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Department of Health and Human Services
Appellate Division

SUBJECT: Maryland Department of Health and Mental Hygiene,

DATE: February 10, 2004



Docket No. A-03-46
Decision No. 1909


The Maryland Department of Health and Mental Hygiene (Maryland) appealed a February 25, 2003 determination by the Centers for Medicare & Medicaid Services (CMS) to disallow federal reimbursement for $3,452,948 in Medicaid expenditures for family planning services because Maryland's reimbursement claim for those expenditures had not been filed within two years after the calendar quarter in which the expenditures were made, as required by section 1132(a) of the Social Security Act (Act). Maryland alleged that its claim fell within an exception to the two-year filing requirement for "adjustments to prior year costs."

For reasons explained below, we conclude that the reimbursement claim was untimely and that the exception to the two-year filing requirement for an "adjustment to prior year costs" is inapplicable. We therefore sustain the $3,452,948 disallowance.

Statutory and Regulatory Background

Medicaid is a program, jointly funded and administered by the states and federal government, that provides medical assistance to poor people. The term "medical assistance" is defined in section 1905(a) of the Act as "payment of part or all of the cost" of care and services (listed in the section) for or to eligible individuals as described in the section. A state with an approved Medicaid plan is eligible to receive federal matching funds, known as "federal financial participation" (FFP), for amounts expended as medical assistance under the state plan, as well as for certain administrative costs. See section 1903 of the Act (42 U.S.C. 1396); 45 C.F.R. 95.505.

For most medical assistance expenditures, a state receives FFP at a rate known as the "federal medical assistance percentage" (FMAP). Sections 1903(a)(1)and 1905(b) of the Act (42 U.S.C. 1396b(a)(1) and 1396d(b)). The FMAP for Maryland during the relevant period was 50 percent. See CMS Ex. 1. Medicaid expenditures for "family planning services and supplies" are reimbursed at a rate greater than the FMAP. Section 1903(a)(5) of the Act provides that a state with an approved plan may receive FFP at the rate of 90% for expenditures "attributable to the offering, arranging, and furnishing . . . of family planning services and supplies." 42 U.S.C. 1396b(a)(5); see also 42 C.F.R. 433.10(c) and 433.15(b)(2).

States submit claims for FFP on form CMS-64, the quarterly statement of expenditures (QSE). Section 1132 of the Act provides that claims for FFP in a state expenditure must be made within two years after the calendar quarter in which the expenditure was made. 42 U.S.C. 1320b-2(a). Section 1132(a) specifies a small number of exceptions to the two-year filing requirement, stating that it "shall not be applied so as to deny payment with respect to any expenditure involving court-ordered retroactive payments or audit exceptions, or adjustments to prior year costs." Id. (emphasis added).

Case Background

Maryland operates a program called HealthChoice. Under this program, managed care organizations (MCOs) contract with Maryland to provide medical services, including family planning services, to its Medicaid-eligible residents. Maryland pays MCOs a monthly risk-based capitation payment for each Medicaid recipient they serve. See Maryland Ex. 2; Maryland Brief at 2.

Because family planning services receive federal reimbursement at a rate higher than the FMAP, Maryland determines the percentage of its managed care capitation payments that are attributable to those services. Maryland uses this percentage, which it calls the "family planning factor," to quantify what part of its Health Choice expenditures qualify for FFP at the 90% rate. (Thus, for example, if total HealthChoice capitation payments for a quarter were $1 million, Maryland would calculate the total amount qualifying for 90% reimbursement by multiplying the family planning factor by $1 million.) During the periods at issue, Maryland calculated the family planning factor using historical fee-for-service claims data. See Maryland Exs. 2-3; Maryland Brief at 3-5.

For the eight quarters between July 1, 1998 and June 30, 2000 -- state fiscal years (SFYs) 1999 and 2000 (1) -- Maryland submitted QSEs seeking FFP for managed care and other categories of Medicaid expenditures. CMS Ex. 1. Each QSE showed the amount of managed care expenditures subject to the 50% FMAP, as well as the amount claimed at the 90% rate for family planning services. For each quarter, Maryland used a family planning factor of .90271% to determine the amount claimed at the 90% rate. Maryland Ex. 6. This factor was calculated using fee-for-service claims data from SFY 1996. See Maryland Ex. 2, 7.

In October 2002, a Maryland contractor named John DiMaggio reviewed the methodology used to determine the family planning factor. Maryland Ex. 8. Using SFY 1997 claims data, Mr. DiMaggio determined that Maryland had underestimated the percentage of capitation payments that represented spending for family planning, and that the family planning factor for SFYs 1999 and 2000 should have been 1.3946296%, instead of .90271%. CMS Ex. 3; Maryland Exs. 8-9. Subsequently, as part of a QSE for the quarter ending September 30, 2002, Maryland requested $3,452,948 in additional FFP for SFYs 1999 and 2000 based on the higher family planning factor (1.3946296%) calculated by Mr. DiMaggio. CMS Ex. 4. This additional FFP did not reflect a net increase in MCO capitation payments for SFYs 1999 and 2000. Rather, the amount reflected an increase in the percentage of capitation payments subject to the 90% FFP rate, and a decrease in the percentage of those payments subject to the lower State-specific FMAP. See Maryland Ex. 2, 12 and Ex. 10.

On February 25, 2003, CMS disallowed the $3,452,948 in additional FFP sought by Maryland for family planning services, finding that the increased amount on the QSE for the quarter that ended on September 30, 2002 constituted a new claim that had been filed more than two years after the calendar quarter in which the expenditures were made and was therefore untimely. Maryland Ex. 1. Relying on our decision in New Jersey Dept. of Human Services, DAB No. 1655 (1998), CMS also determined that Maryland's claim for additional FFP did not represent an "adjustment to prior year costs" because "only the Federal Medical Assistance Percentage is being changed." Id.


The expenditures for which CMS denied FFP are the HealthChoice capitation payments made by Maryland during SFYs 1999-2000 (July 1, 1998 to June 30, 2000). CMS found, and Maryland did not deny, that its claim for additional FFP regarding these expenditures was filed more two years after the quarter in which the expenditures were made. Maryland contended, however, that its claim constituted an "adjustment to prior year costs" and therefore should not be barred as untimely under section 1132(a) of the Act. See Maryland Brief at 8; Maryland Reply Brief at 2-3.

The purpose of the timely claims requirement is to "ensure that states submit final reimbursement requests in a timely fashion so that HHS can plan its budget." Connecticut v. Schweiker, 684 F.2d 979, 982 (D.C. Cir. 1982), cert. denied, 459 U.S. 1207 (1983). In light of this purpose, the Board has stated that the exceptions to the timely claims requirement are intended to cover only "extreme situations" and do not apply to the "routine situation where a state simply did not get around to getting its data together in time to file a claim within the statutory requirements." New York State Dept. of Social Services, DAB No. 521, at 8 (1984), aff'd, New York v. Sullivan, No. 92 Civ. 2832 (LMM),993 WL 266616 (S.D.N.Y. Apr. 7, 1993). Instead, the exceptions are intended to "take care of those cases where it would be patently unfair to a state to outlaw its claim merely because of the passage of time." Id.

Implementing regulations at 45 C.F.R. 95.4 define the term "adjustment to prior year costs" as "an adjustment in the amount of a particular cost item that was previously claimed under an interim rate concept" (emphasis added). A claim for FFP under an "interim rate concept" is one that is based on an interim or provisional payment rate. Historically, Medicaid services provided by institutional providers have been reimbursed using a per diem, per capita, or other per unit rate calculated using the underlying, allowable costs incurred by the provider in providing the services (e.g., costs of personnel, supplies, etc.). See Social Security Act 1902(13), 42 U.S.C. 1396a(13). In a retrospective system of reimbursement, such as the "reasonable cost" methodology originally used in the Medicare program and adopted or modified for many Medicaid programs, the interim rate is derived from historical cost data and applied prospectively to the fiscal period for which the claim is made. When the actual costs for that period become known, the provider submits a cost report, which is then subject to audit, and a final rate is computed. The final rate may then be appealed by the provider and adjusted if necessary, as part of the cost settlement process. See New York State Dept. of Social Services; California Dept. of Health Services, DAB No. 1472 (1994); South Carolina State Health and Human Services Finance Comm., DAB No. 943 (1988), aff'd, South Carolina Health & Human Services Finance Comm'n v. Sullivan, No. 3:88-1313-16 (D. S.C. July 13, 1989), aff'd, 915 F.2d 129 (4th Cir. 1990). Of course, delays in determining the actual, allowable costs for the period may prevent a state from submitting a claim based on a final payment rate within two years after the quarter in which the state's expenditures were made. When this occurs, the claim may, under appropriate circumstances, be treated as seeking an adjustment to prior year costs exempt from the two-year filing requirement.

We have repeatedly held that the exception for an adjustment to prior year costs was intended to apply to claims generated by an established interim and final cost settlement process. See Pennsylvania Dept. of Public Welfare, DAB No. 703, at 3-4 (1985)(noting that a claim may be an adjustment to prior year costs as long as the adjustment was contemplated by the state's rate-setting system and not prohibited by the state's Medicaid plan); Tennessee Dept. of Health and Environment, DAB No. 921, at 5 (1987)(to qualify as an adjustment to prior year costs, an adjustment must be "related to the interim rate process"); South Carolina State Health and Human Services Finance Comm., at 7 ("The exception for adjustments to prior year costs is intended to give a state a reasonable opportunity to adjust its interim rate, consistent with the methods and procedures of its established rate-setting methodology"). We have also emphasized that the exception should be applied only when the state's inability to file the adjusted claim within the two-year period was due to unavoidable or unforeseen circumstances. (2) See California Dept. of Health Services at 5 (the exception is applicable "where an interim rate did not include costs of which a state was not aware at the time it filed its claim based on the interim rate, or where a delay in establishing a final rate was due to circumstances beyond a State's control"); see also Massachusetts Dept. of Social Services, DAB No. 1308 (1992).

In this case, the exception does not apply in part because there was no "adjustment in the amount of a particular cost item" previously claimed. Based on the wording of sections 1903 and 1905 of the Act, we determined in prior decisions that a "particular cost item" that a state may claim as a medical assistance expenditure is the Medicaid covered service furnished by a Medicaid-participating health care provider to a particular Medicaid recipient at a particular point in time. See Pennsylvania Dept. of Public Welfare, DAB No. 703 (1985); Ohio Dept. of Public Welfare, DAB No. 622 (1985). In those decisions, which involved retrospective reimbursement claims, the state claimed FFP for certain medical assistance expenditures, where the amount claimed was based on a per diem or other per unit rate calculated using the provider's allowable costs of providing the medical services. Pennsylvania, DAB No. 703, at 2-4 (noting that "[f]ederal reimbursement of Medicaid expenditures is based on payment rates," and that what is claimed by the state as a Medicaid expenditure is the "cost of the service as measured by the rate" (emphasis added)); Ohio, DAB No. 622, at 7, n.3 (1985)(rejecting a contention that "a particular cost item" was the "smallest divisible item accumulated on the provider's cost report rather than the item the State actually 'claims' under the program, the per diem rate for a given service" (such as a day of inpatient hospital services provided to a particular recipient on a particular day). In the context of managed care, a state is authorized to make capitation payments on behalf of a Medicaid-eligible individual to an MCO, which then undertakes to provide whatever Medicaid covered services are needed by the individual during the period for which the payment is made. The payment amount must be determined according to an approved methodology, in order to be allowable.

Here, for each Medicaid recipient covered by the HealthChoice program, Maryland made a monthly, risk-based capitation payment to cover all of the medical services, including family planning services, furnished to that recipient under the program. CMS asserted, and we agree, that the capitation payments were the "cost items" claimed by Maryland. This view, which is consistent with our prior decisions and with the statutory analysis on which they relied, would treat as a "particular cost item" the monthly capitation payment made to a particular HealthChoice MCO for medical services provided to a particular Medicaid recipient during a particular month. Maryland did not deny, however, that the amounts of the capitation payments that it claimed on the QSEs for the period July 1, 1998 through June 30, 2000 were not adjusted or subject to adjustment. Instead, the amount payable was determined on a prospective basis.

Moreover, the critical "adjustment" in this case was not made to the capitation payments, but was made instead to the family planning factor. The family planning factor is not reasonably viewed as a "particular cost item." Instead, the factor is merely a mechanism for determining what percentage of each capitation payment made to a HealthChoice MCO is intended to cover (and therefore attributable to) family planning services; the factor was calculated and adjusted using amounts historically paid on a fee-for-service basis for all family planning services compared to amounts paid for other covered Medicaid services. See Maryland Exs. 2-3. The family planning factor is similar to a rate. Unlike a per diem or other unit rate used to reimburse a provider for services provided and to reflect the provider's underlying costs, however, the family planning factor is calculated using what Maryland paid in the past for a category of services. Consequently, an adjustment to the factor does not result in an actual increase or decrease in the amount expended by Maryland for a particular cost item, nor does it reflect an adjustment based on the actual costs incurred by the MCO in providing services.

In Massachusetts Dept. of Public Welfare, DAB No. 796 (1996), Massachusetts had filed claims seeking FFP for services provided in state-owned intermediate care facilities for the mentally retarded. Later, after reconciling those claims with a computerized "master eligibility file," Massachusetts learned that the claims had factored in costs associated with Medicaid-ineligible patients and also failed to account for services provided to patients eligible for Medicaid. Consequently, more than two years after the costs were incurred, Massachusetts submitted revised claims based on its findings. We found that Massachusetts' revised claims were not an adjustment to prior year costs, saying:

What we are dealing with here, additional patient days, does not fall within this definition. The State did not increase the amount reimbursed for each patient day of service provided and previously claimed. The State's claims at issue here are related to its earlier claims for the same quarters only in that all the claims are for ICF/MR patient days. This alone will not qualify the [later] claims as adjustments to prior year costs. The State has simply claimed costs for patient days not previously reflected on the State's QERs. As such, these claims are not adjustments to prior year costs, but are wholly independent of previous claims.

Massachusetts Dept. of Public Welfare, at 5 (emphasis added). The situation here is analogous: Maryland, like Massachusetts, did not increase the rate it pays for medical services. Just as Massachusetts determined that it had paid for more patient days than previously calculated, Maryland merely estimated, using an updated family planning factor, that the percentage of the capitation payment amounts attributable to family planning services was higher than previously estimated.

Even assuming, for the sake of argument, that the family planning factor is a "particular cost item," the adjustment to this factor, and the resulting changes to the amounts claimed in the QSEs, did not constitute adjustments to amounts previously claimed under an "interim rate concept," as contemplated by the regulations. Maryland did not allege that it has an established process or policy governing adjustments to the family planning factor, or that the methods and procedures it used to make the adjustment in this case are outlined in its approved Medicaid plan (or were otherwise approved by CMS). It asserted only that the adjustment "has the accoutrements" of a "cost settlement" adjustment in that it is "based on an estimated rate updated when more current data became available." Maryland Reply Brief at 3. However, a cost settlement process is typically designed to permit a reconciliation of estimated and actual costs. See Tennessee Dept. of Health and Environment (noting that the interim rate exception is intended to allow states to reconcile estimated costs based on past history with actual costs incurred). No such reconciliation is alleged to have occurred here. Under the circumstances, we find no basis to conclude that Maryland's claim for additional FFP was related to, or stemmed from, an interim and final cost settlement process. (3)

We also find no basis to conclude that the delay in filing the revised claim was unavoidable. The adjustment to the family planning factor was based on claims data from SFY 1997. Maryland admitted that complete or nearly complete claims data for SFY 1997 was available by the end of SFY 1998 (June 30, 1998). Tr. at 21. The capitation payments at issue were made during SFYs 1999 and 2000 (July 1, 1998 to June 30, 2000). Thus, for the earliest of these expenditures, Maryland had at least two years, or until September 30, 2000, to adjust the family planning factor based on the SFY 1997 data and to submit revised claims based on that adjustment. As indicated, Maryland did not submit its revised claims until late 2002, more than four years after the data supporting the adjustment became available. Maryland offered no excuse or explanation for its failure to submit its revised claims within the two-year period allowed by section 1132(a). In short, this is not a case in which it would be patently unfair to disallow the claim merely because of the passage of time. Rather, it is a case in which a state simply did not get around to assembling and making use of its data in time to file a timely claim.

Maryland asserted that CMS's reliance on the Board's decision in New Jersey Dept. of Human Resources is misplaced. Maryland Brief at 7-8. Although the Board's discussion in New Jersey of the exception for adjustments to prior year costs is dicta, the decision is nevertheless instructive. The expenditures in that case had been made to operate a child support enforcement computer system called ACSES (automated child support enforcement systems). During 1995, New Jersey filed timely claims seeking FFP for ACSES operating costs incurred during the quarters ending September 30, 1994, December 31, 1994, and March 31, 1995. In each instance, the ACSES costs were claimed at the regular or standard FFP rate of 66%. However, when the 1995 claims were filed, the regulations authorized FFP at the 90% rate for hardware and proprietary software costs for states that maintained an approved computerized support enforcement system. New Jersey subsequently determined what portions of the costs claimed in 1995 were eligible for reimbursement at the 90% rate. In May 1997, New Jersey submitted a QSE seeking 90% FFP for the ACSES costs previously claimed in 1995 under the 66% rate.

New Jersey contended that its May 1997 request for FFP at the 90% rate was not barred by the two-year filing limitation because it was not a new or separate claim for additional cost items but merely requested additional reimbursement based on a different rate of FFP. Based on an analysis of the applicable regulations, the Board held that New Jersey's May 1997 request for additional FFP was, in fact, a new "claim" subject to the two-year filing limitation. New Jersey did not contend that its claim was an "adjustment to prior year costs," but the Board remarked that this exception would not have applied "because the enhanced FFP claims were not based on adjustments to the amount of the cost." New Jersey Department of Human Resources, at n.2.

Maryland asserted that its revised claims, unlike New Jersey's revised claims, "reflect adjustments to the amount of the cost of family planning services provided by MCOs." Maryland Brief at 8. However, we see no legally significant difference between Maryland's claims for additional FFP and the claims for additional FFP filed by New Jersey. In each case, the State's actual costs of providing the services in question did not change. New Jersey merely sought to submit a revised claim that moved previously claimed costs from one reimbursement category to the other. Similarly, Maryland reallocated certain expenditures (portions of its capitation payments) to a category that would qualify for reimbursement at a higher rate of FFP. Neither of these unremarkable situations is covered by the narrow and limited exception for an adjustment to prior year costs.


For the reasons above, we uphold CMS's disallowance of $3,452,948.



Cecilia Sparks Ford

Donald F. Garrett

Judith A. Ballard
Presiding Board Member


1. Maryland's fiscal year begins on July 1.

2. We described the "classic example" of an adjustment to prior year costs as follows:

A facility has an "interim" rate set for payment based on the prior year's costs. During the year the cost of an item or items goes up sharply, whether due to inflation or because of a reason peculiar to this cost item. At the end of the year adjustments of the rate are in order, based on changes in the cost of the particular items during the time period. However, it would be grossly unfair to the state not to allow it to claim for FFP based on the retrospective rate because it was now too late under the time limitation statute. In many cases two years might well elapse after the original expenditure before the rate was finally adjusted. Hence, the exception in the statute and regulation to prevent manifest injustice.

New York State Dept. of Social Services, at 8-9.

3. A review of our decisions indicates that the adjustment to prior year costs exception has been invoked most frequently with respect to retrospective reimbursement systems. A managed care capitation payment, however, is a type of prospective payment rate and typically not subject to retrospective adjustment. Cf. New York State Dept. of Health, DAB No. 1867 (2003) (discussing difference between prospective and retrospective rate-setting systems); 67 Fed. Reg. 40,989 (June 14, 2002)(discussing concept of capitation). By agreeing to accept a capitation payment, an MCO assumes the risk that its actual costs for providing family planning and other medical services to a given patient will be more or less than the payment it receives. In drawing this distinction between retrospective and prospective payment systems, we do not wish to imply that the exception can never apply to claims arising under managed care or other new payment or reimbursement systems.