ways
other than a cost study. The State presented inflation figures for the
period from 1979 through 1988 from the "Total Consumer Price Index"
and
from the "Medical Care Component of Consumer Price Index." State's
reply brief, unnumbered pp. 4-5.
We disagree with the State that the matter of lack of cost studies
solely concerns the State agencies. HCFA has a legitimate role in
ensuring that the State reimburses providers in accordance with the
State plan and federal requirements, including the statutory requirement
in section 1902(a)(30) that the State have methods and procedures to
assure that payments are consistent with economy. The State, having
adopted a "reasonable cost" limit in its State plan, was obliged to
document that its payments did not exceed that limit.
While HCFA may have discretion to accept evidence of inflationary trends
as a substitute for annual cost studies to substantiate what reasonable
costs were for each service during fiscal years 1986 and 1987, HCFA is
not required to do so under the circumstances here. While the 1988 cost
study indicates that the average cost of clinic health services was
increasing, it also shows that the costs of some types of service were
actually decreasing, and others were increasing at varying rates.
State's Ex. 3.
The consumer price index figures presented by the State are also
averages, which do not identify inflation rates for specific types of
service. Thus, we do not think that HCFA is compelled to accept these
figures as establishing what the reasonable cost amounts were for the
different types of service.
In sum, since the State did not establish what the inflation rates
actually were for the particular items of service in question here for
the years at issue, HCFA may reasonably use the 1981 costs with no
allowance for inflation.
Whether HCFA improperly adjusted family planning services costs
The cost studies performed by the State for 1981 and 1988 used a
statistical sampling method to allocate county health clinic costs to
various services. In the sample month, each employee was given a time
card on which to record the various categories of service rendered and
the amount of time in that month devoted to each category. The
employees' reported time for a given category was cumulated to produce
the total worker time for each category of service in that month. The
resulting number of hours was "annualized," that is, multiplied by
12.
In order to arrive at the total annual cost for each service, the State
determined percentages for each service (by taking the ratio of the
total annualized hours for each category of service to the total hours
for all services for the year), and applied those percentages to the
total costs of providing all of the services. The resulting total cost
of service for each type of service would then be divided by the
annualized number of service encounters for services of that type
actually rendered during the sample month.
HCFA determined, however, that with respect to certain family planning
services, the State had improperly substituted the actual numbers of
service encounters (as contained in an annual report on family planning
services) for the annualized number of service encounters (as determined
through the sample). HCFA found that, because the number of service
encounters from the annual reports was lower in each year than the
statistic from the sample, this had the effect of increasing the unit
cost for each family planning category. (For an example illustrating
this, see HCFA's brief, pages 15 and 16.) HCFA thus adjusted the cost
study figures given by the State to the unit cost amounts determined by
using the annualized number of encounters from the samples.
The State argued that family planning services were the only services
for which actual encounter data were available and that thus it was not
necessary to use estimates from sample data for those services. The
State argued:
That actual annual data was not available for other services does
not make the actual data that was available any less accurate. The
only purpose for collecting sample data is to try to estimate the
actual cost. If the actual cost is available, sample data, by
definition less accurate, should not be substituted.
State's brief, unnumbered p. 9.
As HCFA pointed out, however, the numerator in the equation used to
determine the cost per unit of service was not an "actual cost" figure,
but one determined through a sampling methodology (that is, by applying
the percentages determined through the time study). If an inconsistent
method is used to determine the denominator in the equation (by which
the numerator is divided), the results are skewed. Here, since the
State used a figure in the denominator lower than the figure it should
have used, the result was to improperly increase the per unit costs for
family planning services.
HCFA's determination on this point not only is logical mathematically,
but is also supported by the State's own description of its system for
allocating the local health department costs, which states:
In order to obtain a uniform number of services provided, a COST
ANALYSIS ENCOUNTER FOR LOCAL HEALTH DEPARTMENTS . . . will be used
to collect the encounters during the time study period. This data
will be annualized and divided into the cost obtained in the
analysis to arrive at a cost per unit of service.
HCFA's Ex. G., Att., p. 2.
The State's substitution of actual service encounter data was therefore
inconsistent with the sampling methodology and an inaccurate way of
determining unit costs for family planning services. As HCFA pointed
out, the overallocation of costs to the family planning services was
particularly significant because those services are reimbursed at a
higher rate of FFP than that generally available. See section 1903(a)
of the Act.
Accordingly, we find that HCFA's adjustments to the State's cost study
figures for family planning services were appropriate.
Conclusion
For the reasons stated above, we uphold the disallowance in the revised
amount of $674,893 as a reasonable calculation of the federal share of
the amount expended in excess of that permitted by the State plan, in
light of the State's failure to follow that plan.
________________________________ Donald F. Garrett
________________________________ Norval D. (John) Settle
________________________________ Judith A. Ballard Presiding
Board