DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: Tennessee Department
DATE: February 22, 1990
of Health and Environment Docket No. 89-195 Decision No. 1136
DECISION
The Tennessee Department of Health and Environment (Tennessee/State)
appealed a determination by the Health Care Financing Administration
(HCFA) disallowing $1,300,432 in federal financial participation (FFP)
claimed by the State under the Medicaid program of the Social Security
Act (Act).
At issue are federal payments for health care services provided on a
prepaid capitation basis to Medicaid recipients under a contract between
the State and a Health Maintenance Organization, the Tennessee Primary
Care Network (Primary Care). The disallowed FFP represents the federal
share of contractual payments made by Tennessee for the time period
prior to the effective date of HCFA's approval of the State's contract
with Primary Care. The contract between the State and Primary Care ran
from July 1, 1988 through June 30, 1989. However, the contract was not
submitted to the Regional Office for HCFA's approval until October 7,
1988. HCFA approved the contract on February 6, 1989, effective October
11, 1988, the date upon which it was received by HCFA. See Notice of
Disallowance (August 17, 1989).
HCFA alleged that Tennessee's failure to get prior approval for the
contract precluded the State from receiving FFP for contractual payments
for the period prior to October 11. Tennessee contended that the
contract in issue (hereafter the 1989 contract) was essentially the same
as its contract with Primary Care for the preceding fiscal year (the
1988 contract). Tennessee received prior approval for the 1988 contract.
See Tennessee Exhibit (Ex.) 2. In view of the similarity of the
contracts, the State asserted that failure to get prior approval for the
1989 contract was merely "harmless error" and should not serve as
the
basis for disallowing FFP in expenditures for services provided by
Primary Care. In the alternative, Tennessee urged that the contract be
treated as a State plan amendment, which, as we explain below, would
reduce the amount of the disallowance by permitting the State to claim
FFP for contractual services from October 1, 1988, forward.
Based on the following analysis we find that, regardless of the
similarity between the contracts, the State was required by the Act to
obtain prior approval for the 1989 contract. Additionally, there is no
merit to the proposition that the contract could be viewed as a State
plan amendment. The statutory requirement for prior approval for
contracts of this type precludes the payment of FFP in expenditures for
services provided prior to the effective date of that approval.
Accordingly, we sustain the entire disallowance of $1,300,432.
Analysis
I. Prior Approval Was Required For the 1989 Contract
Tennessee asserted that the 1988 and 1989 contracts were essentially the
same and that, based on that similarity, it had assumed that no approval
was required for the 1989 contract. Consequently, the State contended
that the 1989 contract should simply be regarded as an extension of the
contract for the prior year and its failure to get prior approval viewed
as "harmless error." Additionally, Tennessee offered the
unsubstantiated assertion that a decision sustaining the disallowance
would impose additional costs on both HCFA and the State. Tennessee
Brief (Br.), pp. 1-2 (unnumbered).
In relevant part, the Medicaid statute provides --
. . . no payment shall be made under this title to a State with
respect to expenditures incurred by it for payment (determined
under a prepaid capitation basis or any other risk basis) for
services provided by any entity . . . unless --
* * *
such services are provided for the benefit of individuals eligible
for benefits under this title in accordance with a contract between
the State and the entity under which prepaid payments to the entity
are made on an actuarially sound basis and under which the
Secretary must provide prior approval for contracts providing
expenditures in excess of $100,000 . . . .
Section 1903(m)(2)(A)(iii) of the Act.
There is no support in the record for the State's argument that the 1989
contract should merely be considered as an extension of the approved
1988 contract. In spite of Tennessee's assertion that these contracts
were "essentially the same," the contracts' similarity in substance
should not be confused with their individual identity as legal
documents. Both contracts were independent documents, designed to cover
specific periods. See Tennessee Ex. 1, p. 28, and Tennessee Ex. 3, p.
31. Further, in its letter transmitting approval of the 1988 contract,
HCFA stated its "understanding that this contract is for a 12-month
period commencing July 1, 1987." See Tennessee Ex. 2. Clearly then,
HCFA's approval was limited to a one-year contract.
The Act expressly requires prior approval of prepaid capitation
contracts in excess of $100,000. There is no question that the State
was aware of this requirement, as it had obtained HCFA's prior approval
of the 1988 capitation contract with Primary Care. 1/ See Tennessee Ex.
2. Tennessee's implication that, since the contracts were essentially
the same, approval of the 1989 contract was merely a formality overlooks
an important, if unstated, function of the prior approval requirement -
program oversight. See 1986 U.S. Code Cong. & Admin. News 4054-4056.
Additionally, the preamble to the final rules regulating state Medicaid
contracts indicates that one purpose of those regulations was to make it
possible for state Medicaid agencies to contract on a "risk basis"
with
Health Maintenance Organizations (HMO) other than those that meet all
the requirements for a Federally qualified HMO. Further, the preamble
noted that the regulatory reforms in this area were intended, in part,
to provide states greater flexibility in using HMOs as sources of
Medicaid services. See 48 Fed. Reg. 54013- 54014 (November 30, 1983).
Thus, the expanded provision of services envisioned by the regulations
and the use of nontraditional providers of services (i.e., HMOs which
might not be federally qualified), made it essential that HCFA maintain
some oversight responsibility. That responsibility is met, at least in
part, by the prior approval requirement.
Moreover, even if the contracts were essentially the same, approval of
the later contract would not be the foregone conclusion presumed by the
State. It is possible, for example, that there could have been a
problem with performance under the prior contract so as to require
revision of the subsequent contract. While there is no evidence here
that HCFA had any problem with either party's performance under the 1988
contract, the importance of HCFA's oversight function cannot be ignored.
Section 1903(m)(2)(A)(iii) requires prior approval for the contract in
issue. In essence, the State's assertion of "harmless error" was a
plea
for equitable relief which the Board cannot provide. The Board is bound
by all applicable laws and regulations. 45 C.F.R. 16.14.
The State's unsubstantiated assertion that the disallowance would
generate additional costs for both itself and HCFA is simply irrelevant
to the question at hand. The contract was subject to prior approval
requirements. Tennessee did not get prior approval for the contract
and, therefore, could not get FFP for services performed prior to the
effective date of HCFA's approval. As HCFA noted, even if the
disallowance were to pose additional costs upon HCFA that fact is
immaterial to the validity of this disallowance. See HCFA Br., p. 4.
There is no dispute that the statute required prior approval of the 1989
contract. The State did not receive that approval. Thus, the
disallowance was proper.
II. The 1989 Contract Is Not a State Plan Amendment
Tennessee asked the Board to treat the 1989 contract as an amendment to
its Medicaid State plan. The logic behind the State's request was based
on the fact that, in general, the earliest effective date of a plan
amendment is "the first day of the quarter in which an approvable plan
[amendment] is submitted to the regional office . . . ." 42 C.F.R.
430.20. Treating the contract as a plan amendment would make its
effective date October 1, 1988, thus enabling Tennessee to receive FFP
for contractual services from that date forward.
The State has offered no evidence as to how the contract could be
considered a State plan amendment. The contract was clearly submitted
as a contract and nothing else. This argument is little more than a post
hoc rationalization by the State in an attempt to get additional FFP.
Conclusion
Based on the preceding analysis, we sustain the entire disallowance of
$1,300,432.
_____________________________ Cecilia Sparks Ford
_____________________________ Norval D. (John)
Settle
_____________________________ Donald F. Garrett
Presiding Board Member
1. Although HCFA did not elaborate on this point in its brief, the
disallowance letter indicated that the State had been informed of the
prior approval requirement for contract renewals by a HCFA Regional
Transmittal Notice dated February 11, 1987. Although neither party put
the transmittal into evidence, Tennessee did not deny that it had
received the transmittal or that it provided adequate notice of the
prior approval requirement.