DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: South Carolina Department of Health and Human Services
Docket No. A-96-2
Control No. SC-95-001-MAP
Decision No. 1602
DATE: October 9, 1996
DECISION
The South Carolina Department of Human Services (South
Carolina) appealed
a determination by the Health Care
Financing Administration (HCFA)
disallowing $14,216,000
in federal financial participation (FFP) claimed by
South
Carolina under title XIX (Medicaid) of the Social
Security Act
(Act). The disallowed amount represented
the federal share of
retroactive payments to
disproportionate share hospitals (DSHs)
claimed by the
South Carolina State Health and Human Services Finance
Commission (SHHSFC), which administers the Medicaid
program for South
Carolina. SHHSFC made the payments in
1994 to nine DSHs for services
rendered by the hospitals
in fiscal year (FY) 1992. HCFA disallowed
the federal
share because it determined that the payments were not
made
in accordance with the South Carolina Medicaid State
plan. According
to HCFA, the payments exceeded limits
imposed by the State plan which
defined available state
funds upon which DSH pool payments were based.
At the outset, it should be emphasized that the subject
matter of this
appeal is limited to adjustments to South
Carolina's DSH payments for FY
1992. South Carolina
submitted its claim for the adjusted FY 1992 DSH
payments
at issue here in its June 30, 1994 Quarterly Expenditure
Report, several months after a December 31, 1993 deadline
for informing
HCFA of adjustments to the 1992 base year
amount to be used in calculating
subsequent years' DSH
payments. 1/ As South Carolina has
not yet made any
claims for DSH payments for FY 1993 and beyond based on
its proposed adjusted figures for FY 1992, both parties
agreed that the
effect of South Carolina's DSH base
payment for FY 1992 on future years' DSH
allotments was
not properly before the Board at this time. Oral
Argument Transcript (Tr.) 44 and 77. 2/
For the reasons discussed below, we conclude that HCFA
misread a
letter written by a South Carolina official to
be an interpretation of the
State plan, and therefore did
not have an adequate basis for determining
that the
adjustments were in violation of South Carolina's State
plan. Moreover, we find that South Carolina provided
evidence that
the adjustments were consistent with its
State plan requirements. We
therefore reverse HCFA's
disallowance of $14,216,000.
Statutory and Regulatory Provisions
In order to qualify for FFP, a state's claim for the
costs of medical
services must be in accordance with an
approved Medicaid State plan.
Section 1903(a) of the
Act. The regulations describe the State plan as
--
a comprehensive written statement submitted by the
agency
describing the nature and scope of its
Medicaid program and giving assurance
that it will
be administered in conformity with the specific
requirements of title XIX, the regulations in this
Chapter IV, and other
applicable official issuances
of the Department. The State plan
contains all
information necessary for HCFA to determine whether
the
plan can be approved as a basis for FFP in the
State program.
42 C.F.R. § 430.10 (1992).
Section 1902(a)(13) of the Act requires that a State plan
provide for the
payment of hospital services provided
under the plan through the use of
rates which take into
account the situation of hospitals serving a
disproportionate number of low-income patients, and which
are reasonable
and adequate to meet the costs incurred by
an efficient and economically
operated facility in
providing care and services.
Factual Background
South Carolina's Medicaid State plan provided for
computation of a
prospective rate for hospitals that
would include hospital specific add-ons
to the base rate
including, among others, an add-on for DSHs.
Attachment
4.19-A of the South Carolina State plan in effect during
FY
1992 provided that add-on payments to DSHs would be
"based on the
availability of funds which make up a
disproportionate share pool."
South Carolina Ex. B,
Section IV (C)(4)(b). Both parties agreed that
the State
plan does not contain a definition for the phrase
"availability of funds." With respect to calculating the
amount of
DSH payments, the State plan contained the
following specific
provisions:
--all state-operated teaching hospitals would
receive a
monthly disproportionate share payment
based on the size of the pool and the
number of
residents assigned to each hospital;
--all
state-supported teaching hospitals would
receive a monthly disproportionate
share payment
based on the number of residents and historical
weighted
Medicaid cases; and
--in determining their allocation of the
disproportionate share pool, all non-teaching
hospitals would receive a
monthly
disproportionate share payment based on each
hospital's total
operating expenses multiplied by
the greater of its low income utilization
percentage or indigent day utilization
percentage.
Id.
The State plan further provided that --
the information submitted by hospitals qualifying
for
disproportionate share payments will be reviewed
for accuracy and a
retrospective adjustment will be
made if appropriate.
Id., Section VIII (C).
In March 1994 South Carolina made DSH payments totalling
$20,000,000 to
ten state-supported teaching and non-
teaching hospitals for services
relating to FY 1992. 3/
In reviewing the payments made in 1994, HCFA declared
that South
Carolina's "State plan specified that the size
of the [DSH] pool was
determined by the availability of
State funds." August 23, 1995
notification of
disallowance (emphasis in original). HCFA disallowed
FFP
for payments to nine of the DSHs because it found that
during FY
1992 SHHSFC limited DSH pool payments to
specified amounts and because HCFA
concluded that the
retroactive DSH payments exceeded these self-imposed
limits. HCFA found that "SHHSFC's decision to limit the
DSH pools
precluded the SHHSFC from retroactively
adjusting the amount in the
pools." Id. at 2.
HCFA did, however, allow FFP in a 1994 adjustment to 1992
payments for
one hospital, the Medical College of
Georgia, because "that additional
payment was a true
adjustment that was necessitated by a documented
accounting error." HCFA Brief (Br.) at 6.
Analysis
HCFA based its position that the payments exceeded
SHHSFC's self-imposed
limits on pool payments to DSHs for
1992 on an April 25, 1994 letter from a
South Carolina
official to a HCFA official (April 1994 letter), in which
he stated that the SHHSFC --
has not made all fiscal year 1992 disproportionate
share payments
allowed under our approved state
plan. We estimate the additional
disproportionate
share payments to be about $25 million. This will
increase the South Carolina Medicaid
disproportionate share allotment
and, subsequently,
affect the allotment in succeeding years.
Based on the South Carolina Title XIX State Plan
effective July 1,
1991, five (5) non-teaching and
all teaching disproportionate share
hospitals were
underpaid for Fiscal Year 1992. The Finance
Commission limited the disproportionate share pool
payments for
non-teaching disproportionate share
hospitals to the operating expenses
multiplied by
the lesser of the low income utilization percentage,
the
indigent day utilization percentage or 40%.
Section IV of the State
Plan states that each
hospital's operating expenses will be multiplied by
the greater of their low income utilization
percentage or indigent day
utilization percentage.
There is no language in the State Plan
requiring the
Finance Commission to set the 40% limit which was
imposed
on 5 non-teaching hospitals.
The Finance Commission also limited the
disproportionate share pool
payments for teaching
hospitals to $150 million. The teaching
hospitals'
disproportionate share pool, based on their
uncompensated
care, amounted to over $595 million.
There is no language in the State
Plan requiring the
Finance Commission to limit the teaching hospital
pool to $150 million.
HCFA Ex. 2, at 1.
HCFA contended that the April 1994 letter explained how
South Carolina
defined available funds in FY 1992, with
DSH payments linked to available
funds that make up the
DSH pool. Tr. 47. Thus, HCFA argued that
this letter
reflected South Carolina's interpretation of its State
plan
in 1994 when South Carolina proposed to make the
payments at issue
here. Tr. 55. According to HCFA, the
letter indicated that
there were limits placed on what
would be available in the DSH pool and any
retroactive
payments to the DSHs in excess of the amount allowable
under
the State plan were therefore ineligible for FFP.
In other words, HCFA
maintained that the adjustments to
the DSHs were simply additional,
arbitrary payments that
were contrary to the State Medicaid plan. HCFA
also
argued that the South Carolina official's statement in
the April
1994 letter that the payments could be made
since the State plan did not
require these self-imposed
limits was an "ad hoc" revision of the State
plan,
because that statement was inconsistent with what that
official
had stated was South Carolina's practice in
1992. HCFA argued that the
Board had previously held
that such an "ad hoc" revision could properly form
the
basis for a disallowance. California Dept. of Health
Services,
DAB No. 1007 (1989).
South Carolina maintained that its 1994 adjustments to
the FY 1992 DSH
payments were made according to its
approved State plan. South
Carolina contended that
HCFA's disallowance determination was incorrect in
that
it was based on two false premises: 1) that the size of
the
DSH pool was based on the availability of state
funds; and 2) that the State
plan limited the amount of
funds available for DSH payments in FY
1992. South
Carolina Br. at 3-4. South Carolina contended that
both
premises were incorrect, in that there was nothing in its
State
plan that defined "availability of funds" as
limited to state funds or
limited the amount of funds
available. Throughout the proceedings in
this appeal,
South Carolina steadfastly rejected HCFA's interpretation
of the April 1994 letter. South Carolina stated that the
letter
was written some 18 months after the close of FY
1992 and did not reflect
South Carolina's State plan or
what South Carolina actually did in that
year, there
being "no cap or limitation on any reimbursement,
regardless
of what the letter may be read to say." Tr.
9. South Carolina
maintained that the April 1994 letter
was simply wrong, in that it did not
reflect SHHSFC's DSH
pool calculations in FY 1992 or the DSH payments that
it
made in FY 1992. South Carolina Reply Ex. A, Affidavit
of Ken
Stone, 5. South Carolina argued that using the
April 1994 letter
in the manner suggested by HCFA would
in effect amend the State plan by
imposing a limit on the
DSH payment pool that did not exist under the State
plan
in 1992. South Carolina described the extensive steps
that
must be taken to amend a State plan and expressed
disbelief that HCFA could
accept a letter from one
employee of a state agency written nearly two years
after
the fiscal year in question as an accurate statement of
its State
plan and therefore consider the State plan
amended.
South Carolina also denied that the 1994 adjustments to
the FY 1992
payments were arbitrary, arguing that those
adjustments were the result of a
routine review of the
regular audit process similar to those which it had
conducted in previous years under its State plan and
which had been
approved by HCFA. South Carolina
explained that its routine practice
was to withhold
payments from some DSHs pending verification of data.
This was done because, in South Carolina's experience,
when revised data
was submitted, the amount of a
hospital's claim usually decreased. By
initially
underpaying the hospital, South Carolina was spared the
time-consuming effort of recouping any excess payment
from the
hospital. South Carolina Summary Br. at 2-3.
South Carolina
presented charts showing: (1) its estimate
of the amount of the DSH pools
which it used in making
the 1992 underpayments; and (2) the revised
calculations
of the DSH pools that it used in determining whether
additional amounts should be paid to the DSHs. South
Carolina
Reply Exs. H, I, J, and K. In many instances,
the data used for a
hospital did not change as a result
of a review; in some instances, the data
reflected a
downward adjustment due, for example, to a ruling that
bad
debt could not be included in a hospital's costs for
DSH purposes.
Id. These charts show that the DSH
payments at issue here did not make
the total payments
exceed the DSH pools initially calculated for each
hospital.
From the arguments it presented before us, it is clear
that HCFA based
its disallowance entirely on its
interpretation of the April 1994 letter
that the amount
of DSH payments was capped by the South Carolina State
plan. HCFA concluded that the payments at issue here
would exceed
that cap and therefore would not be in
accord with the State plan.
According to HCFA, South
Carolina, under the prospective rate system for
paying
hospitals established in its State plan, made a
calculation at
the beginning of FY 1992 setting limits of
available funds for DSHs at $150
million for teaching
hospitals and $54 million for non-teaching hospitals;
any
payments above these limits were thus contrary to the
State plan,
unless South Carolina could show that the
payment was required to correct a
mistake in methodology.
We find, however, that HCFA has failed to produce any
evidence that the
South Carolina plan did, in fact, place
a limit on DSH payments during FY
1992 using the figures
in the April 1994 letter. There is simply no
evidence
that South Carolina defined "availability of funds" in
the
manner suggested by HCFA at the time the DSH add-ons
were calculated and
initial payments were made. The
April 1994 letter states that the
SHHSFC "limited the
disproportionate share pool payments for teaching
hospitals to $150 million." (Emphasis added.) The fact
that
SHHSFC may have limited the payments to $150
million, however, does not mean
that it had determined
that only $150 million were available funds to be
used to
calculate the DSH add-on amount prospectively under the
State
plan. Moreover, the exhibits presented by South
Carolina substantiate
its claim that it calculated DSH
pools at a higher amount but chose to pay
DSHs at a lower
level than indicated by these preliminary figures while
awaiting audited data on which to calculate final amounts
according to
the State plan.
HCFA's characterization of the April 1994 letter's
conclusion that the
1994 payments were appropriate under
the State plan as an "ad hoc revision"
of the State plan
is simply not persuasive. We agree with HCFA that,
in
the context of a prospective payment system that
contemplates
retrospective adjustments only in limited
circumstances, the DSH plan
provision cannot reasonably
be read as permitting South Carolina to
retrospectively
redetermine the amount of available funds. Instead,
since the calculation of the basic rates and add-ons is
to be made prior
to the payment year, the plan clearly
contemplates the determination of an
amount of available
funds at the time the rates and add-ons are set
prospectively. That the plan contemplates calculating
the amount
due under the plan prospectively (with only
limited later adjustments),
however, would not preclude
South Carolina from withholding part of the
payment
otherwise due under the State plan until it has made its
final
calculations after audit. Thus, the letter can be
read consistently
with the State plan, rather than as an
ad hoc revision as HCFA
alleged. Indeed, the letter said
that all the FY 1992 DSH payments
allowed under the
approved State plan had not been made.
Furthermore, South Carolina's explanation that it
routinely underpaid the
DSHs until there was a final
accounting and then paid the hospitals what
they were due
is not inconsistent with the operation of a prospective
rate system. South Carolina explained that the 1994
payments were
made based on verification of hospitals'
claims during the routine Medicare
cost review process;
this process did not always change the amount of a
hospital's claim but simply assured South Carolina that
the total amount
claimed was allowable. (As we discuss
below, HCFA apparently assumed
that, in order for the
1994 payments to be appropriate under the State plan,
they should be based on a change in data to correct an
earlier
mistake.) Under these circumstances, we find
that it is consistent
with South Carolina's prospective
rate system for there to be additional
payments. Thus,
the adjustments proposed here are consistent with the
payment system embodied in South Carolina's State plan.
HCFA did in fact approve FFP for the 1994 adjustments
South Carolina made
to the FY 1992 payments to one DSH,
the Medical College of Georgia
(MCG). HCFA stated that
it approved the FFP for MCG because that
facility had
submitted documentation that payments had been calculated
using the wrong methodology. Tr. 58. HCFA contended
that
South Carolina, unlike this documented error in
MCG's payment, had not
provided documentation showing
errors in how the payments for the other nine
DSHs had
been calculated. South Carolina responded with documents
detailing the amended payments for each of the
facilities. South
Carolina Reply Exs. L and M. South
Carolina asserted that the
documentation it submitted for
the adjustments at issue were of the same
type that was
accepted by HCFA in previous years.
HCFA faulted the proffered documentation for the lack of
the explanation
of the methodology used for determining
the additional amounts to be paid to
the hospitals,
concluding that "they were arbitrarily determined
payments that would not fall within the state plan
provision for
retrospective adjustments." HCFA Sur-Reply
at 4. HCFA never
addressed South Carolina's contention
that the payments were of amounts
withheld pending
verification of cost data, so that the fact that no
"errors" were found (i.e., no changes were made to the
initial data) was
not dispositive. Moreover, HCFA did
not dispute South Carolina's
contention that HCFA had
approved FFP in prior years based on similar
documentation offered by South Carolina.
Conclusion
In sum, we conclude that HCFA misread a letter written by
a South
Carolina official to be an interpretation of the
State plan, and therefore
did not have an adequate basis
for determining that the adjustments were in
violation of
South Carolina's State plan. Moreover, we find that
South Carolina provided evidence that the adjustments
were consistent
with its State plan requirements. We
therefore reverse HCFA's
disallowance of $14,216,000.
__________________________
Judith A. Ballard
__________________________
Cecilia Sparks Ford
__________________________
M. Terry
Johnson
Presiding Board Member
* * *Footnotes * * *
1. The Medicaid
Voluntary Contribution and
Provider-Specific Tax Amendments of 1991, Pub. L.
No.
102-234, amended section 1923 of the Act to establish
limits on the
amount of FFP available for payments for
Medicaid expenditures made to DSHs,
effective for the
1993 fiscal year and beyond. Section 1923(f)(2)(a)
provides that state DSH allotments for FY 1993 be based
on 1992 DSH
payments and that DSH allotments for 1994 and
beyond be based on the prior
year's allotment. In order
to ensure that the 1992 figures, and
subsequent
allotments, would be accurate, states were given until
December 31, 1993, to submit information regarding their
1992 DSH
payments and to correct inaccuracies. 57 Fed.
Reg. 55,261, at
55,262 (1992) (stating that "[a]llowable
expenditures submitted after
December 31, 1993, will not
be used in the calculation of the final State
allotments
and final national DSH limits for Federal fiscal year
1993.") Each state's final 1993 DSH allotment would
then be
calculated based on the adjusted 1992 DSH
payments.
2.
Because of the complexity of the issues
raised by the parties in the written
briefing provided
for in the Board's regulations, the Board conducted an
oral argument by telephone to allow the parties to give a
more detailed
explanation of their respective positions.
3. This was not the
first time South Carolina
had made adjustments to prior DSH payments.
South
Carolina's preliminary Medicaid DSH base allotment for FY
1993 was
$422,651,000. South Carolina Tab E, Attachment
A. In March and
June 1993 the allotment was adjusted to
include retrospective pool payments,
increasing South
Carolina's DSH base allotment for FY 1993 to
$439,759,000. Id., Attachment E. HCFA allowed FFP for
these
adjustments because they resulted from errors in
forms submitted by certain
DSHs. HCFA Br. at 4.
(..continued)