Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: District of Columbia Department of Human Services
DATE: April 29, 1997
Docket No. A-97-001
Decision No. 1617
DECISION
The District of Columbia Department of Human Services
(District) appealed a determination by the Health Care
Financing Administration (HCFA) disallowing $50,008,123
in federal financial participation (FFP) claimed by the
District under title XIX of the Social Security Act
(Act). The claims were retroactive claims for federal
fiscal years 1993 through 1995 and were based on
calculations by a consultant of amounts of
disproportionate share hospital (DSH) payments for
inpatient hospital services provided to Medicaid
recipients. HCFA had previously paid about $75 million
in FFP to the District for DSH payments for the years in
question. The District's retroactive claims included an
upward adjustment of $52,407,308 in FFP in payment
increases for some hospitals, and a downward adjustment
of $2,399,185 in FFP in decreases for other hospitals.
HCFA disallowed the retroactive claims on several
grounds. Specifically, HCFA determined: 1) the District
had not actually expended monies for increased DSH
payments; 2) the calculations improperly included some
costs of outpatient services; 3) the calculations
improperly included amounts related to medical education
and capital costs; and 4) the calculations improperly
allocated adjustments for cost settlements to the year in
which cost settlement payments were made rather than to
the year in which the services were provided and the
costs incurred.
On appeal, the District admitted that it had no actual
expenditures for increased DSH payments to private
hospitals, but asserted that it had expended monies for
two public hospitals. The District agreed that certain
outpatient costs were improperly included in the
calculations for one hospital (although the District did
not provide any recalculations showing how removing these
costs would reduce its claim). With respect to the
medical education and capital costs, the District
disputed HCFA's interpretation of section 1923(c)(1) of
the Act as excluding those costs from the formula for
calculating minimum DSH payment amounts and the minimum
amount of funds allotted to the District for DSH
payments. The District suggested an interpretation under
which medical education costs would be included in the
calculations for the entire disallowance period and both
medical education and capital costs would be included
after April 1, 1995, the effective date of an amendment
to the District's Medicaid State plan. While the
District initially said that it had in fact "accrued"
cost settlements to the relevant service year rather than
to the year of payment of the cost settlement amount, the
District later questioned HCFA's statement concerning
what this meant. Finally, the District raised questions
about how HCFA calculated the District's DSH allotment
amounts.
Based on the District's concession that outpatient costs
were improperly included in the calculations, we uphold
the disallowance to the extent that including such costs
increased the amount claimed. Based on our analysis
below, we conclude the following:
• FFP is not available in any amounts which are
merely calculations of amounts payable to hospitals
in increased DSH payments, but do not constitute
actual expenditures for such payments. The District
admitted it did not expend any monies to make such
increased payments to most of its hospitals.
Contrary to what the District argued, the fact that
estimating techniques may be used in some
circumstances to calculate what amounts may be paid
under Medicaid (either by a state or by HCFA) does
not mean that a retroactive claim for FFP for the
amounts at issue here is allowable. Moreover, while
the District said it had expended monies for
increased DSH payments to two hospitals, the
District provided no evidence to support this
assertion, and the amounts identified clearly were
not all related to properly calculated increases in
DSH payments.
• HCFA's determination that amounts properly used in
calculating the minimum DSH payment under section
1923(c)(1) and the minimum allotment for DSH
payments do not include payments for either medical
education or capital costs is based on the plain
language of that section. Section 1923(c)(1)
specifically refers to "amounts paid . . . for
operating costs for inpatient hospital services (of
the kind described in section 1886(a)(4) of the
Act)." That section in turn defines "operating
costs for inpatient hospital services" to include
certain kinds of costs and to exclude costs of
educational activities and capital costs. The fact
that rate-setting regulations for certain inpatient
hospitals under Medicare permit additional payments,
above a diagnosis-related group (DRG) basic rate,
for certain medical education costs (and refer to
indirect medical education costs as operating costs)
does not transform the additional payments into
amounts paid for operating costs for inpatient
hospital services of the kind described in section
1886(a)(4). While a HCFA policy refers to DRG and
per diem rates as possible examples of amounts paid
for operating costs, the District could not
reasonably interpret this to mean that, merely by
including capital and education costs in a base DRG
or per diem rate, it could increase the amounts
properly included in the DSH minimum payment
calculation.
• The fact that HCFA policy permitted states to make
more than the minimum DSH payments and that a State
plan amendment may have permitted the District to
include capital and education costs in its initial
calculations of DSH payments for some hospitals is
irrelevant. The State plan in effect prior to April
1, 1995 permitted payment only of the minimum
amounts, calculated according to section 1923(c)(1),
and the plan effective April 1, 1995 limited
aggregate DSH payments by the District's federal
allotment. As HCFA argued, the minimum allotment
amount is determined according to the section
1923(c)(1) formula (and thus excludes medical
education and capital costs).
• The District is correct that the formula in section
1923(c)(1) refers to "amounts paid under the State
plan" for certain operating costs and that the
amounts paid under a prospective payment system may
not always correspond exactly to actual audited
costs for the period during which the services for
which payment was made were rendered. The District
did not dispute HCFA's assertion, however, that the
District did not have a prospective payment system
for inpatient hospital services in effect for most
of the disallowance period. Moreover, the State
plan provision effective April 1, 1995 indicates
that, even after that date, the prospective payment
system did not apply to certain public hospitals.
• The allotment amounts determined by HCFA using a
"growth factor" formula and published in the Federal
Register for each fiscal year in question are less
than the minimum allotment amounts for each year (as
calculated by either party) using the section
1923(c)(1) formula. Contrary to what the District
suggested, however, the "growth factor" formula may
not properly be used now to recalculate an increased
allotment amount. HCFA's regulations specifically
provide that the final published allotment for each
year, determined using the "growth factor" formula,
will not be subject to adjustment based on later
developed cost information.
• Under the modified retrospective payment system
applicable to most of the payments at issue here,
the allowable payments must take into account not
only actual audited costs allocable to the cost
reporting period, but also any cost settlements made
subsequent to the audit, as the result of audit
appeals. To the extent that HCFA based its
calculations of the section 1923(c)(1) amounts on
actual audited costs and did not make adjustments
for later cost settlement amounts for allowable
operating costs or later adjustments for patient
days, HCFA may have understated the section
1923(c)(1) amounts. Moreover, for those hospitals
subject to a prospective payment system beginning
April 1, 1995, the District is correct in suggesting
that any cost settlements allocated to the base year
used for calculating the prospective payment amounts
might affect the allowable prospective payment
amounts paid for 1995 (if this type of adjustment is
permitted under the State plan) and therefore affect
the calculations of the amount paid for operating
costs for that year.
Accordingly, we uphold the disallowance, subject to
reduction to the extent the District makes the showing
described below at pages 30-31.
I. Legal background
Title XIX of the Act (Medicaid) authorizes grants to any
state (defined to include the District of Columbia) with
an approved state plan for medical assistance to needy
individuals. Section 1905(a) of the Act defines "medical
assistance" to include inpatient hospital services.
Under section 1902(a)(13) of the Act, a Medicaid state
plan must provide--
(A) for payment . . . of the hospital services . . .
provided under the plan through the use of rates
(determined in accordance with methods and standards
developed by the State which, . . . in the case of
hospitals, take into account the situation of
hospitals which serve a disproportionate number of
low income patients with special needs . . . ) which
the State finds, and makes assurances satisfactory
to the Secretary, are reasonable and adequate to
meet the costs which must be incurred by efficiently
and economically operated facilities in order to
provide care and services . . . ; and such State
makes further assurances, satisfactory to the
Secretary, for the filing of uniform cost reports by
each hospital . . . and periodic audits by the State
of such reports; . . . .
Section 1923 of the Act provides requirements for states
in making disproportionate share hospital (DSH) payments,
including what a state plan must provide, what hospitals
qualify for such payments, what payment adjustments may
be made, and what limits apply. Subsection 1923(c)
states:
PAYMENT ADJUSTMENT.--Subject to subsection (f), in
order to be consistent with this subsection, a
payment adjustment for a disproportionate share
hospital must either--
(1) be in an amount equal to at least the product
of (A) the amount paid under the State plan to the
hospital for operating costs for inpatient hospital
services (of the kind described in section
1886(a)(4)), and (B) the hospital's disproportionate
share adjustment percentage (established under
section 1886(d)(5)(F)(iv));
(2) provide for a minimum specified additional
payment amount (or increased percentage payment) and
. . . for an increase in such a payment amount (or
percentage payment) [meeting certain requirements];
or
(3) provide for a minimum specified additional
payment (or increased percentage payment) that
varies according to type of hospital under a
methodology [meeting certain requirements] . . . .
(Emphasis added.) Subsection (f) provides for denial of
FFP for payments in excess of certain limits. Under this
subsection, in a fiscal year subsequent to fiscal year
1992, FFP is not available to the extent a state's total
payment adjustments exceed the state's DSH allotment for
the year. Paragraph 1923(f)(2) governs determination of
state DSH allotments, and provides:
(A) IN GENERAL.--Subject to subparagraph (B), the
State DSH allotment for a fiscal year is equal to
the State DSH allotment for the previous fiscal year
(or, for fiscal year 1993, the State base allotment
. . . ), increased by--
(i) the State growth factor . . . for the fiscal
year, and
(ii) the State supplemental amount for the fiscal
year . . .
(B) EXCEPTIONS.--
* * *
(ii) EXCEPTION FOR MINIMUM REQUIRED ADJUSTMENT.--
No State DSH allotment shall be less than the
minimum amount of payment adjustments the State is
required to make in the fiscal year to meet the
requirements of subsection (c)(1).
HCFA regulations at 42 C.F.R. Part 447, Subpart E, govern
calculation of the State DSH allotment.
Under section 1903(a) of the Act, the Secretary is
authorized to pay each state with an approved plan for
each quarter "an amount equal to the Federal medical
assistance percentage (as defined in section 1905(b),
subject to . . . subsection 1923(f)) of the total amount
expended during such quarter as medical assistance under
the State plan." Section 1903(d) authorizes the
Secretary to estimate the quarterly amount to which a
state will be entitled and to pay the state "the amount
so estimated, reduced or increased to the extent of any
overpayment or underpayment which the Secretary
determines was made under this section to such State for
any prior quarter and with respect to which adjustment
has not already been made . . . ." HCFA regulations at
42 C.F.R. Part 430, Subpart C, govern submission of
quarterly expenditure reports.
II. Factual background
The record is somewhat unclear about what the District's
Medicaid State plan provided during the relevant period.
In correspondence between the District and HCFA, the
District said it had a prospective payment system for
hospitals. HCFA responded that the prospective payment
system was not put into effect until April 1, 1995, the
effective date of State plan transmittal number (TN)
94-10. The State plan documents submitted by HCFA
indicate the following for the fiscal years relevant
here:
• Effective November 17, 1990, the District had a
system for payments to hospitals that used the
Medicare principles of reimbursement that apply to
hospitals not covered by Medicare's prospective
payment system and provide for reimbursement based
on reasonable costs limited by an operating cost per
discharge amount (TEFRA Target Rate). 1/ If a
hospital's operating costs were less than, or equal
to, its target amount, the hospital is entitled to
an incentive payment calculated pursuant to
42 C.F.R. § 413.40(d)(2) (but costs in excess of the
target amount are not allowable).
• For some hospitals, reimbursement was on a per
discharge basis and for others on a per diem basis.
HCFA Ex. 2 at 7.
• Under this State plan system, periodic interim
payments (PIPs) were made to some hospitals based on
estimated total earnings for services to be rendered
in a fiscal year (October 1 through September 30).
2/ For other hospitals, interim reimbursement was
made as claims were submitted for payment.
Reimbursement was, however, subject to adjustment
for cost settlements based on actual allowable costs
determined by filing or audit of cost reports filed
at the end of the hospital's fiscal year or by
settlements after appeal of audit findings.
• With respect to services provided on or after
August 9, 1993, public hospitals (including at least
D.C. General) were to be reimbursed at 100% of
audited allowable costs, as described in the plan.
Although D.C. General was to receive a PIP based on
estimated costs, the system contemplated a cost
settlement process on a biennial basis beginning
with FY 1995. HCFA Ex. 2, at 10-11.
• Effective April 1, 1995, the District adopted for
some hospitals a prospective payment system using an
All Patient Diagnosis Related Group (APDRG)
classification system. This methodology placed each
of these hospitals in a peer group. Peer group
specific base rates per discharge were to be
determined based on audited fiscal year 1990 cost
reports, exclusive of "outlier costs," adjusted by a
case mix index. Those rates would be updated by
applying an inflation factor, and then the updated
rates were to be multiplied by service intensity
weights.
• Under the APDRG methodology, the peer group
specific base rate included "operating costs,
capital costs and direct medical education costs."
• Certain hospitals or units of hospitals were
specifically named as exempted from the APDRG
methodology and subject to a methodology "specified
elsewhere" in the state plan. HCFA Ex. 2, at
12-18. 3/
See HCFA Ex. 2.
While the methodologies in the State plan other than the
APDRG methodology call for making PIP payments and the
methodology specific to D.C. General refers to them as
"prospective payments," these methodologies are not
prospective payment systems as that term is ordinarily
used--to mean payments that are set in advance using base
year costs trended forward and that are generally not
reconciled to actual costs. Since these methodologies
call for PIP payments on an "interim" basis, subject to
adjustment to reflect actual costs during the cost-
reporting period, they are basically what is referred to
as a retrospective reimbursement system, albeit somewhat
modified. Certain State plan provisions specifically
recognize this by adopting (with certain exceptions) the
methodology used under title XVIII of the Act (Medicare)
for "hospitals not included in the Prospective Payment
System" and set forth in 42 C.F.R. Part 413. 4/ HCFA
Ex. 2, at 7.
With respect to State plan provisions on DSH payment
adjustments, HCFA asserted, and the District did not
deny, that its State plan in effect prior to April 1,
1995 adopted the minimum payment formula in section
1923(c)(1) of the Act. The District asserted, however,
that the HCFA Regional Office had acknowledged in a
February 29, 1996 letter that the plan amendment
effective April 1, 1995 adopted a formula for DSH
payments that included medical education and capital
costs. This is not entirely accurate. The February 29
letter refers to TN 94-10 as adopting a system that
includes capital and medical education costs within the
term "operating costs." The letter notes that this
amendment has not been approved, but says that assuming
the amendment is approvable with the proposed effective
date, "we agree that starting April 1, 1995, the
District's Medicaid plan includes capital and medical
education costs in the operating cost number to arrive at
a DSH amount." District br., Att. VI. D. The record
indicates, however, that the plan amendment to which the
February 29 letter referred is not exactly the same as
the amendment ultimately approved. A January 11, 1996
letter to the Regional Administrator, HCFA, from the
District, quotes the following provision, citing TN 94-
10, page 15, section 10:
DISPROPORTIONATE SHARE HOSPITALS
Hospitals qualifying as DSH as defined in Section 8
below, will receive an additional payment. The
payment will be calculated by multiplying the total
payment for items 1 - 9 above times the DSH
percentage as determined from Section 8 below.
District br., Att. VI.C. at 2 (unnumbered). The letter
then notes parenthetically that "Items 8 and 9 above
include capital and medical education costs." Id.
HCFA's Exhibit 2 includes pages referring to TN 94-10
with an approval date of December 24, 1996 and contains a
similar provision for an additional DSH payment,
incorporating listed items (with different numbers) and
referring to Section 10 as defining hospitals qualifying
as DSH. HCFA Ex. 2, at 16. The list of items
incorporated is the APDRG payment methodology and
includes capital and medical education costs.
The approved plan contains the following provision in
Section 10:
Each hospital that qualified as a disproportionate
share hospital shall be paid an adjustment based
upon the formula set forth in Section 1923(c)(1) of
the Social Security Act: namely the product of the
amount established under section 1923(c)(1)(1) [sic]
times the adjustment percentage established under
Section 1886(d)(5)(F)(iv).
HCFA Ex. 2, at 17.
The approved plan amendment also contained the following
provision:
The total aggregate disproportionate share payments
made to participating hospitals in any one year
shall be the lesser of the actual amount paid or the
amount of the federally established State
Disproportionate Share Allotment for that year,
calculated in accordance with the requirements of 42
C.F.R. 447.298. Payments will be made in accordance
with the method prescribed in this plan, subject to
the limitations listed above.
HCFA Ex. 2, at 18.
Under the approved plan amendment, any DSH payment "shall
be contingent upon the hospital executing an agreement to
return the full amount of the payment, if federal
matching funds for such payment are denied." Id.
The District did not specifically dispute HCFA's
assertion that its exhibit represented the relevant plan
provisions, nor did the District submit any different
version of an approved plan amendment. Thus, we find
that, while the State plan effective April 1, 1995 may be
read to authorize initial DSH payments to some hospitals
calculated using capital and medical education costs,
that plan also set limits on aggregate DSH payments, and
those limits are determined by the federally established
allotment amounts.
The District originally made DSH payments and received
FFP totaling about $75 million for fiscal years 1993 to
1995. This was the full amount based on the District's
DSH allotments for these years, as published in the
Federal Register, which were $38,000,000, $41,039,000,
and $46,505,000 respectively (representing both state and
federal share).
Subsequently, the District hired a consultant who
recalculated DSH payments. These calculations were
described as follows:
One of the reasons for the increase in PIP estimates
over previous calculations arises from the
artificially low estimates of operating costs which
were used, especially in 1994 and 1995. The
calculations contained herein use the reported PIP
annual estimates, by hospital, provided by DSH
accounting, less DSH, and with settlement amounts
added or subtracted, as required. This method
reduces the reported adjusted PIP spending in later
years, but adds to that spending in earlier years.
These adjustments are important, since they add
about 17 percent on the average to reported spending
for any year that is two years or more prior to the
current one. . . .
Since most settlement activity (but not nearly all)
has been concentrated on the 1988 through 1992
years, we examined annual changes as the basis for a
PIP predictor for the 1994 and 1995 years. If the
Medicaid adjusted PIP reports were used, annual
increases would be about 20.3 percent per year.
After adjusting for settlements, however, the
average annual increase calculated to 14.26 percent
per year. This was applied as a predictor of 1994
and 1995 PIP-less-DSH payments to the hospitals.
In addition, the results of a recent study of DC
General costs and payment requirements, as a result
of rate calculation changes, were used for 1992 and
1993 PIP estimates.
District br., Att. VI.A. (Section 2 of Notes on the
Estimates).
Based on the consultant's proposal, the District
requested an additional $102.7 million allotment, taking
the position that the increases would bring the total
allotment to the aggregate minimum payment amount "using
the 1923(c) modifications of the Medicare DSH calculation
methodology." District br., Att. VI.A. (Memorandum).
HCFA's Regional Office apparently agreed that the
published allotments should be raised to the aggregate
minimum payment amount, but calculated the increases
differently. 5/ HCFA calculated the allotment for FY
1993 to total $47,849,689, noting that this figure was
subject to change "if allowable operating costs change
because of appeals." District br., Att. VI.B., at 2-3.
HCFA said that it used "final (that is, actual) audited
operating cost figures for 1993." Id. (In context, it
is clear that HCFA meant by this operating costs as HCFA
defined them, to exclude medical education and capital
costs.) HCFA said it then used the actual 1993 cost
figures as a base and "using TEFRA update factors, . . .
computed trended 1994 and 1995 operating cost figures."
Id. Based on these estimated amounts and on estimated
DSH percentages, HCFA calculated the FY 1994 and 1995
minimum allotments as $50,669,700 and $52,219,263,
respectively. HCFA indicated that its minimum allotment
amounts could change if final operating costs for 1993
through 1995 are significantly different.
On its quarterly expenditure report for the quarter ended
December 31, 1995, the District claimed retroactively FFP
consisting of increased DSH amounts for some hospitals
($52,407,308 FFP) and decreased amounts for others
($2,399,185 FFP). HCFA disallowed the net amount of
$50,008,123 FFP. The disallowance letter stated that
HCFA's review of the claim "disclosed that no actual
payments occurred" and, therefore, the claim must be
disallowed because the District had no actual
expenditures. Disallowance letter at 1.
The letter further stated that, even if these payments
had been made, no FFP would be available "because the
payments 1) are not in accordance with the approved State
plan and 2) would cause the District to exceed its
Federal allotment." Disallowance letter at 1-2. The
disallowance letter identified the following problems
with the District's calculations: 1) the District
included capital and medical education costs as operating
costs, but the definition of operating costs in section
1886(a)(4) of the Act specifically excludes these costs;
2) the District incorrectly included prior year cost
settlements in "the amount paid under the State plan for
operating costs" and it is inconsistent with generally
accepted accounting principles to compute current year
DSH payments based on costs attributable to previous
fiscal years; and 3) the District used PIPs (which are
merely estimated interim payments that are not
necessarily based on inpatient operating costs and which
may include outpatient costs) but "only final audited
operating costs may be used in determining final DSH
payments." Disallowance letter at 3. 6/
III. Analysis
On appeal, the District admitted that the HCFA objection
to including outpatient payments in the DSH calculations
is correct. The District acknowledged that "$10 million
in outpatient payments was included in a $24 million cost
settlement in 1994" for St. Elizabeth's Hospital, used in
the District's calculations. The District indicated that
it had made reductions for this amount and would make
corrections for any other such payments it could
discover, but did not provide any information on what
other outpatient costs were included in its calculations.
The HCFA disallowance letter indicated that it appeared
that the PIPs for St. Elizabeth's also included
outpatient amounts. Section 1923(c)(1) clearly refers
only to the costs of inpatient hospital services, and the
District in effect conceded that outpatient costs should
not be included in calculating DSH payments. Thus, we
hold that any recalculation of DSH payment amounts and
minimum allotment amounts must exclude outpatient costs.
Below, we discuss the following: A) whether the District
actually expended the amount at issue; B) whether HCFA
properly interpreted section 1923(c)(1); C) whether the
cost settlements were properly allocated; and D) whether
HCFA should recalculate the allotment amount, as the
District suggested.
A. Whether the District actually expended the
amount at issue
HCFA's disallowance letter stated that no actual payments
were made for the DSH adjustments proposed by the
District's consultant. HCFA cited as a basis for the
disallowance the State Medicaid Manual (SMM) provision at
2500.A(1), which sets out requirements for a Quarterly
Medicaid Statement of Expenditures for the Medicaid
Program (Form HCFA-84) and states: "The amounts reported
on Form HCFA-84 and its attachments must be actual
expenditures . . . ." See HCFA Ex. 1, at 1.
The District did not address this basis for the
disallowance in its initial brief. In its brief, HCFA
explained: "HCFA disallowed the claim because it was
based on estimated rather than actual expenditures. The
District has never expended monies to make the DSH
payments for which it seeks FFP in this claim." HCFA br.
at 1 (emphasis in original). In addition to the SMM,
HCFA cited to regulations describing the Form HCFA-84 as
"the State's accounting of actual recorded expenditures"
and stating that the "disposition of Federal funds may
not be reported on the basis of estimates." 42 C.F.R. §§
430.30(c)(2).
In reply, the District raised two points to address what
it called the matter of "estimate" versus "actual."
First, the District cited to the Board's decision in New
York State Dept. of Social Services, DAB No. 1134
(1990), describing the Board's holding there as rejecting
HCFA's use of the same argument "since it was based upon
an out-of-context use of the regulation at 42 C.F.R.
430.30(c)(2), given the underlying law at Section
1903(d)(1) of the Social Security Act, which assumes that
estimates are constantly made by both the Secretary and
the States." Reply at 2 (unnumbered). Second, the
District argued that HCFA uses estimates constantly,
including in administering the DSH program, such as in
calculating the "growth factor" in the allotment formula
and in determining patient ratios. In response to HCFA's
assertion that the District has never expended monies to
make the DSH payments for which it seeks FFP, the
District stated that this was "partly correct, partly not
correct." Reply, Attached Discussion at 9 (unnumbered).
The District explained:
The District has expended a total of $46,591,517
(the original $20,267,654 for FY 93-95 for the
District of Columbia General Hospital and an
adjusted $26,323,863 for St. Elizabeth's, which is
the original amount, corrected for a $10 million
outpatient payment booked in 1994, and its effect
carried over to FY 1995). The District has not yet
expended the remainder of the claim for the private
hospitals.
Id. What the District refers to as "original" amounts
are the amounts of DSH payment increases identified by
the consultant. See District br., Att. VI.A.
(Incremental DSH), total of amounts for D.C. General and
St. Elizabeth's for FYs 1993, 1994, and 1995).
To the extent that the District has not actually made
payments to the hospitals for the increased DSH payment
adjustments at issue here, they clearly do not constitute
"actual expenditures" in which FFP may properly be
claimed. Section 1903(a) of the Act authorizes FFP in
the "total amount expended under the State plan as
medical assistance." While section 1903(d) of the Act
permits advance payments to states based on quarterly
estimates of expenditures, it also contemplates
reductions or increases for prior quarters only if
overpayments or underpayments of FFP were made for those
quarters. The Form HCFA-84 is the report of actual
recorded expenditures which is used as the basis for
making such adjustments. These adjustments must comport
with the amount that HCFA is authorized to pay--allowable
amounts actually expended under the State plan.
Here, the District admitted that the DSH adjustments it
calculated for private hospitals were never actually paid
to those hospitals. While it is understandable why the
District might wish to resolve issues concerning the
amount of funds allotted for this purpose before making
additional DSH payments to the private hospitals, HCFA is
correct that the District's entitlement to FFP is
contingent on the District actually expending funds for
allowable purposes. With respect to the two hospitals
which the District asserted it had paid, the District
provided no evidence to support this assertion. Since
these are public hospitals, it is possible that the
District is relying on having advanced funds to these
hospitals to cover their total costs, likely in excess of
the amounts recorded as Medicaid expenditures previously.
To receive FFP, the District must provide evidence to
show that it in fact recorded additional DSH payments for
these hospitals and that total recorded expenditures
would not exceed amounts actually paid to the hospitals
for covered services provided in the relevant years. If
the District makes such a showing, HCFA should adjust the
disallowance accordingly, consistent with our decision
regarding what amounts of DSH payments and allotments are
proper. In addition, HCFA should provide guidance to the
District concerning whether any future DSH payments to
the private hospitals for the disallowance period, made
consistent with our decision, should be claimed on a
future Form HCFA-84 or whether HCFA would simply adjust
the disallowance accordingly.
With respect to the question of whether claims may be
based on estimates, the District misunderstood both the
Board's previous decision and HCFA's point. In DAB
No. 1134, there was no question that New York there had
actually expended money for medical assistance and
recorded those expenditures on its books. The estimation
used was in determining what part of those actual
expenditures was for allowable payments for children
meeting program eligibility requirements. In that
particular case, the Board found that New York's use of
statistical sampling was similar to HCFA's use of
statistical sampling in auditing; in these instances
statistical sampling does not substitute estimated for
actual expenditures, but is used as a reliable estimation
technique to determine what part of the actual
expenditures are allowable. The Board distinguished this
situation from other instances where states had
improperly claimed estimated rather than actual
expenditures, or did not have source documentation
supporting the allowability of the claim.
In context here, HCFA's reference to the District's use
of estimates primarily went to the point that the
retroactive claims were based on adjustments which the
consultant estimated and proposed should be made, rather
than records of expenditures for increased DSH payments.
7/ A mere proposal to make a payment does not
constitute an actual expenditure.
The District's reply brief and Attached Discussion give
numerous examples of ways in which estimates are used,
particularly in calculating DSH payment adjustments and
allotments. That estimates may properly be used in
calculating (at least on an interim basis) payment rates
for providers or limits on payments such as allotment
amounts is irrelevant. The issue here is not whether
estimating techniques may be used to determine the proper
amount of payment, but whether payments (however
calculated) were in fact made.
As HCFA's disallowance letter indicated, lack of actual
expenditures is sufficient as a basis for disallowance.
Since our decision provides the District an opportunity
to show it had recorded some actual expenditures for
increased DSH payments, we proceed to address the
remaining issues concerning the allowability of the
claims.
B. Whether HCFA properly interpreted section 1923
(c)(1)
The first part of the DSH payment adjustment formula in
paragraph 1923(c)(1)(A) refers to "amounts paid under the
State plan to a hospital for operating costs of inpatient
hospital services (of the kind described in section
1886(a)(4))." Section 1886 establishes the Medicare
system of hospital reimbursement. Section 1886(a)(4)
states:
For purposes of this section, the term "operating
costs of inpatient hospital services" includes all
routine operating costs, ancillary service operating
costs, and special care unit operating costs . . .
and includes [certain Medicare covered services
related to the patient's admission to the hospital].
Such term does not include costs of approved
educational activities, a return on equity capital,
or, other capital-related costs . . . .
(Emphasis added.)
In our view, the plain language of section 1923(c)(1), by
incorporating the definition of "operating costs of
inpatient hospital services" in section 1886(a)(4) and by
referring to costs of that kind, clearly indicates that
amounts paid for education costs and capital costs were
not to be included in calculating the minimum DSH
amounts. 8/
The District's rationale for alternative interpretations
is not persuasive. The District argued that section
1923(c)(1) could be interpreted either to cover amounts
paid for medical education (which the District said was
the strictest possible interpretation) or, alternatively,
to cover both capital and medical education costs.
The District's rationale for what it called the strictest
possible interpretation of section 1923(c)(1) was based
on two points. First, the District argued that HCFA's
interpretation ignored the phrase "amounts paid" in
section 1923(c)(1) and focused only on "operating costs."
According to the District, "amounts paid" would not
always correspond to final audited costs. 9/ The
District pointed to subsection 1886(d)(5) of the Act for
its position that the law means "payment for operating
costs" but did not explain how subsection 1886(d)(5)
supports this position. Second, the District argued that
"the definitions in section 1886(a)(1) and following, and
their interpretation in 42 C.F.R. 412.5 and Subpart G,
are clear," and that, since these sections include an
additional payment for indirect medical education costs,
medical education costs could be included in the DSH
calculations (even prior to April 1, 1995).
Essentially, the District's argument is that any amount
paid for an operating cost should be included in the
paragraph 1923(c)(1)(A) calculation. The key problem
with this view is that it renders meaningless the
statutory limitation to amounts paid for "operating costs
for inpatient services (of the kind described in section
1886(a)(4))." If Congress had intended to include
amounts paid for all operating costs of a kind for which
payment may be made under Medicare, it could have said
so. While the Medicare statute and regulations provide
for additional payments (some of which may be included in
what HCFA regulations refer to as "prospective payments
for operating costs"), this does not transform the
entirety of those payments into amounts paid for
operating costs of inpatient hospital services of the
kind described in section 1886(a)(4).
The District's reliance on provisions from section 1886
of the Act is misplaced. Nothing in that section
supports an interpretation of 1923(c)(1)(A)'s reference
to amounts paid for the kinds of costs described in
section 1886(a)(4) to include payments made for either
medical education or capital costs.
Section 1886(a)(1) provides that, in determining the
"amount of payments that may be made under [Medicare]
with respect to operating costs of inpatient hospital
services (as defined in paragraph (4))," the Secretary
may not consider as reasonable costs that are in excess
of certain limits specified for particular years.
Section 1886(d) provides a prospective payment
methodology for payments to certain hospitals (called
"subsection (d) hospitals"). Subsection (d)(1) provides
formulas for different years for "the amount of the
payment with respect to the operating costs of inpatient
hospital services (as defined in subsection (a)(4))."
These formulas include calculation of national and
hospital-specific DRG rates per discharge, but do not
include amounts for educational or capital costs.
Subsection (d)(5) provides for certain "additional
payments", including costs for certain outlier cases
under paragraph (A), for indirect costs of medical
education under paragraph (B), and for disproportionate
share hospitals under paragraph (F). Section 1886(g)
provides for a prospective payment system for certain
capital-related costs and an additional payment for a
return on equity capital. The District appears to be
arguing that all payments authorized under section 1886
(or at least payments for medical education costs) should
be considered "amounts paid for operating costs" and
therefore included in the DSH calculation. If this were
so, however, DSH payments themselves would be included in
the amounts paid described in section 1923(c)(1)(A), and
this would not make sense. Moreover, even though section
1886 allows for payment of capital costs, capital costs
are nowhere referred to as operating costs. Thus, mere
authorization of payment for particular costs does not
mean they qualify as operating costs, much less that they
are necessarily the kind of operating costs referred to
in section 1886(a)(4).
The District is also mistaken in relying on Medicare
regulations at 42 C.F.R. Part 412, which implement the
prospective payment systems in sections 1886(d) and (g).
Subpart D sets forth the basic methodology by which
prospective payment rates for inpatient operating costs
are determined. Subpart F sets forth the methodology for
determining additional payments for outlier cases.
Subpart G sets forth rules for special treatment of
certain facilities under the prospective payment system
for inpatient operating costs. Section 412.90(g) in
Subpart G states that HCFA makes an additional payment
for "inpatient operating costs to a hospital for indirect
medical education costs attributable to an approved
graduate medical education program." At most, the
wording of section 412.90 indicates that HCFA considered
such indirect costs part of hospital operating costs. It
does not necessarily imply that they are considered
"operating costs of inpatient hospital services," of the
kind described in section 1886(a)(4). Indeed, section
412.105, which sets out procedures for calculating the
additional payment for indirect medical education costs,
includes in the calculation residents assigned to the
outpatient department of the hospital. Moreover, section
412.2(e) specifically excludes certain direct medical
education costs from prospective payment amounts.
In sum, only part of the prospective payments made under
the Medicare system are properly considered "amounts paid
. . . for operating costs for inpatient hospital
services," as defined in section 1886(a)(4), and that
part does not include the additional payments for capital
and medical education costs. Thus, the District cannot
reasonably read the wording "amounts paid" in section
1923(c)(1) to broaden the provision to encompass amounts
paid for costs of the kind that are excluded from the
1886(a)(4) definition.
The District further argued, however, that the statute
and HCFA policy recognized that there were differences
between Medicare and Medicaid hospitals and permitted
states to define "operating costs" differently for
Medicaid purposes than for Medicare. The District said
that Congress recognized these differences by using the
phrase "of the kind" in section 1923(c)(1)(A).
We agree with the District that the phrase "of the kind"
indicates that Congress recognized that the operating
costs of providing Medicaid inpatient hospital services
would not be the same as the operating costs of providing
Medicare services. Also, the legislative history of
section 1923(c) refers to "a percentage adjustment in
Medicaid payment for operating costs comparable to the
adjustment which would be made under the Medicare rules
for disproportionate share hospitals." Conf. Rep. H.R.
495, 100th Cong. 1st Sess. 753 (1987). The use of the
word "comparable" indicates similarity, not sameness.
But capital costs and medical education costs are
nonetheless kinds of costs that may be incurred under
either Medicare or Medicaid, and which are explicitly
excluded from the definition of operating costs of
inpatient hospital services in section 1886(a)(4).
Including these costs in the calculation would lead to a
Medicaid DSH payment which would not be comparable to the
Medicare DSH payment because it would be calculated by
including payments which the Medicare DSH calculation
does not include. 10/
The District further argued that HCFA's policy issuances
permitted an interpretation of section 1923(c)(1)(A)
which would include payments for both medical education
and capital costs in the DSH payment adjustment
calculation if a state's payment rate included such
amounts. First, the District cited HCFA SMM 6000.2,
which states:
Under § 4112, the payment adjustment must at a
minimum provide either:
1. An additional payment amount equal to the
product of the hospital's Medicaid operating cost
payment (e.g., DRG payment, per diem rate) times the
hospital's Medicare disproportionate share
adjustment percentage . . . ."
(District's emphasis.)
Second, the District cited the following statement which
it said was from the preamble to the proposed HCFA rule
on DSH payments, but actually was proposed section
447.292:
(b) Medicare methodology--(1) General rule. The
amount of the adjustment must be at least equal to
the product of the hospital's payment adjustment
factor multiplied by the hospital's Medicaid
operating costs. (Medicaid operating costs are
defined by the State and are similar to the Medicare
operating costs described in 412.2(c) of this
chapter.)
District br. at 3 (unnumbered).
These statements are at most ambiguous regarding the
issue here and, in any event, could not override the
plain language of the statute. The District could not
reasonably read these statements to imply that whatever
the District decides to label its payment for Medicaid
operating costs controls. The states define Medicaid
operating costs because, under section 1902(a)(13) of the
Act, states establish the state plan methods and
procedures for reimbursing hospitals and may define
allowable operating costs differently from the Medicare
systems. DRG rates and per diem rates may be examples of
payments for operating costs as determined under a state
plan. This does not necessarily mean, however, that any
such rate (no matter what costs are included in
calculating that rate) should be considered a payment for
operating costs of inpatient hospital services of the
kind described in section 1886(a)(4), within the meaning
of section 1923(c)(1)(A).
The proposed regulatory section the District quoted
refers to costs similar to the operating costs described
in 42 C.F.R. § 412.2(c). (The District's brief contains
a typographical error, citing this as section 412.1(c).)
Section 412.2(c) lists as "inpatient operating costs"
the kinds of costs included in the 1886(a)(4) definition
and does not list medical education or capital costs. In
any event, the language relied on by the District was not
used in the final rule on DSH payments. Instead, the
final rule describes the minimum payment adjustment as
"the amount required by the Medicare methodology
described in section 1923(c)(1) of the Act for those
hospitals that satisfy the minimum Federal definition of
a disproportionate share hospital in section 1923(b) of
the Act." 42 C.F.R. § 447.296(b)(5). The preamble to
the final rule refers to the methodology in section
1923(c)(1) as "the Medicare methodology." 57 Fed. Reg.
55,118, 55,131 (Nov. 24, 1992). The methodology in the
Medicare regulations for calculating DSH payment
adjustments does not include in the calculations the
additional payments for medical education and capital
costs. 42 C.F.R. § 412.106(a)(2).
Moreover, since section 1923(c)(1) describes a minimum
payment, states are not precluded from providing in their
state plans for DSH payments that exceed that amount.
Thus, if the District intended after April 1, 1995, to
pay some hospitals a DSH payment amount that is more than
the section 1923(c) amount, that might be permissible.
FFP is not available in such payments, however, if the
aggregate amount exceeds the District's allotment. 11/
Thus, we conclude that HCFA correctly determined that the
District's calculations were not consistent with section
1923(c)(1)(A) since they included amounts paid for
medical education and capital costs.
C) Whether the cost settlements were attributed to
the proper periods
Based on statements the District had made in
correspondence regarding its consultant's calculations,
HCFA raised a question concerning whether the
calculations had provided accounting treatment of cost
settlements consistent with generally accepted accounting
principles. Specifically, HCFA questioned whether prior
year cost settlements had improperly been included in the
calculations for the years at issue. HCFA said it was
"contrary to generally accepted accounting principles to
compute current year DSH payments based on costs
attributable to previous fiscal years." Disallowance
letter at 2, citing 42 C.F.R. § 413.5.
The District responded by referring to HCFA's method as
an "accrual" method. The District said that HCFA had
misunderstood its calculations. According to the
District, it had used the accrual method (although the
District indicated that it did not see a problem with
booking the cost settlement amounts either to the year in
which the services were provided or to the year in which
the amounts are paid). The District also said that, for
many purposes, a prior year settlement is booked in the
year paid, but that "it probably should be booked for the
year FOR which it is paid." District br., Att. VII, at
2.
In its brief, HCFA did not deny that the District used
the year of service for cost settlement amounts, but
explained HCFA's understanding of an accrual system, as
follows:
HCFA understands an accrual system (for the
settlement of cost reports) to mean that costs
incurred in one cost-reporting year remain in that
year, and may be adjusted up or down for that year
in a final settlement, regardless of the year in
which payment is made for them.
HCFA br. at 2, n. 2. The District replied:
The HCFA language here is not quite correct. In an
accrual accounting approach, it is revenues or
payments which are accrued along with costs. Thus,
the "amount paid" is (for DSH purposes) adjusted by
those settlements. At that point, whatever
adjustment is applied to the original payments to
meet an allowable DSH multiplier definition will
also be applied to the cost settlements. It might
be argued that the settlement changes can be "backed
into" the cost report. However, such cost
settlements are often made after the "final audit"
of a given year's cost reports.
Reply, Attached Discussion at 9 (unnumbered). The
District also commented that "HCFA apparently wants to
accept the costs that are accrued, but not the payments,"
and "in any normal accrual system, both costs and
revenues are accrued." Reply at 2 (unnumbered).
Both parties have confused the issue here somewhat.
Section 1923(c)(1) refers to the "amounts paid under the
State plan to a hospital for operating costs of inpatient
hospital services." Section 1902(a)(13) provides for
payments for hospital services through use of rates
determined according to methods and standards in the
state plan. DSH amounts are adjustments to those rates.
A payment rate applies to services provided in a
particular year.
Cost settlement is a term used in hospital reimbursement
systems to mean the process involved in reconciling the
hospital's estimated costs to actual allowable costs.
Costs are reported at the end of a cost-reporting period
(usually a year). The reported costs are usually subject
to a desk audit and may be subject to a field audit.
Adjustments are made based on differences between
reported and audited costs. If a hospital appeals an
audit finding, further adjustments may be made, based on
settling the appeal or on a decision from an
administrative process or court. Allowable payment rates
are recalculated at various stages of the cost settlement
process, and adjustments would be made to the amounts
previously paid for any over- or underpayment to the
hospital due to differences between an interim rate and
the final rate (or in the amount of services provided,
such as changes in the number of patient days of service
provided). Generally, a retrospective system would call
for rate adjustments based on the costs reported and
settled for the year to which the rate applies, and
payments for services rendered during that rate year
would be the ones adjusted. A prospective payment system
generally uses costs of a "base year" to determine
payment rates, trended forward by inflation factors. If
the cost settlement process results in changes to base
year costs, then it could result in a rate adjustment to
a prospective rate based on that year's costs, if such
adjustments to base year costs are permitted under the
state plan. Thus, the state plan methodology is what
determines what rate-years are affected by differences
between a hospital's estimated and reported costs, and
any adjustments to reported costs resulting from audits
or appeals.
For the period the District used a retrospective system,
the year in which the costs were incurred (the year in
which the hospital accrued expenditures) is the same as
the period in which the hospital provided the services to
which the rate determined based on those costs applies.
HCFA is correct that, in a retrospective system, payments
for services provided in a current year for which DSH
payments are being calculated cannot properly include
payments made based on settlement of costs from a prior
cost-reporting period. The regulation on which HCFA
relied refers to a retrospective reimbursement system.
Under a prospective payment system, however, a base
year's costs are used, and, if permitted by the State
plan, adjustments to base year costs could affect the
rate for services provided in a later period and
therefore the amounts paid under the state plan for that
period. The District's prospective system in effect for
some hospitals for the last half of FY 1995 used base
year costs from 1990. Conceivably, a cost settlement
adjusting 1990 costs could affect the prospective rate
and lead to payment adjustments for services provided in
FY 1995 that might be paid in that year.
If the District was including in the DSH calculation for
a particular year cost settlements made in that year,
rather than allocating cost settlement amounts to the
year for which the payment was made (that is, the year to
which any adjusted rate or change in the days of service
provided applied), this was clearly incorrect. The
District statements are ambiguous on this. Thus, HCFA
may require the District, as part of the showing
described below, to provide assurance that the District
included cost settlement amounts in the appropriate
year's DSH calculations.
We note that the District did not clearly explain what it
meant by its allegation that HCFA was not allowing
accrual of revenues and that this was inconsistent with
requiring accrual of costs. With respect to the
hospitals, their entitlement to payment for particular
services arises in the year of service, so attributing to
that year any retrospective adjustments to the applicable
rate appears to us to be consistent with attributing
costs to the year in which accrued and reported.
If the District meant by its statement about treatment of
"accrued revenues" that HCFA should include in
calculations of the DSH minimum payment amounts those
amounts the District's consultant identified as owed to
the DSH hospitals for projected increases in PIPs, we
disagree. Section 1923(c)(1) refers to "amounts paid
under the State plan," rather than to amounts paid or
due. Even if "amounts paid" could be interpreted to
include amounts a state has calculated should be paid,
however, the question would remain whether they were
"under the State plan" -- that is, in accordance with
what is authorized under the State plan. 12/ The
State plan permits PIP payments, subject to adjustment
based on actual allowable costs. The District did not
point to any language in its State plan specifically
providing for retroactive increases to the PIP amounts
based on projections like the District's consultant
apparently used here.
If the District meant that HCFA should treat as actual
expenditures for purposes of FFP amounts calculated as
due to hospitals for increased DSH payments, since these
might be considered "accrued revenues" of the hospitals
even if not paid, we disagree. For purposes of FFP, the
issue is whether the District made an actual expenditure.
Whether accrued amounts may be allowed depends on
whether the District itself (as opposed to its hospitals)
is on a cash or accrual basis of accounting. The
District in effect acknowledged that its Medicaid program
is on a cash accounting basis. District br., Att. VII,
at 2 (unnumbered). Thus, the District would not record
any expenditure for increased DSH payments to hospitals
until payment was made.
Moreover, the District did not assert that it had
recorded as accrued expenditures on its accounting books
the amounts its consultant calculated as due to private
hospitals, and, to the extent the District recorded
aggregate amounts in excess of its properly calculated
DSH allotment, such amounts would not be "amounts
expended under the State plan" within the meaning of
section 1903(a)(1). The State plan limits payments by
the allotment amount, and section 1903(a)(1) of the Act
provides that FFP for medical assistance is subject to
the DSH allotment limits in 1923(f).
Thus, we conclude that 1) HCFA's determination was in
principle correct (except to the extent it did not take
into account that the District had a prospective payment
system for some hospitals for the second half of FY
1995); 2) the District's statements on what in fact it
did are too ambiguous to be reliable; and 3) contrary to
what the District alleged, HCFA's position does not
involve an inconsistent treatment of costs and revenues.
D. Whether HCFA correctly calculated allotment
amounts
The District, at various places in its briefing, raised
some additional issues about HCFA's calculation of the
minimum allotment amounts for the District. In its reply
brief, the District also suggested that HCFA should use
updated figures to recalculate an allotment amount using
the "growth factor" formula in section 1923(f) of the
Act.
We first note that HCFA apparently calculated minimum DSH
allotment amounts in excess of the allotment amounts for
the District published in the Federal Register for the
years in question. To the extent that the District can
show it has made increased DSH payments to individual
hospitals consistent with how HCFA calculated the minimum
payments for those hospitals for each of the fiscal years
involved, it would appear that those amounts should be
allowed, at least on an interim basis.
In its calculations, HCFA used what it referred to as
"final allowable audited costs" for fiscal year 1993 and
then trended these costs forward by the TEFRA targets for
FYs 1994 and 1995. The District's arguments raised
several questions about this. The District noted that
HCFA had used an estimation technique. Since it appears
that audits for these years may not have been completed,
we do not see a problem with HCFA estimating what the
minimum allotment will be, subject to adjustment as
actual cost information is received--particularly where
it raises the allotment amounts that otherwise would
apply. HCFA recognized that further adjustments to these
amounts might be needed as such information is obtained.
The District also argued that cost settlements sometimes
occur after audits as a result of appeals, suggesting
that audited costs would not always take these cost
settlements into account. HCFA's explanation of its
calculations indicates, however, that it did take such
settlements into account for FY 1993 and is willing to
make any additional adjustments if necessary to account
for such cost settlements. HCFA should provide
information to the District to enable it to evaluate what
cost settlements HCFA took into account, and then the
District should have an opportunity to show that
additional cost settlements for 1993 should also be taken
into account. The District should also be permitted to
show if actual audited allowable operating costs for FY
1994 and the first half of FY 1995 (including adjustments
for cost settlements) exceeded the figures HCFA obtained
by trending forward the FY 1993 costs.
The District further argued that "amounts paid" might be
different from final audited costs. We have addressed
this argument at various points above. We conclude that
1) the calculations must be for amounts paid under the
State plan for operating costs of inpatient services of
the kind described in section 1886(a)(4) of the Act (and
therefore exclude amounts paid for medical education and
capital costs); and 2) for hospitals or units not subject
to the prospective APDRG system, the "amount paid under
the State plan" cannot be simply the amount paid as PIPs
or estimated PIPs since the State plan subjects PIP
amounts to retrospective adjustment. In determining the
"amount paid under the State plan," application of any
relevant cost limits in the plan in effect for the fiscal
year might mean that total audited operating costs could
not be included in the calculations. HCFA appeared to
recognize this, however, since it referred to "final
audited allowable costs." Usually, costs in excess of
any cost limit would not be considered allowable for
purposes of rate calculation.
We also conclude, however, that for private hospitals
subject to the APDRG system after April 1, 1995, the
"amounts paid under the State plan" for the second half
of fiscal year 1995 would be payments for that part of
the prospective rates attributable to properly included
operating costs and would not be subject to adjustment to
actual audited costs of the service year. The District
should have an opportunity to make a showing that using
this part of its prospective payments for the second half
of 1995 (rather than HCFA's method of trending forward
actual allowable audited costs for 1993) would increase
the minimum allotment for FY 1995.
The District also explained that part of the increased
DSH payment amounts it calculated was attributable to
increases in the second part of the minimum DSH payment
formula, set out in section 1923(c)(1)(B). This part of
the formula (the "multiplier") refers to the hospital's
Medicare disproportionate share percentage at section
1886(d)(5)(iv) of the Act. See 42 C.F.R. § 447.292. SMM
6000.2 refers states to the Medicare fiscal intermediary
to obtain this data. Since the Medicare disproportionate
share percentage uses a "Medicaid proxy" as part of the
calculation, this calculation could be affected by
changes such as retroactive determinations of Medicaid
eligibility (which the District said would not always be
made prior to submission of a cost report). (For a
discussion of the Medicaid proxy, see Jefferson Hospital,
Inc. v. Secretary of Health and Human Services, 19 F.3d
270 (6th Cir. 1994).) HCFA did not directly challenge
the District's calculations on the basis that the
District used the wrong multipliers. The record is not
clear whether or not HCFA used the same multipliers in
calculating minimum DSH allotments, nor whether the
District's calculations of the multipliers is consistent
with that of the Medicare fiscal intermediary for the
District (for those hospitals that have Medicare
disproportionate share percentages calculated by the
intermediary). 13/ HCFA should provide information
to the District on what multipliers HCFA used, and permit
the District an opportunity to show that these
multipliers were incorrect.
Finally, we reject the District's suggestion that HCFA
should recalculate the District's DSH allotments using
the "growth factor" formula from section 1923(f)(2)(A) of
the Act since HCFA's calculations using the growth factor
calculation were biased downward. HCFA's regulations
clearly provide that it will publish its calculation of
the allotment using this formula preliminarily before the
start of the fiscal year and then publish a "final"
allotment amount in April of the fiscal year, and that
this amount will not be subject to adjustment based on
information provided later. 42 C.F.R. § 447.297(d)(1).
This is a reasonable implementation of the allotment
provision, and is binding on us. See 45 C.F.R. § 16.14.
Conclusion
For the reasons stated above, we uphold the disallowance,
subject to reduction to the extent the District makes a
showing, consistent with our analysis at pages 13-30
above, that--
• It recorded actual expenditures for increased DSH
payments; and
• Amounts paid for outpatient costs, medical
education costs, and capital costs have been
excluded from calculations of the increased DSH
payment amounts;
• The actual audited cost figures used by HCFA did
not take into account cost settlements for allowable
operating costs;
•
• Amounts paid for allowable operating costs after
April 1, 1995 to hospitals subject to a prospective
payment system exceeded the actual audited costs for
that period used in HCFA's calculations.
The District should make such a showing within 30 days of
receipt of our decision or such longer period as HCFA
permits. Our decision does not preclude the District
from making further actual expenditures for increased DSH
payments, consistent with our decision, but the District
should consult with HCFA about whether any such increased
payments must be reported on a subsequent quarterly
expenditure report.
_____________________________
Judith A. Ballard
_____________________________
Cecilia Sparks Ford
_____________________________
M. Terry Johnson
Presiding Board Member
* * * Footnotes * * *
1. TEFRA refers to the Tax Equity and Fiscal
Responsibility Act of 1982, Public Law 97-248. Section
101 of that Act imposed limits on what operating costs of
inpatient hospital services may be recognized as
reasonable.
2. In a letter to HCFA's regional office, the
District referred to the acronym "PIP" as standing for
"program inpatient payments." The State plan, however,
uses the acronym to refer to "periodic interim payments."
The term "interim payments" is commonly used in
reimbursement systems for payments which are made on a
prospective basis, but which are subject to retrospective
adjustment.
3. The plan refers to Attachment 4.19A,
Sections 4A 5. and 6. Section 4A provides a system for
services provided before November 17, 1990. Section 5 is
the system effective November 17, 1990, using TEFRA
Target Rates, and section 6 describes the system for
reimbursing public hospitals 100% of costs.
4. Part 413 provides for suitable retroactive
adjustments, after the provider has submitted fiscal and
statistical reports, that "represent the difference
between the amount received by the provider during the
year for covered services . . . and the amount determined
in accordance with an accepted method of cost
apportionment to be the actual cost of services furnished
. . . during the year." 42 C.F.R. § 413.9(b)(1).
5. Attachment VI.B. to District's brief is a
draft of a Regional Office letter. HCFA did not assert
that this letter did not represent its final position on
the matters discussed therein.
6. HCFA did not specifically challenge the
District's recalculation of Medicare DSH percentages
under section 1923(c)(1)(B). See our discussion of this
below.
7. HCFA's earlier correspondence faulted the
District for using the PIP amounts since they are
estimates. Starting with those amounts (to the extent
attributable to operating costs, properly defined) may be
permissible if the appropriate adjustments are made for
payments and recoveries for cost settlements (to the
extent attributable to operating costs, properly
defined). The result should correspond to allowable
amounts paid for operating costs, properly defined. (See
page 2 of HCFA's April 8, 1997 brief.) The District
would have to show, however, that the District actually
paid the PIP amounts and actually paid any amounts due
for cost settlements. There is some indication in the
description of the PIP amounts used by the consultant in
calculating the DSH amounts that increased PIPs (and cost
settlement adjustments) were estimated after the fact for
each year, rather than being determined by the District's
records of what amounts were in fact paid to the
hospitals for services provided in each year. This
raises the question of whether these amounts were ever
paid to the hospitals (particularly the private ones).
As the District itself emphasized, the section 1923(c)(1)
minimum DSH payment adjustment is to be calculated using
"amounts paid" for operating costs.
8. We note that the purpose of the DSH payments
is to recognize that certain hospitals provide services
to a large population of Medicaid recipients and other
low-income individuals and therefore are faced with
special financial needs. See 57 Fed. Reg. at 55130. The
District did not argue that this purpose could not be met
if the minimum DSH payment amounts did not include
amounts paid for medical education and capital costs.
9. We agree with the District on this limited
point. In a true prospective payment system, the
prospective rate is final, not interim, and is not
reconciled to actual audited costs in the period in which
the services for which payment was made were rendered
(although some prospective systems allow for limited
retroactive adjustments or for rate increases to account
for adjustments to base year actual costs). Moreover,
even in a retrospective system like that in effect for
District hospitals under the State plan prior to April 1,
1995, there may be cost limits that apply, so that even
total net payments after a final cost settlement may not
equal total actual audited costs. HCFA appears to have
recognized this, however, since it said it used allowable
audited costs and applied the TEFRA Target Rate limits.
(As discussed below, there is nonetheless some question
about whether either party's calculations took into
account all of the appropriate adjustments for cost
settlements.)
10. The DSH calculation for Medicare is based
on the hospital's revenues from the basic DRG payment
plus outlier payments, but does not include the
additional payments for medical education and capital
costs. 42 C.F.R. § 412.106(a)(2).
11. HCFA may have introduced some confusion by
approving both the State plan provision that refers to
cost items including medical education costs and capital
costs as part of the calculation of the DSH payment (at
least to hospitals covered by the APDRG system) and the
provision that refers to section 1923(c)(1). We do not,
however, see any prejudice to the District from HCFA's
approval action since the District plan also limits
aggregate DSH payments to the federally established
allotment, and since this plan amendment was not approved
until after HCFA had notified the District that medical
education and capital costs should not be included in the
1923(c)(1)(A) calculation. We also note that the State
plan refers to the peer group specific rate as including
"operating costs, capital costs and direct medical
education costs" so it may not have clearly conveyed that
the District intended to consider payments for medical
education and capital costs to be amounts paid for
operating costs. See HCFA Ex. 2, at 13.
12. Under a retrospective system, a state plan
authorizes interim payments, but what is ultimately
considered expended in accordance with the state plan,
within the meaning of section 1903(a)(1) of the Act, is
determined by the state plan rate-setting methodology for
establishing final rates. See, e.g., Commonwealth of
Massachusetts v. Heckler, 749 F.2d 89 (1st Cir. 1984).
13. As the District pointed out, language at
the end of section 1923(c) provides a special formula for
the multiplier for children's hospitals (using only the
second half of the Medicare multiplier formula).
(..continued)