DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: New Jersey Department
DATE: March 29, 1990
of Human Services Docket Nos. 89-74 and 89-94
Decision No. 1143
DECISION
The New Jersey Department of Human Services (State) appealed two
disallowances by the Health Care Financing Administration (HCFA)
totaling $348,825 in federal financial participation (FFP) claimed under
title XIX (Medicaid) of the Social Security Act (Act). 1/ The
disallowed claims represented the clothing component of the per diem
rate for public psychiatric hospitals and private residential treatment
centers. HCFA determined that clothing costs are not a covered
inpatient psychiatric service for individuals in public hospitals or
residential treatment centers.
The central issue before us is whether clothing costs are allowable
under the specific provisions of the State's Medicaid plan. For the
reasons discussed below, we find that, as the State has elected to use
Medicare reimbursement principles in setting its reimbursement rates for
inpatient psychiatric services and as these principles do not include
clothing as allowable costs, the clothing costs cannot be charged to the
Medicaid program. Accordingly, we sustain the disallowances.
Background
In order to qualify for FFP under Medicaid, a state must submit a State
plan which meets all the requirements imposed by the Act. Section 1902
of the Act. Under 42 C.F.R. 447.253(g), the State may only claim
Federal funding for rates "determined in accordance with methods and
standards specified in an approved State plan." A State plan for
medical assistance must provide for reimbursement through the use of
rates which are reasonable and adequate to meet the costs incurred by
efficiently and economically operated facilities. Section 1902(a)(13)(A)
of the Act. Among the services a state may elect to cover under its
State plan are inpatient hospital services for individuals age 65 and
over in institutions for mental diseases and inpatient psychiatric
services for individuals under age 21. Sections 1905(a)(14) and (16) of
the Act. The costs at issue were included in the rates developed for
payment to public psychiatric hospitals and private psychiatric
residential treatment centers for inpatient services.
In setting its Medicaid reimbursement rates, a state may, at its option,
rely upon Medicare reimbursement principles. The State made that
election here in its State plan, using the Medicare standards and
principles of reimbursement in setting its rates for inpatient
psychiatric services. The rates were accordingly based on the HCFA
Health Insurance Manual (HIM-15), which is a handbook setting out the
principles of reimbursement governing Medicare payments to health care
providers.
In September 1987, HCFA issued a SPECTRUM 2/ review of the State's
psychiatric hospital reimbursement system. SPECTRUM is designed to
examine the quality of a state's actions in setting, adjusting, and
monitoring Medicaid reimbursement rates and to compare those activities
with the methods and procedures contained in the Medicaid State plan as
approved by HCFA. The SPECTRUM review determined that the State
overclaimed FFP for patient clothing costs for State fiscal years 1985
through 1987. The questioned clothing supplied by the State to
psychiatric patients was not institutional clothing, such as gowns or
pajamas, but rather day-to-day "street" clothes. 3/ In reaching the
conclusion that the cost of this type of clothing was unallowable, the
SPECTRUM review referred to the following sections of HIM-15:
2102.2 Costs Related to Patient Care.--These include all
necessary and proper costs which are appropriate and helpful in
developing and maintaining the operation of patient care
facilities and activities. Necessary and proper costs related
to patient care are usually costs which are common and accepted
occurrences in the field of the provider's activity. They
include costs such as depreciation, interest expenses, nursing
costs, maintenance costs, administrative costs, costs of
employee pension plans, normal standby costs, and others.
Allowability of costs is subject to the regulations prescribing
the treatment of specific items under the Medicare program.
2102.3 Costs Not Related to Patient Care.--Costs not related to
patient care are costs which are not appropriate or necessary and
proper in developing and maintaining the operation of patient
care facilities and activities. Such costs are not
allowable in computing reimbursable costs. They include, for
example, costs of meals sold to visitors; costs of drugs
sold to other than patients; cost of operation of a gift
shop; and similar items.
The SPECTRUM review found that the clothing was not covered under these
sections of HIM-15. HCFA adopted the SPECTRUM finding and disallowed
the State's claims for the costs of the clothing.
Discussion
In New York State Dept. of Social Services, DAB No. 1036 (1989), the
Board examined the identical issue to that presented here. There, in
affirming HCFA's disallowance of clothing costs, the Board declared:
We find that the clothing costs are not allowable costs properly
included in the calculation of rates charged to Medicaid.
Contrary to [New York's] assertion, the HIM provisions do not
support these costs. . . . [C]lothing costs are not among those
specifically cited as examples of allowable costs. Indeed,
clothing costs do not bear any perceivable relationship to the
types of costs specifically cited as allowable.
pp. 4-5.
While HCFA argued that the law and facts in these appeals parallel those
in New York, the State vigorously contended that New York should not be
controlling here.
According to the State, the Board in New York was not adequately
presented with expert opinion and testimony as to the therapeutic value
of street clothing in the treatment of psychiatric patients. The State
argued that it is now widely accepted within the mental health
profession that providing a psychiatric patient with his own clothes,
rather than institutional garments, serves a vital role in the treatment
and rehabilitation of the individual. As such, the State contended,
clothing should be considered, within the meaning of HIM section 2102.2,
a necessary and proper cost related to patient care, as street clothes
have become a common and accepted occurrence in a psychiatric patient's
care. The State disputed any suggestion that the clothing should be
considered a "personal care item" which could be purchased through
a
Personal Needs Allowance (PNA). 4/ The State argued that the allowance
was clearly inadequate to purchase the entire amount of clothing
provided when the patient entered the facility and that patients could
not be forced to use the allowance to buy clothing rather than other
items with their allowance.
During the hearing convened at the State's request, the State provided
testimony about its policy of providing clothing to indigent psychiatric
patients. A State psychiatrist testified about the process of
"normalization," which attempts to "restore the patient to normal
social
functions and to facilitate the patient's introduction into the
mainstream of society." Tr. at 30. The psychiatrist stated that
clothing plays a significant role in the normalization program, and that
he did not know of a state which does not provide clothing to its
indigent psychiatric patients. Tr. at 31-34. Another State witness
testified that, when patients were previously dressed in institutional
garb, the cost of this clothing (which did not become the patient's
property) was routinely reimbursed by Medicaid under linen and general
service laundry cost centers. Tr. at 42. The State also contested the
amount of the disallowance, arguing that HCFA, in addition to
disallowing the direct cost of the clothing, also disallowed overhead
costs associated with the clothing. 5/
HCFA did not contest the State's assertions about the therapeutic value
of a patient having his own clothes during the course of his psychiatric
treatment. Tr. at 88. Nor did HCFA dispute that the use of street
clothes is now a widely accepted feature of psychiatric treatment. Id.
HCFA denied, however, that the purchase of such clothing under the
State's Medicaid plan is a Medicaid reimbursable expense. 6/ A HCFA
official testified that the HIM provision at issue had never been
interpreted by HCFA to include street clothing for patients, and that
where costs related to a specific group of patients are to be covered by
the program, an explicit provision must authorize the coverage. Tr. at
85-87.
While the Board does not question the State's position on the
therapeutic value of individual clothing in psychiatric treatment, the
State has not convinced us that such costs are reimbursable under the
provisions of its plan. The use of street clothes as an aspect of
current psychiatric treatment was raised before the Board in New York.
Here the State, through its witnesses, has only provided more detailed
information and elaboration about this concept and how it works in
practice. Yet the fact remains that New Jersey, as did New York, chose
to utilize the Medicare reimbursement principles in setting its Medicaid
reimbursement rates. As such, the State was bound by the Medicare
principles, including those set forth in HIM-15. In New York the Board
found that the clothing costs did not fit within the allowable cost
provisions of HIM section 2102.2 and that HCFA's position therefore was
reasonable. p. 5.
We reaffirm that finding here. There is no explicit statement that
these costs are allowable in section 2102.2. Moreover, clothing costs
bear no relationship to the examples cited as allowable in section
2102.2. The examples concern facility-wide costs for developing and
maintaining the operation of the facilities. None of the costs relate
to specific patient services or needs items, much less to items that
would only apply to a restricted category of patients. The State did
not point to any contemporaneous official State interpretation of
section 2101.2 to cover such costs. Indeed, the State conceded that
street clothing for indigent patients was not included in the list of
examples and attempted to explain the omission by arguing that the list
apparently was drafted prior to the time when street clothing replaced
institutional garb for this group of patients. State Supplemental Brief
(Supp. Br.), p. 8. Moreover, we find that HCFA reasonably
differentiates in coverage under the HIM provision between institutional
garb, which hospitals traditionally provide for patient use when
required, and personal street clothing, which the hospital actually
gives to a particular group of patients. 7/
Finally, HCFA's position is buttressed by the regulation providing for
income disregards in Medicaid eligibility. The regulation at 42 C.F.R.
435.725(c) provides that states in determining eligibility must
disregard specified amounts of money from the income of
institutionalized Medicaid patients, and includes in such disregards a
PNA "reasonable in amount for clothing and other personal needs of the
individual while in the institution." (emphasis added) This regulation
supports HCFA's interpretation of the HIM provisions that clothing is
outside the scope of allowable costs, since another source exists for
the purchase of the clothing. The State insisted that the PNA was
needed for such personal needs as toiletries, cosmetics, cigarettes,
snacks, and reading material, and that for various reasons it was
impractical to use the PNA for clothing. Even if the PNA is not
sufficient in every case as the State argued, its existence for this
stated purpose undercuts the State's position that clothing by
implication is allowable under its plan. 8/
As long as the State elects to use the Medicare reimbursement principles
in its Medicaid State plan, it will be bound by those principles,
including provisions of HIM-15. Under 42 C.F.R. 447.253(g), the State
may only claim Federal funding for rates determined in accordance with
its plan. See, e.g., California Dept. of Health Services, DAB No. 1007
(1989). If the State changes its State plan, different principles of
course may apply. 9/ But, under the current State plan, the
disallowances must stand. The fundamental problem with the State's
position here is that while there may be commendable policy reasons for
covering these particular costs, and while the costs may be viewed by
particular facilities as worthwhile or necessary, the State must first
make provision for their inclusion in its plan. The State plan is the
ultimate arbiter of whether cost items that otherwise meet program
requirements may be included in a facility's rate.
Conclusion
For the reasons stated above, we sustain the disallowance of $348,825
FFP for the claimed clothing costs.
___________________________ Cecilia Sparks
Ford
___________________________ Norval D.
(John) Settle
___________________________ Donald F.
Garrett Presiding Board Member
1. At the State's suggestion, and with no objection by HCFA, the Board
joined the two appeals. Docket No. 89-74 concerns the claim of $14,349
FFP for the clothing component of a retroactive per-diem rate adjustment
for private residential treatment centers for fiscal year 1985, which
was made on the State's quarterly statement of expenditures for the
quarter ended March 31, 1987. Docket No. 89-94 concerns the claim of
$334,476 FFP for the clothing component of the per-diem rate for public
psychiatric hospitals from July 1, 1984 through June 30, 1987.
2. SPECTRUM is the acronym for State Performance Evaluation and
Comprehensive Test of Reimbursement Under Medicaid. See State Exhibit
(Ex.) 7.
3. Clothing is provided to those patients who do not have their own
personal clothing when they enter the psychiatric facility. The types
and amount of clothing issued to a patient varied from hospital to
hospital. For example, one hospital provided the following items: three
shirts, two sweaters, three pants, five undershirts, five underpants,
one pair of shoes, and a coat. State Ex. 20 (Ancora Psychiatric
Hospital).
4. The Personal Needs Allowance is a monthly payment to eligible
institutionalized recipients funded by both federal (Supplemental
Security Income or SSI under Title XVI of the Act) and state programs.
Medicaid-eligible patients receive the PNA. The PNA in New Jersey is
$40 per month. Transcript (Tr.) at 55.
5. A HCFA witness explained that when HCFA finds a specific cost is
unallowable, its policy is to disallow also the overhead costs
associated with that specific cost. Tr. at 95. The State did not
question this explanation, and we agree that overhead costs associated
with an unallowable cost would also be unallowable. See, e.g., Florida
Dept. of Health and Rehabilitative Services, DAB No. 821 (1987), p. 19.
6. The fact that HCFA might not have disallowed the cost of street
clothing in the past, as alleged by the State, is not indicative that
there was any expressed HCFA policy to allow such costs.
7. The State asserted in its brief that its claim may have covered
institutional garb as well. See State Supp. Br., p. 9. If the State
can document within a time frame acceptable to HCFA that any of the
costs claimed were in fact for institutional garb, those costs should be
allowed.
8. The Medicare statute and regulations also explicitly exclude from
coverage under the program "personal care items." Section 1862(a)(6)
of
the Act and 42 C.F.R. 405.310(j). Again, if the State wished to treat
street clothing as allowable and distinguish the clothing from an
unallowable personal care item, it should have done so explicitly in its
plan.
9. At the hearing a HCFA official testified that HCFA's disallowance
was based on the narrow issue of the State plan's incorporation of the
Medicare principles, and that, if the State were to propose an
acceptable plan amendment to cover the cost of street clothing for
indigent psychiatric patients, those costs would be allowable. Tr. at
86 and