California Department of Health Services, DAB No. 1430 (1993)

  Department of Health and Human Services

        DEPARTMENTAL APPEALS BOARD

     Appellate Division


SUBJECT:        California Department     DATE:  August 5, 1993 of
    Health Services Audit Control No.
   A-09-89-00165 Docket No. A-92-70 Decision No.
   1430

   DECISION

The California Department of Health Services (California) appealed a
disallowance by the Health Care Financing Administration (HCFA) of
$109,880 in federal financial participation claimed under Title XIX
(Medicaid) of the Social Security Act (Act).  HCFA asserted that the
disallowed amount represented the federal share of a $223,180
overpayment to the Harold D. Chope Community Hospital (Chope) for the
hospital's fiscal period ending June 30, 1984 (FPE 1984).

The payment to Chope was one of the hospital payments disallowed as
overpayments and previously appealed to the Board in California Dept. of
Health Services, DAB No. 1254 (1991).  While upholding HCFA's ability to
disallow the federal share of firmly established overpayments, even if
California had not yet recovered these amounts from the providers, the
Board also afforded California the opportunity to submit documentation
to HCFA showing that the overpayment amounts had been reduced by
settlements, recalculations, and administrative appeal decisions, or had
been refunded to HCFA subsequent to the audit on which the disallowance
was based.  HCFA and California subsequently settled the disallowance
for all the providers except Chope.  Stipulation of Parties, California
Exhibit (Ex.) C.

As discussed below, we find that there was no basis for HCFA's
determination that California overpaid Chope for FPE 1984.  California
did not determine that Chope was overpaid, and HCFA did not establish
that Chope received reimbursement in excess of that to which it was
entitled under California's State Medicaid plan.  Accordingly, we
reverse the disallowance.

 


Applicable law

Title XIX of the Act authorizes federal grants to states to aid in
financing state programs which provide medical assistance and related
services to needy individuals, including inpatient hospital services.
Any state that wishes to participate in the Medicaid program must
develop and submit a plan that meets certain requirements set forth in
the Act and regulations.

Realizing that many states might have difficulty financing a Medicaid
program even if subsequently reimbursed by the federal government,
Congress also established a funding mechanism by which the Department of
Health and Human Services advances funds to a state, on a quarterly
basis, equal to the federal share of the estimated cost of the program.
A state submits a quarterly expenditure report to HCFA which serves as
the basis for adjustments to future payments to reflect any overpayment
or underpayment which was made to the state for that or any prior
quarter.  Section 1903(d) of the Act.  Specifically, section 1903(d)(2)
of the Act provides that amounts paid to a state shall be reduced to the
extent of any overpayment which HCFA determines was made to the state
for any prior quarter and with respect to which adjustment has not
already been made.

Under Section 1902(a)(13) of the Act, state plans must provide for
payment of hospital services through the use of reimbursement rates
which the state finds, and makes assurances satisfactory to HCFA, are
reasonable and adequate to meet the costs which must be incurred by
efficiently and economically operated facilities.  This provision, known
as the "Boren Amendment," was intended to provide the states greater
flexibility in developing methods of provider reimbursement.  Missouri
Dept. of Social Services, DAB No. 1189 (1990); South Dakota Dept. of
Social Services, DAB No. 934 (1988).  Generally, states pay hospitals on
the basis of a reimbursement rate based on the hospital's costs, such as
the costs per diem or per discharge.  States also have their own
procedures for determining whether a Medicaid overpayment has been made
to a health provider.  These procedures generally include audits of the
providers to determine whether they have properly reported costs used to
set such rates, whether patient days or discharges have been correctly
claimed, and whether the reimbursement otherwise meets the state plan
and federal requirements.  See California Dept. of Health Services, DAB
No. 1152 at 1-2 (1990).

In numerous cases involving excess or improper payments by states to
Medicaid providers, this Board has held that, under section 1903(d)(2),
HCFA may require adjustment of the grant award for the federal share of
firmly established provider overpayments, even if a state has not yet
recovered these amounts from the providers.  The Board reasoned that
excess or improper payments are not "medical assistance" within the
meaning of sections 1903(a)(1) and 1905(a) of the Act.  See, e.g.,
California Dept. of Health Services, DAB No. 1015 (1989); California
Dept. of Health Services, DAB No. 977 (1988); California Dept. of Health
Services, DAB No. 619 (1985); Massachusetts Dept. of Public Welfare, DAB
No. 262 (1982). 1/  The Board has upheld disallowances based on state
overpayment determinations where properly performed state audits showed,
with a high degree of reliability, that providers had received
reimbursement in excess of what was permitted under the state plan and
federal requirements.  California Dept. of Health Services, DAB No. 977
(1988); California Dept. of Health Services -- Accounts Receivable, DAB
No. 334 (1982).  A state is provided the opportunity to show that HCFA
should not rely on its overpayment determination.  If there is no state
overpayment determination upon which HCFA may rely, then HCFA must make
its own factually and legally supportable overpayment determination.

Background

This appeal concerns application of a 1989 change in California's method
for calculating inpatient hospital reimbursement.  California's State
Medicaid plan provides several limits on reimbursement for inpatient
hospital services, including a limit based on the hospital's all
inclusive "rate per discharge" (RPD).  The allowable RPD for a
particular settlement year is determined by adjusting the RPD for the
prior, or base, year through application of a "hospital cost index"
(HCI) reflecting inflation and other cost factors.  The HCI is
calculated using cost information from the midpoints of the settlement
year and the base year.  The allowable RPD for the settlement year is
then multiplied by the number of Medicaid discharges to compute the
maximum inpatient reimbursement limit.

The State Medicaid plan does not specify how to determine what RPD the
HCI is applied to, and in implementing its plan California employed two
different methods.  Under the method which was used to determine the
reimbursement limit for Chope for FPE 1984, the HCI was applied to the
RPD at the beginning of the settlement year (which is the same as the
RPD at the end of the base year), to yield the RPD for the end of the
settlement year.  These two RPDs, one for the beginning and one for the
end of the settlement year, were then averaged to determine the
allowable RPD for the settlement year.  The parties referred to this
process as the "averaging" method.  Using the averaging method then in
effect, California provided Chope with a notice of settlement dated
April 20, 1989, which informed Chope that there had been no overpayment
for FPE 1984.  California Ex. D-2.

In a memorandum to the staff of California's Hospital Reimbursement
Section dated August 7, 1989, California's Rate Development Branch
announced a prospective change in the method for calculating the
allowable RPD for the settlement year.  The allowable RPD for the
settlement year would be determined by applying the HCI to the RPD from
the midpoint of the base year (also described as the average RPD for the
base year).  California Ex. D-1.

According to the August 7, 1989 memorandum, the method was changed so
that the HCI and the RPD to which it was applied would reflect cost
information from the same time period.  Since the HCI was calculated
based on information from the midpoint of the base year, California
determined that it should be applied to the RPD from the midpoint of the
base year as well, instead of to the RPD from the beginning of the
settlement year, as was the case under the averaging method.  The
memorandum explained that the time period based on which the HCI was
computed could be skewed by as much as six months from the time period
affected by the HCI, with the result that only one-half of adjustments
to certain cost items reflected in the HCI were actually realized in the
settlement year, the remainder being realized in the subsequent year.
The memorandum noted that several providers had objected to the
averaging method, and had advocated applying the HCI to the average base
year RPD to get the average current year RPD.  The memorandum further
explained that providers would be affected differently by the change,
with some benefitting from higher rates in all years, some with lower
rates, and some with a combination of higher and lower rates than under
the averaging method.  Id.

To implement the change, the memorandum explained that while all
settlement years would be recomputed using the midpoint method, new
settlements would be issued only for active years, including settlement
years that were the subject of pending administrative appeals and
lawsuits.  No new appeal rights would be granted for closed years.
California then sent notices of the change in the calculation method to
its providers which showed what each provider's reimbursement for recent
closed years would have been under the new midpoint method.  The notices
further stated that liabilities assessed in previously closed final
settlement years would not be amended, that no new appeal rights would
be given, and that there would be neither recoupment nor refunds of
additional funds for the closed years.  The notices stated that closed
years' settlements had been recalculated for "flow through" effects and
to assure the providers that the settlements were comparable.  The
notice sent to Chope, dated August 24, 1989, showed that under the
midpoint method, reimbursement for FPE 1984 would have been reduced by
$223,180.  California Ex. D-4.

Contentions

HCFA asserted that California's notice to Chope showing that it would
have received less reimbursement for FPE 1984 under the midpoint method
was a reliable determination that Chope had been overpaid for that year,
and that California should be required to return the federal share of
the overpayment to HCFA.  HCFA asserted that California changed its
calculation method because the averaging method was defective, and that
California's original finding that Chope had not been overpaid was
therefore unreliable.  HCFA noted that the Board has repeatedly held
that HCFA may base a disallowance on a state's own determination that a
provider was overpaid, so long as the state's overpayment determination
had a high degree of reliability.

In support of its position, HCFA presented the declaration of an
official in California's Rate Development Branch who stated that
California had adopted the midpoint method because the averaging method
was technically invalid, mathematically incorrect, and inconsistent with
all component parts of the RPD calculations.  HCFA Ex. 1.  The official
also indicated that California had first used the midpoint method but
had switched to the averaging method in 1981, after which provider
hospitals began complaining that the rate calculations failed to
accurately reflect their costs.  He stated that California had settled
provider appeals challenging the use of the averaging method because
California would have lost such appeals.  HCFA argued that it was thus
entitled to rely on the midpoint calculations that California had
concluded were the more accurate ones. 2/

California argued that its FPE 1984 settlement with Chope was closed and
final prior to the time that it changed its method for calculating
reimbursement limits.  There was no determination that Chope had been
overpaid, California asserted, and the notice to Chope showing what it
would have received under the midpoint method was only an informational
document issued to provide comparability for future reimbursement
calculations.  California argued that HCFA's determination that Chope
was overpaid was a "misunderstanding" concerning the significance of the
recalculation using the midpoint method for FPE 1984.  California Brief
at 2.

Analysis

This case raises the issues of whether California's calculation showing
what Chope would have received for FPE 1984 under the midpoint method
was correctly construed by HCFA as a determination that Chope had been
overpaid, and, if not, whether HCFA has independently shown that Chope
received an overpayment.

California's final cost settlement for FPE 1984 expressly stated that
there was no "reimbursement reduction" (overpayment) due from Chope for
that year.  California Ex. D-2.  Although California changed its method
for calculating inpatient reimbursement limits and found that Chope
would have received less reimbursement for FPE 1984 under the midpoint
method, we find that this did not amount to a determination that Chope
had been paid more for that year than what Chope was entitled to under
California's State Medicaid plan.  Rather, California's determination of
Chope's FPE 1984 reimbursement under the midpoint method was made in the
context of notifying providers of a prospective change in the method for
calculating inpatient reimbursement limits and the effect of that change
on their reimbursement rates.  The notice letter showed, for
"flow-through" purposes only, what hospitals would have received for
closed cost years under the new method.  California Ex. D-4.  As
California noted, the change in the calculation method was applied
prospectively only to settlement years which were still open or for
which there were pending administrative appeals and lawsuits.
California also clearly stated that settlements for closed years would
not be reopened, and there has been no evidence introduced showing that
any such settlements were reopened.  HCFA also provided no reason why
this one provider should be singled out for retroactive application of
the midpoint method to a closed settlement year.

Moreover, we find that this case is distinguishable from cases where the
Board held that HCFA could use state records of overpayment
determinations to disallow federal funding.  The Board concluded in
those cases that HCFA could recover the federal share of firmly
established overpayments where states had determined, with a high degree
of reliability, that the providers had been overpaid.  Generally, those
cases involved situations where state audits, performed according to
accepted audit standards, had made findings based on review of
providers' cost records, the states had attempted to recoup the
overpayments based on those audits, and the overpayment findings were
subject to appeal by providers.  In this case, by contrast, there was no
audit by California establishing that Chope received reimbursement
beyond what it was entitled to under California's State Medicaid plan
and policies.  In addition, since the notice to Chope was informational
only, the calculations were not subject to challenge (and, consequently,
closer scrutiny) through an administrative appeals process.  HCFA did
not point to any other California determinations which established that
Chope received reimbursement for costs unallowable as charges to federal
funds.

We further conclude that HCFA did not independently establish that Chope
had received an overpayment.  HCFA did not demonstrate that the
averaging method was inconsistent with the requirements of California's
State Medicaid plan, or so defective as to be an unreasonable
implementation of the plan and therefore render the closed settlements
invalid.

In support of its position that Chope was overpaid, HCFA relied
primarily upon the declaration of the California official addressing the
reasons behind the change to the midpoint methodology.  HCFA Ex. 1.  The
declaration is too vague about what was required by California's
rate-setting methodology, and too conclusory in evaluating the averaging
method, to support a determination that that method was inconsistent
with the State plan.  The declaration, which was signed on August 8,
1991, prior to this appeal, explains the basis for California's
settlement of disputed overpayments with six hospital providers.  For
some of these hospitals California had reduced disputed overpayment
amounts based on recalculations using the midpoint method.  However, the
declaration does not address Chope and provides no basis for concluding
that California's final cost settlement with Chope should be reopened.
Additionally, the declaration of an analyst in California's Hospital
Reimbursement Unit indicates only that the midpoint method was
considered to give a "more accurate" comparison of a provider's actual
versus allowable costs.  California Ex. D.  The fact that the midpoint
method may have been more accurate than the averaging method does not
establish that the averaging method was unreliable or inconsistent with
California's State Medicaid plan.

We note that the record indicates that providers had complained that the
averaging method resulted in rate limits that failed to adequately
reflect their cost adjustments and were thus presumably too low.  Here,
by contrast, Chope's reimbursement under the averaging method was higher
than what would have been available under the midpoint method for the
one year in question.  While the August 7, 1989 memorandum to
California's hospital reimbursement staff indicates that only one-half
of certain cost adjustments were being realized in any one year under
the averaging method, it also states that the remainder were realized in
the following year.  This gives rise to the inference that the averaging
method could have resulted in reasonably accurate settlements over the
course of several years.  California Ex. D-1.  Therefore, there is no
reason to conclude that the averaging method was an inherently
unreasonable implementation of California's State Medicaid plan.

As noted above, the Boren Amendment gave states flexibility in
establishing reimbursement methods for inpatient hospital services.
California's official interpretation of its reimbursement method was
that while the midpoint method was preferable, California's State plan
did not require it to apply the method retrospectively to reopen closed
settlements.  HCFA has presented no persuasive reason why we should not
defer to that interpretation.  To find an overpayment on the basis of
California's change to the midpoint method would have the effect of
discouraging states from revising their calculation methods to more
accurately implement their state plans.

Accordingly, we find that the mere fact that California changed its
calculation method prospectively to one that may have been more
mathematically precise did not amount to a determination that Chope had
been overpaid for FPE 1984.  To make a valid determination of an
overpayment, HCFA must show that the payment was in excess of the amount
determined payable under the State plan.  Here, California did not
determine that Chope had been overpaid for FPE 1984, and HCFA did not
determine based on its own review that the rate calculation method in
effect at that time violated the applicable State plan provision.

Conclusion

For the reasons discussed above, we reverse the disallowance.

 


   Judith A. Ballard

 

 

   M. Terry Johnson

 

 

  Cecilia Sparks Ford Presiding Board Member

 


1.   The Board's prior holdings on overpayments issues have been upheld
in three decisions by United States Courts of Appeals:  Massachusetts v.
Secretary, 749 F.2d 89 (1st Cir. 1984), cert. denied, 472 U.S. 1017
(1985); Perales v. Heckler, 762 F.2d 226 (2d Cir. 1985); and Missouri
Department of Social Services v. Bowen, 804 F.2d 1035 (8th Cir. 1986).

2.   HCFA also argued that California's assertion that the FPE 1984
settlement was closed and that California was unable to recover any
funds from Chope for that year did not affect California's obligation to
refund the federal share of the overpayment to HCFA.  HCFA noted that
the Board has held that HCFA may recover overpayments from states
regardless of whether the overpayments have been recovered from the
providers.  However, since we find that there was no overpayment
determination upon which HCFA could properly rely, we need not address
this