Oklahoma Department of Human Services, DAB No. 1575 (1996)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT: Oklahoma Department of Human Services

DATE: May 9, 1996
Docket No. A-96-42
Control No. 95/001/MAP
Decision No. 1575

DECISION

The Oklahoma Department of Human Services (Oklahoma)
appealed a disallowance of $7,165,817 in federal
financial participation (FFP) claimed under the Medicaid
program. The disallowance represents the federal share
of payment adjustments that Oklahoma made for the Hissom
Memorial Center (Hissom), a State-operated intermediate
care facility for the mentally retarded (ICF/MR), for
services provided during State fiscal years (FYs) 1989
and 1990. Oklahoma made the adjustments after
determining that Hissom qualified for an exception to the
routine cost limits that otherwise would apply in
calculating Hissom's Medicaid reimbursement rates using
Medicare cost reimbursement principles, as required by
the State plan. HCFA took the disallowance on the
grounds that 1) the exception was not timely requested,
and 2) Oklahoma's total payments, as adjusted, for FYs
1989 and 1990 exceeded the aggregate upper payment limits
applicable to State-owned ICFs/MR for those years.

There is no dispute here that the payment adjustments at
issue were properly calculated as adjustments to the
rates paid for covered services to Medicaid eligible
individuals. Moreover, HCFA agreed that Hissom qualified
for the exception, if timely requested. The issues here
are whether Medicare procedures apply in determining
timeliness of an exception request and whether the
adjustments exceeded upper payment limits for ICF/MR
payments. For the reasons stated below, we conclude that
the exception request was timely made in accordance with
Oklahoma's State plan. We also conclude that HCFA did
not show here that the upper payment limits, properly
calculated, were exceeded. Accordingly, we reverse the
disallowance.


Statutory and Regulatory Background

When the Medicaid program under title XIX of the Social
Security Act (Act) was first implemented, states
reimbursed long-term care facilities for services using
the retrospective system of reimbursement established for
the Medicare program under title XVIII of the Act. That
system pays facilities at an interim rate, which is then
retrospectively adjusted to actual "reasonable costs"
after the end of a cost reporting period. Reasonable
costs are determined using Medicare cost reimbursement
principles.

In the 1970's, states were permitted to adopt other
reimbursement systems for Medicaid, but the systems had
to be approved by the Secretary and reimbursement could
not exceed what would have been paid using the Medicare
cost reimbursement principles. See generally 41 Fed.
Reg. 27,300 (July 1, 1976).

In 1981, Congress adopted the "Boren Amendment," which
amended section 1902(a)(13)(A) of the Act to permit
states greater flexibility in developing reimbursement
systems. Under the Boren Amendment, a state must provide
assurances that the rates set are reasonable and adequate
to meet the costs that must be incurred by efficiently
and economically operated facilities to provide services
in accordance with all applicable laws, regulations and
safety standards.

HCFA regulations on Medicaid reimbursement systems for
long-term care facility services are at 42 C.F.R. Part
447, Subpart B. FFP is not available in a state's
expenditures for such services that are in excess of the
amounts allowable under this subpart. 42 C.F.R.
 447.257. The Medicaid state plan must comprehensively
set out the methods and standards used by the agency to
set payment rates. 42 C.F.R.  447.252. The state must
make assurances, satisfactory to HCFA, that certain
requirements are met. 42 C.F.R.  447.253(a). Section
447.253(a)(2) provides that one of the assurances the
state must make is that the proposed payment rate will
not exceed the upper payment limits specified in section
447.272. HCFA established these limits based on section
1902(a)(30) of the Act, which requires that payments be
consistent with efficiency, economy, and quality of care.
See 42 C.F.R.  447.250(b). The upper payment limit for
each group of health care facilities is that amount that
can be reasonably estimated would have been paid for
those services under Medicare payment principles. 42
C.F.R.  447.272(a). Additionally, aggregate payments to
each group of state-operated facilities (including
ICFs/MR) may not exceed the amount that can reasonably be
estimated would have been paid under Medicare payment
principles. 42 C.F.R.  447.272(b).

According to section 447.253(e), each state must provide
an appeals procedure that allows providers an opportunity
to submit additional evidence and to receive prompt
review of issues that arise involving payment rates.

Although the Boren Amendment permits states to develop
their own systems, some states still choose to adopt the
Medicare system, in whole or in part. The Medicare cost
reimbursement principles are set out in HCFA regulations
at 42 C.F.R. Part 413. One general principle is that
reimbursable provider costs may not exceed certain limits
established by HCFA. 42 C.F.R.  413.30(a)(2). These
limits include a schedule of limits on the reimbursement
of routine service costs. 52 Fed. Reg. 37098 (1987); 56
Fed. Reg. 13317 (1991). A provider, however, may request
and receive an exception to these limits. 42 C.F.R.
 413.30(c). One exception is for "extraordinary
circumstances." 42 C.F.R.  413.30(f)(2).

Factual Background

The following facts are undisputed. The Oklahoma
Medicaid Plan in effect during State FYs 1987-1994
reimbursed State-operated ICF/MR facilities on the basis
of a retrospective cost reimbursement methodology
following Medicare cost reimbursement principles. During
the years in issue, the three state-owned and operated
ICF/MR facilities were Enid State School, Pauls Valley
State School, and Hissom.

Oklahoma originally determined the payment rates for FYs
1989 through 1993 for all of its ICFs/MR by allowing
routine costs only up to the routine cost limit amounts
established by HCFA. HCFA reimbursed the FFP claimed for
these payments made to the facilities during those years.

During FYs 1989-1993, Hissom incurred a dramatic increase
in costs as the result of a court order to improve its
services and conditions. Thus, during those years, the
routine costs at Hissom exceeded the facility's routine
cost limits. The issue of whether Hissom should be
granted an exception to these limits first arose in
February 1994. On April 25, 1994, an exception was
requested for Hissom. On April 27, 1994, Oklahoma
granted Hissom's request. Also on April 27, 1994,
Oklahoma submitted a request to HCFA for Hissom for an
exception to the cost limits for the period covered by
FYs 1989-1993. Oklahoma claimed FFP in the amount of
the adjustments to Hissom's payment rates made as a
result of Oklahoma granting the exception.

On July 22, 1994, HCFA requested documentation to help
determine the allowability of Oklahoma's claim for
additional reimbursement for Hissom. After receiving the
documentation, HCFA agreed that Hissom's increased costs
in complying with the court order were due to
"extraordinary circumstances" under the criteria of 42
C.F.R.  413.30(f)(2). However, HCFA found that only
requests for exceptions regarding cost reports for FYs
1992 and 1993 were timely. HCFA reimbursed the FFP
claimed for payment adjustments for those two years only.

HCFA deemed the requests for the exceptions for FYs 1989,
1990 and 1991 to be untimely. HCFA based this
determination on the Medicare regulation at 42 C.F.R.
 413.30(c). That section requires that providers submit
a request for an exception to an "intermediary" within
180 days of the date of the intermediary's "notice of
program reimbursement" to the provider. HCFA recognized
that, unlike Medicare, Medicaid does not use
intermediaries, nor did Oklahoma issue a formal "notice
of program reimbursement" to the provider. Thus, HCFA
measured the 180-day time period from the date of final
settlement of the cost reports for each fiscal year
because that was Oklahoma's determination of the total
amount of reimbursement due the provider. Based on the
180-day rule, HCFA deferred payment of FFP for these
years.

HCFA later reconsidered Oklahoma's claim and in a letter
dated October 26, 1995, HCFA disallowed Oklahoma's claim
for the reimbursement adjustments for Hissom only for FYs
1989 and 1990. HCFA mentioned the 180-day time period
for an exception request and referred to the "other
issue" as the upper payment limit requirement at 42
C.F.R.  447.272(b). HCFA Disallowance Letter at 2-3.
HCFA paid the FFP claimed for adjusted payments made to
Hissom for FY 1991 because HCFA found that payments to
the three state-owned facilities did not exceed the upper
payment limit for that year.

Oklahoma appealed, arguing that it was not required under
its State plan to follow Medicare procedures in granting
an exception to the routine cost limits and that the
upper payment limits were not exceeded. In its response,
HCFA argued that its disallowance was based on the upper
payment limit requirements; HCFA did not specifically
argue that the State plan adopted the 180-day time limit
in the Medicare regulations. Since both issues were
raised in the disallowance letter and since they are
related, we discuss them both below.

Analysis

1. Whether the 180-day time limit applies

As noted above, states are required to make payments for
Medicaid services in accordance with the methods and
standards in the state plan. The Board has previously
held that because of the flexibility given to states in
the Boren Amendment a state's interpretation of its own
plan is entitled to deference "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."
California Dept. of Health Services, DAB No. 1474, at 3
(1994). A state's interpretation of its state plan,
however, is not entitled to deference where a state's
proposed interpretation does not give reasonable effect
to the language of the plan as a whole, where the
interpretation appears to have been adopted for the
purposes of litigation, or where the administrative
practice of the state was not consistent with the
proposed interpretation. See South Dakota Dept. of
Social Services, DAB No. 934, at 4 (1988). The Board
gives greater scrutiny to payments made to state-owned
facilities in determining whether this standard is met.
Id.

In this case, Oklahoma's application of the exception
provision is not an issue. HCFA found that the exception
was warranted because extraordinary circumstances existed
that were beyond the control of the provider that caused
the costs to exceed the cost limits. HCFA therefore,
agreed with Oklahoma that the exception was proper, if
timely requested.

Oklahoma took the position that the exception was timely
requested pursuant to its State plan. We find that
Oklahoma's interpretation of its plan is reasonable.

Oklahoma asserted that it had not adopted Medicare
procedures, but had established its own procedural rules
for rate appeals, citing its regulation at Section OAC
340:125-3-20-(b). Oklahoma asserted that this state
regulation applies to rate appeals by both ICFs/MR and
other nursing facilities and is incorporated into its
State plan by reference, specifically, by the assurance
that Oklahoma provided, in its State plan amendment
transmittals, that it complies with the rate appeals
requirement of 42 C.F.R.  447.253(c). According to
Oklahoma, its rate appeals regulation contains no time
limit for seeking a rate adjustment. Oklahoma also
argued that nothing in the Medicaid statute or
regulations required Oklahoma to limit the time within
which a State-operated ICF/MR could request a review of
its reimbursement amount.

HCFA did not dispute Oklahoma's interpretation of its
plan as permitting a provider to seek a rate adjustment
at any time. HCFA also did not point to anything in the
State plan or practice or in federal requirements that is
inconsistent with Oklahoma's own interpretation of the
procedural rules that apply.

Moreover, simply because Oklahoma adopted the Medicare
cost reimbursement principles in its State plan does not
mean it was required to follow the Medicare procedures
(an argument which HCFA did not in any event specifically
make). The Board has previously noted that not every
procedural rule applicable to the Medicare program
applies merely because a state plan requires a state to
apply Medicare principles of reimbursement. See Alaska
Dept. of Health and Social Services, DAB No. 573 (1984).
Also, HCFA has recognized that, while Congress intended
that states retain for providers an opportunity to avail
themselves of an exception process when they believe an
exception is warranted, states do so by providing an
appeals procedure in the state plan, as required by 42
C.F.R.  447.253(c). State Medicaid Manual, 6006, 3-90.

Therefore, we conclude that the 180-day rule does not
apply in determining Medicaid reimbursement rates under
the Oklahoma State plan, and that the exception for
Hissom was timely requested for FYs 1989 and 1990.

2. Whether the payments exceeded the upper payment
limits

In its brief to the Board, HCFA said that it based its
disallowance on the upper payment limit requirements.
Specifically, HCFA said that it had determined that the
retroactive claim for FYs 1989 and 1990 exceeded the
upper payment limits computed by Oklahoma for those
years. HCFA stated that--

the amount of the aggregate payments made to
the three State operated facilities during
fiscal years 1989 and 1990 was identical to the
amount that "would have been paid under
Medicare cost payment principles for those
years." 42 C.F.R.  447.272(b). Consequently,
because payments made to the three State
operated facilities during FYs 1989 and 1990
had equalled the maximum Medicare payments when
made, any additional retroactive Medicaid
payment made to Hissom for either FY 1989 or
1990 made the aggregate Medicaid payments
exceed the maximum amount payable under
Medicare for facilities for that year, the
upper payment limit set by 42 C.F.R.
 447.272(b).

HCFA brief at 5 (emphasis in original).

The problem with HCFA's rationale is that it uses as the
upper limits the amounts it said were calculated during
the years in question. There is nothing in the
regulations that prevented Oklahoma from recomputing the
upper limits once it determined that an exception to the
routine cost limits should apply. In this case, HCFA
acknowledged that extraordinary circumstances existed
which would make granting the exception consistent with
the Medicare regulations (other than the 180-day rule,
which, as we determined above, is purely procedural).
Since HCFA acknowledged that the amount of the aggregate
upper limit for State-owned ICFs/MR should be identical
to the amount of the aggregate payments calculated under
Oklahoma's reimbursement system, it appears that HCFA
used an upper limit calculated without accounting for the
exception. That HCFA in effect applied the Medicare 180-
day procedural rule in determining what upper payment
limits apply is confirmed by HCFA's argument that
Oklahoma's "provider relief provision" can "have no
effect to waive or raise the total aggregate payment
limit defined and imposed by 42 C.F.R.  447.272." Id.
at 6.

HCFA's position here, however, is inconsistent with its
own policy. In section 6005 of HCFA's State Medicaid
Manual, HCFA specifically stated that, in calculating
upper payment limits, "States need not follow exactly
every detailed procedure used to implement [the Part 413
cost limit] principles in the Medicare program, so long
as the principles are satisfied" and may "choose to
depart from the Medicare procedures used to implement the
principles . . . ." See State Medicaid Manual Section
6005 (reprinted in Medicare and Medicaid Guide (CCH)
14,725.71 at 6399-23-3, Oklahoma Exhibit (Ex.) 4). In
section 6005.1 of the Manual, HCFA further explained that
states "possess the flexibility to grant requested
exceptions from or exception to the limits in a manner
similar to that used by Medicare." See Medicare &
Medicaid Guide (CCH) 14,725 at 6399-23-4, Oklahoma Ex. 4.
Therefore, HCFA recognized that exceptions to routine
cost limits do raise the total aggregate upper payment
limits and that Medicare procedures do not apply.
Indeed, applying the Medicare procedural rules in
calculating an upper payment limit would not make sense.
First, not all states adopt the Medicare cost
reimbursement principles. In those states, the upper
payment limit is purely a state calculation and providers
that do not participate in Medicare (such as ICFs/MR)
would not be involved in requesting exceptions using the
Medicare rules. Second, even in states that do adopt the
Medicare system, states may adopt a different appeals
procedure. Applying one procedure for purposes of
determining payment rates and another for determining the
upper payment limits would be too confusing. Also, as
noted above, the 180-day rule in the Medicare procedures
at 42 C.F.R.  413.30(c) refers to the notice issued by
the "intermediary"; this term is used in the Medicare
program but not in Medicaid.

Moreover, contrary to what HCFA argued, using an
aggregate upper payment limit which includes an
adjustment for any exception to the routine cost limits,
properly granted under state procedures, does not
contravene the purpose of the upper payment limit
provision at 42 C.F.R.  447.472(b). HCFA argued that
this regulation was promulgated "in large part to prevent
a state from paying its own facilities more than its
allowable costs . . . ." HCFA brief at 5 (emphasis in
original). HCFA quoted the following statement from the
preamble to the regulation:

Although not specifically stated as such,
[42 C.F. R.  447.272(b)] was intended to preclude a
State Medicaid agency from paying State-owned or
operated facilities more than would be payable under
Medicare principles.

52 Fed. Reg. 28,141, 28,144 (1987). According to HCFA,
"this rationale is particularly applicable here where
Oklahoma is theoretically paying its state operated
ICF/MRs their reasonable costs based on Medicare
principles." HCFA brief at 5.

In making this argument, however, HCFA failed to
distinguish between Medicare cost reimbursement
principles and Medicare procedural rules. The payment
adjustments here were consistent with the Medicare cost
reimbursement principles, which recognize an exception to
the routine cost limits based on extraordinary
circumstances. These are the principles that establish
what are a facility's allowable reasonable costs. Some
providers might be precluded under Medicare from
obtaining such an exception, and therefore recovering all
of their allowable costs, if they fail to timely request
an exception under the 180-day rule. This does not mean,
however, that applying different procedural rules in
Medicaid means that the providers are somehow being
reimbursed for more than their reasonable costs.

In sum, consistent with HCFA's own policy, Oklahoma could
properly recompute its upper limits to take into account
the exceptions at issue here. HCFA provided no evidence
that Oklahoma's payment adjustments would make its
aggregate payments to ICFs/MR exceed the upper limits,
properly recomputed. 1/

Conclusion

For the reasons stated above, we reverse the disallowance
of $7,165,817 in Oklahoma's claims for FFP in payment
adjustments for Hissom for FYs 1989 and 1990.

________________________
Cecilia Sparks Ford

________________________
Norval D. (John) Settle

________________________
Judith A. Ballard
Presiding Board Member


1. Our decision would not preclude HCFA from issuing
a new disallowance if it determined that Oklahoma claimed
FFP in payments in excess of the upper payment limits
recomputed by taking the exceptions into account.