Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Oklahoma Department of
DATE: September 5, 1990
Human Services Docket Nos. 90-33 and 90-57
Decision No. 1192
DECISION
The Oklahoma Department of Human Services (State) appealed two
determinations by the Health Care Financing Administration (HCFA). HCFA
disallowed a total of $2,784,443 in federal funding claimed by the State
under Title XIX of the Social Security Act for payments for hospital
outpatient clinic services provided to Medicaid recipients. HCFA found
that the payments exceeded the "upper limits" established for such
payments by regulation.
It is undisputed here that the amounts disallowed represent payments
made by the State, using rates determined in accordance with the
approved method in the Medicaid State plan, for outpatient services
actually provided by the hospitals to Medicaid recipients. The issue
essentially is whether the total amounts the hospitals reported as
"charges" effectively defined the hospitals' "customary charges"
(which
act as an upper limit on payment).
As discussed below, the State provided evidence that the hospitals'
"reported charges" were inadvertently incomplete, and did not in fact
represent what was customarily charged to non-Medicaid patients for
comparable services. HCFA did not offer any evidence to the contrary.
Further, HCFA presented nothing in regulations or elsewhere which would
preclude correction of reported charges in circumstances like those
here. We find HCFA to be unreasonable in insisting, even in the face of
the State's evidence, that the reported charges represent the upper
limits and cannot be changed. Accordingly, we reverse the disallowance.
However, since we also find that the State's evidence does not
definitively establish exactly what the upper limits should be, our
decision does not preclude HCFA from further examining this issue and
requiring the State to provide further relevant information.
Statutory and regulatory requirements
Section 1902(a)(30) of the Social Security Act (the Act) requires that a
state plan under Medicaid provide for methods and procedures relating to
payments for Medicaid services to assure that such payments are
"consistent with efficiency, economy, and quality of care." Based
on
this section, HCFA has promulgated a regulation setting upper limits on
payments for outpatient hospital services under Medicaid. These upper
limits are based on reimbursement principles used in the Medicare
program established under Title XVIII of the Act. Specifically, 42
C.F.R. 447.321 provides:
(a) General rule. FFP is not available for any payment that
exceeds the amount that would be payable to providers under
comparable circumstances under Medicare.
(b) Application of the rule. Payments by an agency for outpatient
hospital services may not exceed the total payments received by all
providers from beneficiaries and carriers or intermediaries for
providing comparable services under comparable circumstances under
Medicare.
This provision resulted from a revision effective October 26, 1987, and
thus was applicable during only part of the period at issue here. Prior
to the revision, section 447.321 provided:
The agency may not pay more than the combined payments the provider
gets from the beneficiaries and carriers or intermediaries for
providing comparable services under comparable circumstances under
Medicare.
The purpose of the 1987 revision was "to clarify that the upper payment
limit for outpatient services is calculated based on total payments
received by all providers, which results from determining the payments
made to individual providers during the period." 52 Fed. Reg. 28142
(July 28, 1987).
Under Medicare, payment for services is limited generally to "reasonable
costs" as defined in section 1861(v) of the Act or the provider's
customary charges for those services, if lower. Sections 1814(b) and
1833(a)(2) of the Act. Medicare regulations define "customary charges"
as the regular rates for various services that are charged to both
Medicare beneficiaries and other paying patients who receive the
services. 42 C.F.R. 413.13(e); 413.53(b).
The facts
The basic facts in this case are not disputed. Attachment 4.19-B to the
Oklahoma State Medicaid plan, as in effect during the disallowance
period, provides the following with respect to outpatient hospital
clinic services:
Payment Limits - payments will not exceed the total allowable
amount for comparable services under comparable circumstances under
Medicare. Payment will be equal to 20% of the hospital's average
inpatient per diem rate with no retroactive adjustment. Payment is
made for all services provided to eligible individuals on one day,
including physician's services.
State Exhibit (Ex.) 3, p. 1a, section 4(F). Under this provision, the
State pays a prospective rate (equal to 20% of the hospital's inpatient
per diem rate) for each outpatient "encounter." An "encounter"
is
defined as all the clinic visits and ancillary services used by a
Medicaid patient in a single day, and the amount paid is the same for a
patient who has one clinic visit as for a patient who has five clinic
visits and receives a number of ancillary services in a given day.
State Ex. A, p. 2.
In Oklahoma, a number of hospitals provide outpatient clinic services.
The largest clinic program is operated by the Oklahoma Medical Center
(OMC), a network of several hospitals in Oklahoma City. OMC clinics
offer services in such varied areas as surgery, orthopedics, obstetrics
and gynecology, and general medicine, and also offer ancillary services
such as radiology and laboratory services.
Some professional medical services at the OMC clinics are provided by
physicians belonging to the Professional Practice Plan (PPP), a group of
over 300 physicians organized within the University of Oklahoma Health
Sciences Center. Other professional medical services are provided by
the medical residents and interns at OMC. OMC compensates the PPP for
their medical services by paying the Health Sciences Center a
percentage of the Medicaid payments OMC receives for the outpatient
services, up to a maximum of 25% of the payments.
Although OMC and other hospitals are paid for Medicaid services using
their prospective encounter rates set under the State plan, they are
also required to report to the State Medicaid agency what their
"charges" would be for the services provided. According to the State,
these reported charges have no impact on the amount a hospital is
actually paid, which is determined by multiplying the number of
encounters at the hospital by the encounter rate.
HCFA first questioned whether Medicaid payments made to the State for
outpatient services exceeded the reported charges several years ago.
State officials analyzed OMC charges and determined that the reported
charges consisted of (1) clinic fees and (2) charges for ancillary
services, but did not include any charges for physician services. The
Director of Finance for OMC explained that OMC had not originally
thought to report physician charges because hospitals do not typically
bill for physician services, which are ordinarily billed by the
physicians themselves. He further explained what happened when, at the
State's request, OMC tried to adjust its charges to include charges for
physician services. He stated:
This request presented us with the difficult task of trying to
determine a uniform charge to be reported for each clinic visit.
The difficulty is that allowable physician charges vary according
to the specialty of the physician and the particular service
performed. My staff and I ultimately decided that we would use a
physician charge that we felt confident was well below the average
charge, but that would at least make the reported charges somewhat
more realistic.
For this reason, we decided to use $20 as the physician charge per
clinic visit. That charge was used to cover the whole range of
physician services from a brief office visit to the most expensive
outpatient procedures. We revised our billing system and began
adding the $20 physician charge to the reported charges for
outpatient clinic visits in March 1988.
Even after March 1988, however, the $20 charge was not uniformly
reported for each clinic visit. The additional charge had to be
added manually at the time the bills for all patients were
processed, and the OMC staff did not always remember to add in the
additional $20 charge for Medicaid patients. A further problem
developed in February 1989 when OMC switched to a new computer
system that could not accommodate the Medicaid clinic charges at
all. From February 1989 through the end of September 1989, neither
the basic clinic fee nor the additional $20 physician charge was
reported for any of the Medicaid patients. The only reported
charges were the charges for ancillary services.
State Ex. A, pp. 3-4 (paragraph numbers omitted).
HCFA subsequently compared the total amounts the State paid each year
for outpatient hospital services for federal fiscal years (FFYs) 1987,
1988, and 1989, to the total hospital charges for outpatient hospital
services for each of those years. HCFA determined that, in each of
those years, the aggregate amounts paid exceeded the total charges, and
therefore, HCFA said, exceeded the Medicare upper limits. 1/
The issues
The State did not contest here HCFA's position that customary charges
act as an upper limit on its payments for outpatient hospital services,
under the statutory and regulatory provisions cited above. The State
argued, however, that HCFA was treating reported charges as if they
represented the customary charges under Medicare. According to the
State, HCFA's analysis is flawed because the reported charges for OMC
(which accounted for most of the disallowed funds) are incomplete in two
ways: (1) they do not take into account physician services, except for
the period between March 1988 and January 1989 when a $20 charge for
physicians' services was reported (irregularly); and (2) the reported
charges for the period February through September 1989 also do not
include the basic clinic fee charge. 2/
The State argued that, for FFYs 1988 and 1989, the Medicaid charges
would have exceeded Medicaid payments if a $20 physician charge had been
used for each clinic visit. For FFY 1987, the State argued that "the
difference between charges and payments would be virtually eliminated by
a physician charge of $20, and a physician charge of $21.91 would
eliminate the difference completely." State brief, p. 11. According to
the State, OMC could reasonably have reported a physician charge of
$21.91, or even higher, for each clinic visit and still have remained
well below the amount that would have been paid by Medicare for
physician services.
HCFA responded that the maximum amount reimbursable under Medicare for
outpatient hospital clinic services was established conclusively for
each year by the cumulative "billed amounts" on the computer listings
of
claims the State provided to HCFA (that is, by the amounts the State
referred to as "reported charges"). HCFA took the position that the
State should not be permitted to "in effect, make a bookkeeping entry
adding an amount to the reported charges . . . ." HCFA brief, p. 8.
According to HCFA, the State had notice of the upper limit standard and
simply failed to monitor its Medicaid payments against the standard.
HCFA argued that neither the State nor the hospital should be allowed
retroactively to adjust the hospital's reported charges.
HCFA also argued that the encounter rate paid the hospital under the
State plan included physician services, so the hospital had notice that
it cannot bill Medicaid separately for physician's services incurred in
the delivery of outpatient services. Finally, HCFA argued that normally
a hospital is not eligible to report as part of its Medicare charges
costs of non-resident physician services which are paid directly to the
physician by the Medicare carrier.
Analysis
Whether OMC is precluded from making any changes in its reported charges
HCFA's position that the State is rigidly bound by the hospitals'
reported, but incomplete, charges is unreasonable. The State presented
undisputed evidence that those charges were incomplete. HCFA pointed to
nothing in State regulations or policy that would prohibit a hospital
from billing additional amounts if that is necessary to correct billing
errors. While HCFA argued that a hospital would not be allowed
retroactively to change the amount it billed to a private pay patient,
that is beside the point. The rate established under the State plan
determines the State's obligation to pay for Medicaid services, and the
billed amount for Medicaid has meaning only to the extent it in fact
represents customary charges.
The unreasonableness of HCFA's position is particularly evident with
respect to the basic clinic fee, which was omitted from OMC's reported
charges for the period February 1989 through September 1989 because of
OMC's switch to a computer system which could not accommodate such
charges. HCFA accepted this fee as representing part of what would
customarily be charged by OMC during the remainder of the disallowance
period when it was in fact billed. OMC's failure to bill Medicaid
during the period February 1989 through September 1989 does not change
the nature of the fee as part of the customary charge, and the fee
clearly ought to be considered when establishing whether the State's
payments exceeded the upper limits.
This does not mean that we think HCFA acted unreasonably in initially
comparing the hospitals' reported charges with the amounts paid to the
providers under the State's Medicaid program. While the State argued
that the charges were reported solely for "recordkeeping" purposes,
HCFA
could reasonably assume that the State was keeping such records for the
purpose of ensuring that payments did not exceed customary charges. The
State has the duty under both the federal regulations and the State plan
to ensure that its payments do not exceed Medicare allowable amounts.
In this case, however, as the record of this dispute has developed, the
State's evidence is sufficient to show that OMC's total reported charges
did not in fact accurately represent customary charges for comparable
services provided under comparable circumstances. In the face of this
evidence, HCFA's continued reliance on the original reported charges as
establishing the Medicare upper limits is unwarranted. 3/
Thus, we conclude that OMC is not precluded from making retroactive
changes to its reported charges to more accurately reflect the total
customary charges.
Whether physicians' charges may be added to the reported charges
We also reject HCFA's position that the hospital is precluded from
billing Medicaid separately for physicians' services either because the
encounter rate established under the State plan includes payment for
such services or because non-resident physicians may be paid directly
under Medicare.
As the State pointed out, 42 C.F.R. 447.321 describes the upper limit as
"total payments received by all providers from beneficiaries and
carriers or intermediaries for providing comparable services under
comparable circumstances under Medicare." The only reasonable reading
of this regulation, when customary charges are used as an upper limit,
is that the relevant charges are the total charges that would
customarily be charged by all providers for providing comparable
services under comparable circumstances. Thus, we agree with the State
that, to the extent the outpatient hospital services provided to a
Medicaid recipient include physician services which would have been
billed by the physician as separate charges, calculation of what the
total Medicare charges would be for comparable services should take
account of such additional charges.
The State acknowledged, however, that non-resident physicians may agree
to obtain payment under Medicare from the hospital, rather than billing
separately for their services, and that the PPP physicians had an
agreement with OMC not to bill separately under Medicaid. Also, some
physician services at OMC were provided by resident physicians, who
would not bill separately. Thus, the key issue is whether the
physicians' charges the State seeks to add here are equivalent to the
customary charges for comparable services under circumstances where the
physician is not billing separately. As HCFA pointed out, the State did
not provide evidence of the elements of or the process for establishing
the hospitals' reported charges. Absent such evidence, we cannot say
definitively that the State's proposed changes to the reported charges
represent the relevant customary charges. 4/
Thus, our decision does not preclude HCFA from further examining what
the Medicare upper limits would in fact be for these services, nor from
taking a different disallowance if HCFA finds that the State's payments
exceeded those upper limits.
The State's evidence is clearly sufficient, however, to show that, in
originally reporting its charges, OMC failed to take into account the
fact that non-resident physicians' services were included in the
services provided to Medicaid recipients and were not billed separately
by the physicians. Indeed, HCFA accepted the validity of the $20
physician charge for the brief period during which OMC manually reported
the charge. Moreover, OMC and the State made a reasonable attempt to
establish what could have been billed under Medicare for those services.
Absent any evidence or analysis from HCFA to rebut the State's
presentation, we cannot uphold HCFA's finding (based solely on the
original reported charges) that the State's payments exceeded the
Medicare upper limits.
Conclusion
For the reasons stated above, we reverse both disallowances. Our
decision does not, however, preclude HCFA from requiring the State to
provide additional information necessary to determining what, in fact,
the upper limits of payment were for the outpatient services provided.
_____________________________ Donald F. Garrett
_____________________________ Norval D. (John)
Settle
_____________________________ Judith A. Ballard
Presiding Board Member
1. HCFA disallowed $1,926,002 in federal funds for payments made by
the State during FFYs 1987 and 1988 (Docket No. 90-33), and $858,441 for
payments made during FFY 1989 (Docket No. 90-57).
2. State Exhibit 2 lists charges reported by Oklahoma hospitals for
Medicaid outpatient services for the fiscal years at issue here,
compared to the Medicaid payments to each hospital for those services.
The State explained that it focused on OMC because any payments in
excess of charges for other hospitals were offset by still other
hospitals that reported charges in excess of payments. State brief, p.
9, n. 15. HCFA did not deny this, and Exhibit 2 appears to support it.
3. If the State or hospital were attempting retroactively to change
amounts on a schedule of fees customarily charged to private pay
patients for comparable services under comparable circumstances, we
would agree with HCFA that the changes would be impermissible. Here,
however, the structure of both the hospital's services to Medicaid
patients and the State's payment methods for those patients differed
from the structure for other patients. Because of this, the reported
charges were in a sense intended as a surrogate for customary charges
and have no validity if they do not have the requisite comparability.
4. The amounts which the State proposed using are based on what OMC
calculated would be the average amount allowable under Medicare for
physicians' services per clinic visit ($20), or, for FFY 1987, what the
State said could be supported as an average charge per clinic visit and
was needed to make payments not exceed charges ($21.91). These amounts
are based on averages and assume that no physician charges were
reflected in OMC's basic clinic fees or fees for ancillary services.
Also, the averages were derived from physician charges for the types of
services generally provided in outpatient clinics, which may not be
comparable to the services actually provided by OMC to Medicaid
outpatients. Finally, it appears that the State's figures reflected
non-resident physicians' charges which would be billed separately under
Medicare; it is not clear that the same amounts would have been billed
by the hospital under circumstances where it had an agreement with PPP,
as it did for Medicaid services, or where resident physicians provided
the