Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: California Department of Health Services
DATE: April 19, 1994
Audit Control No. A-09-92-00094
Docket No. A-93-210
Decision No. 1474
DECISION
The California Department of Health Services (California or DHS)
appealed a disallowance by the Health Care Financing Administration
(HCFA) of $7,530,145 in federal financial participation (FFP) claimed
under Title XIX (Medicaid) of the Social Security Act (Act) for fiscal
years (FYs) 1985 through 1989. The claims were for payments for mental
health services provided by 14 California counties pursuant to
agreements with the California Department of Mental Health (DMH). Based
on an audit by the Office of the Inspector General (OIG), HCFA
determined that the amount of California's payments to the counties
exceeded applicable limits in California's State Medicaid plan. One of
those counties, the County of Fresno (Fresno), was granted permission to
participate in this appeal by filing written submissions.
The OIG auditors found 1) that California made payments in excess of
statewide maximum allowances; and 2) that California made payments in
excess of the county providers' usual and customary charges to the
general public for the same or similar services. California conceded
that it had made payments to three counties in excess of statewide
maximum allowances (and estimated that the overpayment of FFP was
$1,166,048). California denied, however, that the counties' "posted
charge rates" used by the OIG auditors to compute excess payments in
fact constituted "usual and customary charges to the general public for
the same or similar services" within the meaning of California's
Medicaid plan. California asserted that these counties had no customary
charges to apply and were properly reimbursed at their negotiated rates
(to the extent these rates did not exceed statewide maximum allowances).
For the reasons explained below, we conclude that, contrary to what HCFA
argued, California reasonably applied Medicare reimbursement principles
in interpreting its plan. "Customary charges" is a term of art, defined
in the Medicare regulations and administrative guidelines, and
California had a longstanding policy of adopting the Medicare meaning.
While DMH auditors initially found that the "posted charge rates"
were
customary charges, HCFA provided no evidence that these auditors'
findings were based on official California policy. The record shows
instead that, based on an opinion obtained by Fresno from the Medicare
fiscal intermediary (with HCFA's concurrence), California reasonably
adopted the interpretation advanced by the counties concerning how the
customary charge concept applied to their actual charging practices.
The counties provided evidence that they rarely billed the posted charge
rates, instead imposing nominal fees based on ability to pay.
HCFA's concern that the negotiated rates paid to the counties also
exceeded their reasonable costs of providing the services is misplaced.
The California Medicaid plan specifically contemplated substituting
negotiated rates as a limit in place of reasonable costs for the
counties at issue here. We note that HCFA made no finding that
California's payments to its providers exceeded any of the federal
reimbursement limits in the Medicaid regulations. These limits ensure
that California's aggregate payments for various types of services do
not exceed what could be paid using the Medicare reasonable cost system;
they permit states to use prospective rate-setting systems, such as the
negotiated rates in question, so long as the aggregate upper limits are
not exceeded.
Accordingly, we reverse the disallowance to the extent it is based on
payments exceeding the counties' "posted charge rates." We remand
the
case to HCFA to determine the correct amount of the disallowance based
on payments to three counties in excess of statewide maximum allowances.
General Background
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. In order to qualify for federal funding,
a state's claim for the cost of medical services must be in accordance
with an approved Medicaid state plan. Section 1903 of the Act. The
plan must fulfill certain statutory and regulatory requirements, and
must be approved by the Secretary of the Department of Health and Human
Services (HHS). Medicaid regulations, at 42 C.F.R. 447.252(b),
require that the state plan specify the methods and standards used by
the state Medicaid agency to set payment rates. The federal share of
payments made at a rate higher than authorized in the approved state
plan is considered an overpayment subject to recovery by HCFA. Section
1903(a) of the Act; Missouri Dept. of Social Services, DAB No. 1229
(1991); California Dept. of Health Services, DAB No. 1007 (1989); Ohio
Dept. of Public Welfare, DAB No. 637 (1985).
Generally, the Board gives deference to a state's interpretation of its
own state plan, so long as that interpretation is an official
interpretation and is reasonable in light of the language of the plan as
a whole and the applicable federal requirements. Missouri Dept. of
Social Services, DAB No. 1412 (1993), and the decisions cited therein.
However, the Board has held that states must follow the methods and
standards set out in their Medicaid plans, and cannot change their plans
unilaterally. California; Massachusetts Dept. of Public Welfare, DAB
No. 853 (1987).
Case Background -- Short-Doyle Mental Health Services
California law provides for a comprehensive system of community mental
health services known as the Short-Doyle program. The mental health
services at issue here were provided pursuant to interagency agreements
between DHS, the single State Medicaid agency for California, and DMH.
The agreements, incorporated as attachments to California's Medicaid
plan, called for DHS to provide the federal share and DMH the state
share of the cost of providing mental health services to eligible
Medicaid recipients. California Exhibits (Exs.) A-E. DMH entered into
contracts with counties to provide the mental health services. The
mental health services were provided in a variety of settings, and
included inpatient, outpatient, clinic, and day care services.
California Exs. A-E; HCFA Ex. 11, 8. To the extent that individuals
receiving services were federally eligible for Medicaid, California
claimed FFP in the payments made for services covered by Medicaid.
The interagency agreements between DHS and DMH incorporated the limits
on payments for mental health services contained in section 51516 of
title 22 of the California Code of Regulations (C.C.R.). That section
provided that California would pay the lowest of:
1. The provider's usual and customary charge to the general public
for the same or similar services;
2. The negotiated rates or negotiated net amounts as approved by
the State DMH for Short-Doyle Medi- Cal providers contracting on
a negotiated rate or negotiated net amount basis pursuant to
5705.2 of the Welfare and Institutions Code;
3. The provider's allowable cost of rendering the services, as
defined in 5715 of the Welfare and Institutions Code, for
Short-Doyle Medi-Cal providers not contracting on a negotiated
rate or negotiated net amount basis; and
4. The following maximum allowances. [specific allowances omitted]
1/
The parties agreed that limit no. 3, above, did not apply to the county
providers at issue in this appeal. California also conceded that it
paid three of the counties $2,332,096 above limit no. 4, the statewide
maximum allowances, and did not challenge the disallowance of the
federal share of those payments, which it reported was $1,166,048.
California Brief (Br.) at 10. HCFA reported that it had not verified
those figures, and requested that if the Board found for California, it
remand the case to HCFA to determine the actual amount owed. HCFA Br.
at 5-6, fn. 3.
The issues
The disallowance was based on an OIG report titled "Review of
Short/Doyle Medicaid Contract Rates for Fiscal Years 1985 through 1989."
HCFA Ex. 2. 2/ Based on that report, HCFA determined that California
had paid the providers in excess of limit no. 1, in 22 C.C.R. 51516
above, the provider's usual and customary charge to the general public
for the same or similar services. Instead, HCFA asserted, California
improperly reimbursed the county providers at limit no. 2, their
negotiated rates. HCFA asserted that this resulted in the counties
receiving reimbursement beyond either the reasonable cost of the
services or the customary charge for them, in violation of the limits in
California's Medicaid plan, and in violation of the basic Medicaid
principle that payment rates be consistent with efficiency and economy.
The charges for services that HCFA determined were the providers' usual
and customary charges were contained in charge schedules established by
each county's Board of Supervisors for the purpose of billing those
patients who have the ability to pay the rate, or who have insurance
coverage that will pay. California Br. at 5-6; Declaration of Walter J.
Hill, California Ex. G. 2. The parties generally referred to these
charges as the counties' posted charge rates. HCFA disallowed the
federal share of payments on behalf of eligible Medicaid recipients to
the extent they exceeded these posted charges.
HCFA asserted that the posted charge rates were the providers' customary
charges under section 51516, as DMH auditors had used the posted charges
to calculate Medicaid reimbursement ceilings for these providers for
many years. HCFA introduced memoranda and other materials to show that
California had used the counties' posted charge rates in auditing the
county providers.
California asserted that the posted charge rates were not the providers'
"usual and customary charges" because very few of the counties' clients
actually paid those charges, and that the posted charge rates were thus
fictitious, with no basis in reality. California Br. at 8. Instead,
California and Fresno reported, most of the patients receiving mental
health services through the counties were charged reduced fees
determined through California's "Uniform Method of Determining Ability
to Pay" (UMDAP). UMDAP, mandated by section 5718 of the California
Welfare and Institutions Code, is a sliding scale charge schedule which
determines an annual fee for a family, regardless of the type of service
or the number of visits, based on family size and income. California
Ex. G., 3. California and Fresno also argued that under the Medicare
regulations, the use of reduced fees qualified the counties as "nominal
fee providers," entitled to an exception from the lower of costs or
charges limit under Medicare. Thus, they argued, there were effectively
no customary charges to be applied as a limit under 22 C.C.R. 51516,
and the next higher limit would be applied.
Fresno reported that it had challenged DMH's audits, which applied the
posted charge rates as customary charges, beginning in 1981, based on
its position that it qualified as a nominal fee provider. Fresno
further reported that it had obtained an opinion from its Medicare
fiscal intermediary confirming that Fresno qualified as a nominal fee
provider under Medicare because of its use of a sliding scale charge
schedule under UMDAP. Fresno also reported that as a result of this
opinion, DMH had rescinded the audit exception that had been based on
the posted charges for the years in question here. Fresno asserted that
the intermediary's opinion had been reviewed and approved by HCFA, and
argued that HCFA should be estopped from now acting contrary to that
advice in taking this disallowance.
Analysis
Below, we first discuss the concept of "customary charges" under
Medicare as applied to these counties, and how California could
reasonably determine that the fact that the counties qualified as
nominal fee providers meant that they effectively had no "customary
charges" under Medicare. We then discuss why California could
reasonably apply the Medicare definition of "customary charges" in
interpreting its plan. We then address other arguments raised by HCFA
concerning whether California's interpretation is an official
interpretation, consistent with the Medicaid plan language and with
federal policy.
1. The Medicare definition of "customary charges" and related
principles
The Medicare provisions on "customary charges" are found in the Medicare
regulations at 42 C.F.R. Part 413, and in Chapter 26 of HCFA's Health
Insurance Manual, HIM-15. The concept of customary charges originally
arose in connection with the principle that reimbursement to providers
for services to Medicare beneficiaries is based on the lower of the
reasonable cost of providing those services (as defined at section
1861(v) of the Act) or the customary charges for the same services.
This limit on reimbursement is referred to as the lower of costs or
charges (LCC) limit. HIM-15 2600.
"Customary charges" are defined at section 2604.3 of HIM- 15 as --
[t]hose uniform charges listed in a provider's established charge
schedule which is in effect and applied consistently to most
patients and recognized for program reimbursement. Where a
provider does not have an established charge schedule in effect and
applied to most patients, the determined "customary charges" are
the most frequent or typical charges imposed uniformly for given
items or services. However, in either case, in order to be
considered customary charges, they must actually be imposed
uniformly on most patients and actually be collected from a
substantial percentage of "patients liable for payment on a charge
basis." Such charges must also be recognized for program
reimbursement.
(Emphasis in original.)
A provider's established charge schedule, when "imposed uniformly on
most patients" and "actually collected from a substantial percentage
of
`patients liable for payment on a charge basis'" will be considered the
provider's customary charges for Medicare reimbursement. HIM-15
2604.3. However, where a provider's established charge schedule does
not meet these criteria (or where the provider fails to make a
reasonable effort to collect its charges from a substantial percentage
of "patients liable for payment on a charge basis") the established
charge schedule will not be considered its customary charges.
Under the LCC limit, reimbursement for a provider whose customary
charges happen to be less than its reasonable cost of providing services
will ordinarily be limited to the customary charges. Public providers
who provide services at no charge or for only a nominal charge ("nominal
fee providers") are exempt from having their reimbursement limited to
such non-existent or nominal charges. 42 C.F.R. 413.13(f).
Specifically, a public provider's charges are considered nominal where
its aggregate customary charges are less than 60% (or 50% for cost
reporting periods beginning before October 1, 1984) of the reasonable
cost of services or items represented by such charges. Nominal charges
are charges which are usually token in nature and not intended to be
full reimbursement for the items or services furnished. 42 C.F.R.
413.13(f); HIM-15 2604.4. In such cases the provider will be paid
"fair compensation," the reasonable cost of providing the services.
42
C.F.R. 413.13(a); HIM-15 2616.
HIM-15 provides another, similar, method for determining reimbursement
limits for public providers who are required, by state or local law, to
offer services at charges based on patients' ability to pay and to
determine such charges through use of a sliding scale charge structure
which meets certain stated conditions. 3/ For such qualifying public
providers, the determination of nominal charges is made using the ratio
of sliding scale or discounted charges to the provider's full customary
charges. HIM-15 specifies several methods for calculating these
providers' discounted Medicare aggregate customary charges. HIM-15
2606.2(E). The reduced aggregate charges yielded by these calculations
are then compared to aggregate reasonable costs to determine if the
provider qualifies as a nominal fee provider. 42 C.F.R.
413.13(e)(iii); HIM-15 2616. California noted that these calculations
determine what a provider's customary charges really are. California
Br. at 9. HCFA did not dispute California's description.
California could reasonably determine that counties which qualified as
nominal fee providers effectively had no "customary charges" that
can be
applied as a limit on reimbursement. We note that providers who do not
actually use their established charge schedules are not entitled to have
those charges considered customary for Medicare reimbursement. Instead,
the established charge schedule is disregarded, customary charges are
calculated based on the provider's actual collections, and the
provider's Medicare reimbursement is correspondingly less than it would
have been if based on the established charge schedule. Qualifying
nominal fee providers, however, are excused from having their
reimbursement limited to charges that they actually impose and collect,
so California could reasonably conclude that they effectively have no
"customary charges" for Medicare reimbursement. Their established
charges are not "customary" because they are not imposed and collected
in accordance with the definition of customary charges, and the nominal
charges they do collect are not treated as a customary charge limit.
2. The counties as nominal fee providers
In support of the assertion that the county providers qualified as
"nominal fee providers," Fresno cited the opinion it had received
from
its Medicare fiscal intermediary as part of a dispute with California
over the amount of Medicaid reimbursement Fresno was entitled to receive
for providing Short-Doyle mental health services. The dispute began in
1981, Fresno reported, after DMH auditors had completed an audit of
Fresno's Medicaid cost report for FY 1977-1978 and applied an audit
exception. Declaration of Mike Cazares, Fresno Ex. 1, 3. Fresno
further reported that it had appealed the audit exception, and that the
appeal was combined with subsequent audit appeals concerning the same
issue. In 1988, Fresno reported, it contacted HCFA's Regional Office to
seek an opinion, and was referred by HCFA to the Medicare fiscal
intermediary.
Fresno's request to the intermediary, in January 1989, asked whether the
use of charges discounted through application of UMDAP made the county a
nominal fee provider exempt from the LCC limit under HIM-15. The
request stated that the county had a published schedule of full,
nondiscounted charges (the posted rates), and that pursuant to UMDAP,
patients were charged based on their ability to pay. The request also
stated that Fresno's Medicare aggregate customary charges were less than
50% of its reasonable costs for providing services to Medicare/Medicaid
patients. Fresno Ex. 1A. With the request, the county provided a
position paper outlining why it felt that it qualified as a nominal fee
provider. Fresno Ex. 1B. The position paper noted that California
followed HIM-15 and related regulations in applying the LCC limit to its
Short-Doyle Medicaid audits.
The intermediary's response to the request stated that UMDAP's intent
and purpose was to determine the patient's ability to pay and did
constitute a sliding scale structure, that the calculations of adjusted
Medicare charges in the paper's examples were correct under HIM-15
section 2606.2(E), and that an exception to the LCC principle was
available to Fresno, provided all other conditions in HIM-15 were met.
The intermediary's letter also noted that the HCFA Regional Office
agreed with the intermediary that UMDAP constituted a sliding scale
structure. 4/ Fresno Ex. 1C.
Both Fresno and California supplied worksheets and computations which
they said demonstrated that the counties in question here qualified as
nominal fee providers for the years at issue in this disallowance.
California Ex. G; Fresno Ex. D. HCFA did not question the validity of
these calculations. HCFA also did not dispute the conclusions in the
intermediary's opinion, nor make any specific finding that the posted
charge rates would be considered "customary charges" under the HIM-15
provisions.
Accordingly, in the absence of any findings or evidence to the contrary,
we conclude that California reasonably determined that the counties
could qualify as nominal fee providers, and that their posted charge
rates would not be treated as "customary charges" under the Medicare
regulations and HIM-15.
3. The application of the Medicare principles in interpreting
California's Medicaid plan
Above, we examined the Medicare definition of customary charges and the
concept of nominal fee providers as applied to the counties here. HCFA
argued that these Medicare principles could not be applied to
California's Medicaid plan, since the plan failed to specify that
Medicare principles would be applied in determining limits on
reimbursement to the counties. HCFA noted that the only specific
reference in the plan to Medicare cost principles was the definition of
allowable costs as costs permitted by applicable Medicare standards and
principles of retrospective reimbursement. Plan Att. 4.19-A, at 3, HCFA
Ex. 6. HCFA argued that this reference was not applicable here, where
the state plan does not include costs as a limit for Short-Doyle
providers contracting on a negotiated rate basis. 22 C.C.R. 51516(a).
For the following reasons we conclude here that it was reasonable for
California to look to those Medicare principles in interpreting the
meaning of customary charges as used in its plan:
o The phrase "customary charge" as used in 22 C.C.R.
51516 is essentially a term of art developed for the Medicare
program and defined in the Medicare regulations and administrative
guidelines, i.e,
HIM-15.
o California has long applied the provisions of HIM-15 in
interpreting its Medicaid plan. Specifically, a November 1977
memorandum from California to local mental health programs cited
Chapter 26 of HIM-15 as one of the sources of the lower of cost or
charges principle and the routine cost limitations, and advised
that the lower of cost or charges comparison was based on the
Medicare model as set forth in HIM- 15, sections 2610 and 2612.
HCFA Ex. 8.
o The federal Medicaid regulations adopt Medicare payment limits as
limits on a state's aggregate Medicaid payments to various classes
of providers. See 42 C.F.R. 447.272, 447.321. It is thus
reasonable to conclude that California's intent in imposing a limit
based on customary charges was to assure that the Medicaid upper
limits were not exceeded. Since the Medicaid upper limits utilize
the Medicare limits, the Medicare definition of customary charges
should be applied in interpreting those limits.
o Provisions of the plan refer to Medicare principles in HIM-15.
HCFA Ex. 6.
o HCFA approved California's Medicaid plan and did not assert that
HCFA would not have approved the plan if it had known that the
counties could be paid at their negotiated rates because they
qualified as nominal fee providers.
Accordingly, California properly considered the Medicare definition of
"customary charges" and its related concepts in determining whether
the
posted charge rates constituted the providers' customary charges for the
purposes of the reimbursement limits adopted in its Medicaid plan.
HCFA argued that the Medicare principles were inapplicable because
California failed to comply with 42 C.F.R. 447.252(c), which requires
state Medicaid plans to specify if Medicare cost limits from 42 C.F.R.
413.30 will be applied on an individual provider basis. This argument
fails to recognize the distinction in HCFA regulations between cost
limits and payment limits. The Medicare cost limits from section 413.30
act as limits on particular cost items used to calculate payment rates.
5/
Customary charges, on the other hand, are part of Medicare payment
limits, which are limits on total payment amounts, rather than on
individual cost items which are used in setting a provider's rates.
Rather than applying the Medicare cost limits to individual providers,
California used Medicare reimbursement principles to interpret the term
"customary charges" which is used as one of the payment limits in
its
Medicaid plan. Accordingly, we find that section 447.252(c) is not
applicable to the facts in this appeal, and did not preclude California
from using the Medicare definition of customary charges in interpreting
its Medicaid plan.
4. HCFA's interpretation of California's Medicaid plan
HCFA based the disallowance solely on its determination that California
failed to adhere to the payment limits incorporated into its approved
Medicaid plan. HCFA read the plan as requiring that the providers'
posted charge rates be considered the providers' customary charges to be
applied as a limit on reimbursement for mental health services.
However, the payment limits at 22 C.C.R.
51516 make no reference to a provider's posted charge rates. The
disallowance was thus based on HCFA's interpretation of California's
Medicaid plan, an interpretation which California has disputed, rather
than on the plain language of the plan itself. As noted earlier, where
there is a question of the interpretation of a state plan, the Board
will generally defer to a state's official, reasonable interpretation.
HCFA argued that California had long interpreted its plan as requiring
that the providers' posted rates be considered their customary charges,
and had audited the providers on this basis for many years. However, we
note that those audit determinations were challenged by Fresno beginning
in 1981, when the audit exception based on the posted charge rates was
first applied by DMH. 6/ (In this regard, the OIG audit report
confirmed that California had allowed a large backlog of unresolved
audit exceptions to accumulate over the years. HCFA Ex. 2, at 3.)
Fresno's challenge began a dispute that lasted many years and culminated
when Fresno obtained the opinion from the intermediary confirming its
status as a nominal fee provider. It was not until that time that
application of the term "customary charges" to the specific facts
of the
county providers' actual charge methods was resolved for California.
We also find that HCFA's reliance on materials issued in 1977, 1987, and
1988 by California as establishing a policy of using the providers'
posted charge rates as their customary charges is misplaced. 7/ Those
memoranda do not consider the effect of application of the UMDAP sliding
scale charge schedule to the established charges, and do not address
whether the posted charge rates would still be considered customary
charges even after they had been reduced in most cases by the
application of UMDAP. For example, the letter that California sent to
providers in 1977 advised them that the actual cost of each mode of
service within each provider would be compared to what was charged the
general public for that service. HCFA Ex. 7. However, that letter did
not address whether the posted charge rates would still be considered
the providers' charges "to the general public" where they were rarely
imposed because most patients paid reduced charges because of UMDAP.
The other materials are similarly silent on this question. Accordingly,
we find that these materials do not reflect a prior policy preventing
California from considering whether the counties qualified as nominal
fee providers based on their offering services at reduced rates through
UMDAP.
We also note that HCFA's interpretation of California's Medicaid plan
was based on its contention that the provisions of HIM-15 were not
applicable in determining reimbursement under the plan. However, there
was never any dispute between California and the providers over whether
HIM-15 applied. The record indicates that California had always applied
HIM-15 in interpreting payment limits in its plan. Rather, the issue
was over how HIM-15 applied to these particular counties and whether
they could qualify as nominal fee providers. California, through its
process for resolving audit issues, ultimately determined how HIM-15
applied to these providers in the specific circumstances here. The fact
that there was a dispute over this issue was made clear in the letter to
the intermediary. In this respect, the OIG auditors relied too heavily
on the fact that there had been these DMH audit determinations, without
considering that the auditors' recommendations were ultimately
overridden by California's adoption of a policy consistent with the
Medicare fiscal intermediary opinion.
The Board has held that a plan interpretation that a state advances on
appeal merely as an after-the-fact justification for its excessive
payments is not entitled to deference. Oklahoma Dept. of Human
Services, DAB No. 1183 (1990); Georgia Dept. of Medical Assistance, DAB
No. 987 (1988). However, that is not the case here. Rather, the
record supports the conclusion that California resolved the issue of how
HIM-15 applied in determining reimbursement limits for specific county
providers as part of the resolution of a protracted dispute with its
providers. Thus, this is not a situation where a state advances a new
interpretation for the first time in a federal disallowance proceeding.
Instead, California had a longstanding policy of interpreting its
Medicaid plan in light of Medicare principles.
We further find that it was reasonable for California to interpret the
reference in its plan to customary charges in light of the Medicare
definition of that term. Considering whether the counties could qualify
as nominal fee providers gave reasonable effect to the plan's longtime
adoption of the HIM-15 Medicare principles. Applying the Medicare
customary charge principles is also reasonable in light of one likely
purpose of adopting the Medicare definition of customary charge:
ensuring conformance to the Medicaid aggregate upper payment limits,
which are based on Medicare reimbursement limits.
Accordingly, HCFA has not shown that California should be precluded from
applying its interpretation of its Medicaid plan. 5. HCFA's argument
on the nominal fee provider provision
HCFA argued that California had the option of explicitly providing an
exemption for nominal fee providers because that is permitted by the
Medicaid regulation at 42 C.F.R. 447.271(b). (That regulation makes
customary charges an upper limit on payments for inpatient hospital
services under Medicaid, but permits a state to pay nominal fee
providers at rates that would be used if the charges were equal to or
greater than costs.) Citing several prior Board decisions, HCFA argued
that the requirement that states specify their reimbursement methods in
their state plans meant that California was required to elect explicitly
to exempt nominal fee providers if it intended to do so. HCFA further
argued that California's Medicaid plan "logically precluded" application
of the LCC principle by specifying that negotiated rates would be used
in place of costs for counties that had such rates and by adding
statewide maximum allowances as an alternative limit.
While an explicit exemption for nominal fee providers in the plan would
have avoided the dispute here, we reject HCFA's arguments, for the
following reasons:
o The record indicates that California's plan originally had a lower
of costs or charges provision. HCFA Exs. 7, 8. The provision at
issue here could reasonably be viewed as simply a modification of
that principle by adding other limits. HCFA pointed to nothing
indicating that California intended to adopt a different view of
what were customary charges when it changed the provision to add
these other limits.
o Although the exemption for nominal fee providers is explicitly
stated at 42 C.F.R. 447.271(b) and elsewhere, HCFA's own
descriptions of that exemption indicate that it can reasonably be
viewed as part of the interpretation of what are the type of "usual
and customary charges to the general public" that were intended to
be used as payment limits. 51 Fed. Reg. at 34,790, 34,796 (1986).
Moreover, those discussions indicate that it is the discounted
charges of such a provider which might be considered customary, not
a nondiscounted fee schedule like the posted charge rates at issue
here. It is highly unlikely that California intended to treat as
upper limits the discounted amounts a nominal fee provider charges
and, indeed, HCFA did not argue here that the discounted amounts
should be so treated. 8/
o HCFA's reliance on the Board's decisions in California and
Massachusetts, which HCFA cited for the holding that states must
follow the methods and standards set out in their Medicaid plans
and cannot change their plans unilaterally, is misplaced. These
cases are distinguishable because they involved changes in state
policy. Contrary to what HCFA's arguments implied, there is no
evidence that shows that California previously had officially
adopted a policy that the counties' posted charge rates were
customary charges, notwithstanding the use of the UMDAP sliding
scale charge schedule.
HCFA also argued that the exemption of nominal fee providers from the
requirement that reimbursement be limited to customary charges, in 45
C.F.R. 413.13, applied only to services provided by specified
entities, such as hospitals, and not to services provided by clinics,
which presumably encompassed some of the mental health services at issue
here. However, we did not find that these providers fell within the
specific aegis of Part 413. Rather, as noted above, we found it
reasonable to apply Medicare principles to interpret the reference in
California's Medicaid plan to customary charges as a limit on Medicaid
reimbursement. The fact that the regulation applies only to certain
classes of providers does not make it inappropriate to use the
regulation to construe the meaning of this term as applied to broader
classes of Medicaid providers. Indeed, California's Medicaid plan
clearly applies the customary charge limit to all Short-Doyle services.
6. Other arguments
As noted above, nominal fee providers are exempt from having
reimbursement limited to their customary charges, and instead receive
"fair compensation," defined as the reasonable cost of providing the
services. 42 C.F.R.
413.13(a); HIM-15 2616. HCFA argued that California violated this
principle by paying the county providers their negotiated rates for
services, rather than the reasonable cost of providing those services.
HCFA argued that it was not appropriate for California to treat the
counties as nominal fee providers since California's Medicaid plan did
not use reasonable cost as one of the applicable reimbursement limits.
HCFA argued that paying the providers their negotiated rates, even where
they exceeded the actual cost of the services, contravened the LCC
principle's purpose of ensuring that nominal fee providers receive the
reasonable cost of the services they provide, as well as the principle
that Medicaid payment rates be consistent with efficiency and economy,
as reflected in sections 1902(a)(13)(A) and 1902(a)(30)(A) of the Act.
HCFA argued that reimbursing these providers at their negotiated rates
resulted in their receiving a profit over both the cost of the services
and their posted charges. 9/ HCFA further argued that reimbursing the
counties based on their negotiated rates would leave "virtually no
restraint" on the reimbursement they receive. HCFA Br. at 7.
These arguments have no merit. The significance of the counties' status
as nominal fee providers was that neither their posted charges nor their
discounted charges were customary charges under Medicare and under 22
C.C.R. 51516 as incorporated into California's Medicaid plan.
Since there were no customary charges for these particular providers,
the next appropriate limit in the plan would be applied. Under 22
C.C.R. 51516(a), those other applicable limits were the providers'
negotiated rates, or the statewide maximum allowances. HCFA did not
dispute that California's approved Medicaid plan incorporated the
negotiated rates and the maximum allowances as limits on reimbursement
for contract providers of mental health services. Thus, HCFA was aware
that these providers could conceivably be reimbursed at those levels.
HCFA also did not dispute that California's Medicaid plan did not
incorporate reasonable cost as one of those limits. A state is entitled
to payments for expenditures made in accordance with its approved
Medicaid plan and federal requirements.
Accordingly, HCFA's assertion that the county providers were reimbursed
in excess of their reasonable costs does not provide a basis for
sustaining this disallowance, where the providers were paid at a level
specified in California's Medicaid plan, and where the plan does not
include reasonable costs as one of its reimbursement limits.
Additionally, the possibility that some counties may have received
reimbursement at their negotiated rates greater than the reasonable cost
of the services they provided does not necessarily mean that they were
paid contrary to the principle, cited by HCFA, that Medicaid payment
rates be consistent with efficiency and economy. As the Board has noted
with respect to Medicaid prospective reimbursement systems, the fact
that the rates paid in any given year are not retrospectively adjusted
to reflect the cost of services actually provided in that year gives
providers an incentive to keep costs down, since they are entitled to
the difference between actual costs and the amount paid through the
rate, if the latter is higher. North Carolina Dept. of Human Resources,
DAB No. 1110 (1989). Any difference that existed between the counties'
negotiated rates and their reasonable costs may have resulted from this
incentive to keep costs down that the plan afforded by permitting
reimbursement at the counties' negotiated rates (which were set in
advance based on prior years' costs).
Finally, we note that the payments to the counties could still be
subject to disallowance if they violated the federal Medicaid
regulations. Those regulations adopt Medicare payment limits as limits
on a state's aggregate Medicaid payments to various classes of
providers. Specifically, 42 C.F.R. 447.272 requires that a state's
aggregate payments to each group of health care facilities (i.e.,
hospitals, nursing facilities and intermediate care facilities) for
inpatient hospital and long-term care facility services may not exceed
the amount that can reasonably be estimated would have been paid for
those services under Medicare principles, and section 447.253(b)
requires states to assure that their proposed payment rates will not
exceed the upper limits as specified in section 447.272. 52 Fed. Reg.
28,147 (1987). 10/ For outpatient hospital and clinic services, FFP is
not available for any payment that exceeds the amount that would be
payable to providers under comparable circumstances under Medicare, and
payments for outpatient hospital services may further not exceed the
total payments received by all providers from beneficiaries and carriers
and intermediaries for providing comparable services under comparable
circumstances under Medicare. 42 C.F.R. 447.321.
HCFA has justified imposing Medicare limits on Medicaid reimbursement as
implementing the requirement of section 1902(a)(30) of the Act that
payments be consistent with efficiency and economy. 52 Fed. Reg.
28,141-44 (1987). Thus, payments within the aggregate limits should be
considered consistent with that principle. HCFA did not determine that
any of the applicable federal payment limits in the Medicaid regulations
were violated. In the absence of any such finding, we conclude that
these payments were permissible since they were made consistent with
California's reasonable interpretation of its approved Medicaid plan and
with federal requirements.
Conclusion
For the reasons explained above, we find that California's
interpretation of its Medicaid plan, under which the counties' posted
charges were not their customary charges as used as one of the
reimbursement limits incorporated into the Medicaid plan, was
reasonable. Accordingly, we reverse the disallowance to the extent that
it was based on the posted charge rates. As California did not contest
the disallowance of payments to three counties above the maximum
allowances in 22 C.C.R. 51516, we remand the appeal to HCFA for the
limited purpose of determining the amount by which the OIG auditors had
found that California's payments had exceeded those allowances and to
revise the disallowance accordingly. If California disagrees with
HCFA's determination of the disallowance amount, it may return to the
Board on that limited issue within 30 days after receipt of HCFA's
determination.
Donald F. Garrett
M. Terry Johnson
Judith A. Ballard Presiding Board Member
1. California's Medicaid plan contains similar reimbursement limits
for acute inpatient hospital mental health services. Plan Attachment
(Att.) 4.19-A, HCFA Ex. 5. HCFA characterized these limits as
essentially identical to those in 22 C.C.R. 51516.
2. Fresno requested that the OIG report on which the disallowance was
based be stricken from the record because HCFA had refused to disclose
information referred to in the report. Fresno noted that report states
that OIG was advised by the HHS Office of General Counsel that
California's position was inconsistent with the language of its Medicaid
plan. Fresno reported that HCFA counsel refused to tell Fresno what
that advice was, citing attorney-client privilege. Inasmuch as we have
determined that this disallowance should be reversed, however, Fresno is
clearly not prejudiced by the inclusion of the OIG report in the record.
Accordingly, we reject Fresno's request to strike the OIG report.
3. Those conditions are as follows:
1. The provider must have a published schedule of its full
(nondiscounted) charges.
2. The provider's revenues for patient care must be based on
application of the published charge schedule.
3. The provider must maintain written policies for its process of
making patient indigency determinations.
4. The provider must maintain sufficient documentation to support
the amount of "indigency allowances" written off in accordance with
the
above procedures.
HIM-15 2606.2(D),(E).
4. Fresno argued that since the intermediary's opinion stated that it
had been reviewed by the HCFA Regional Office and that HCFA had agreed
with it, HCFA should be estopped from taking this disallowance. Since
we are reversing the disallowance, we need not reach this argument. Our
decision is based on our determination that California's interpretation
of its Medicaid plan was reasonable, and on the absence of any finding
by HCFA that these payments exceeded federal Medicaid reimbursement
limitations. We make no finding regarding Fresno's claim that HCFA
should be estopped from disagreeing with California's plan
interpretation.
5. HCFA has said that 42 C.F.R. 413.30 sets forth "the general rules
under which HCFA may establish limits on provider costs recognized as
reasonable in determining Medicare program payments, and . . . the
general rules under which HCFA may establish limits on the operating
costs . . . that are recognized as reasonable in determining Medicare
program payments. " 51 Fed. Reg. 34,800 (1986).
6. The audits HCFA cited were conducted by DMH. See HCFA Ex. 11;
California Exs. A-E. However, as the single state Medicaid agency, DHS
would normally be responsible for interpreting the provisions of
California's Medicaid plan.
7. These materials consisted of the following:
o A letter that California sent to providers in 1977 instructing them
to assure that the posted rates charged patients, insurance
carriers, and other third-party payors were adequate to cover
actual costs. The letter advised that at the time of audit, the
actual cost of each mode of service within each provider would be
compared to what was charged the general public for that service,
and that an exception would be taken if the cost exceeds the charge
rate. HCFA Ex. 7.
o A November 1977 memorandum California issued to local mental health
directors, program chiefs, and administrators discussing
application of the lower of cost or charges principle to
reimbursement for Short-Doyle services. The memorandum explained
how services for various types of providers would be aggregated for
the purpose of making the lower of cost or charges comparison. The
memorandum further stated that the aggregated charges used in
applying the cost limits would be based on the county's "customary
posted charge rates for a particular service made to the general
public," multiplied by the audited units of service. HCFA Ex. 8.
o A 1987 DMH audit checklist which stated that total customary
charges for the LCC comparison would be computed by multiplying the
audited Medicaid units of service by the appropriate charge rates
indicated in the schedule of charges. HCFA Ex. 9, at 11.
o A 1988 memorandum to local mental health directors, program chiefs,
and administrators clarifying DMH's policy concerning audit
application of section 51516. The memorandum stated that
determining total charges as defined in HIM-15, chapter 26 would
require "knowledge of the specific charge rates of each contract
provider rendering Short-Doyle Medicaid services to the county as
well as the rates approved by the County Board of Supervisors for
all county operated programs," and that the "charge rates" would
be
multiplied by the audited units of service. HCFA Ex. 10.
8. We note that Fresno specifically informed the intermediary that it
had a published schedule of its full charges (the posted rates) as
required by HIM-15
2606.2(D),(E) to qualify as a nominal fee provider on the basis of a
sliding scale charge schedule.
9. HCFA referred to an internal DMH memorandum, dated March 30, 1990,
in which an official estimated that, according to his preliminary
analysis, "the FFP generated under the SB 900 process during [FY
1987-88] was 12% higher than it would have been for county plan counties
and 8% higher than cost." HCFA Ex. 12. The SB 900 counties are those
that have negotiated rates with DMH, including the 14 counties at issue
in this appeal. Fresno Ex. 1, 10.
10. Prior to that regulation, states were required to assure that
their estimated proposed Medicaid payment rates were reasonably expected
to pay no more in the aggregate for inpatient hospital and long-term
care facility services than the amount that the state reasonably
estimated would be paid for the services under the Medicare principles
of reimbursement. 447.253(b)(2); 48 Fed. Reg. 56,057