DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: California Department DATE: January 4, 1989 of Health
Services Docket No. 88-96 Decision No. 1007
DECISION
The California Department of Health Services (State) appealed the
disallowance by the Health Care Financing Administration (HCFA or
Agency) of $1,117,651 in federal funding under the Medicaid program
(title XIX of the Social Security Act). The disallowance represents the
federal share of payments to Medicaid Intermediate Care Facilities for
the Developmentally Disabled (ICFs-DD) that the Agency alleged were in
excess of the rates allowed by California's Medicaid State plan. The
payments were made for the rate years that ended on July 31, 1984 and
July 31, 1985 (State Fiscal Years (FYs) 1984 and 1985). For the reasons
discussed below, we uphold the disallowance in full.
Background
During the period covered by the disallowance, California's Medicaid
plan provided detailed procedures for developing specific rates for each
ICF-DD facility. The procedures generally included auditing cost
reports from a certain number of providers, which were selected based on
the number of beds in their facility. From the data base of audited
cost reports, prospective payment rates were developed by projecting
expenditures and adjustments. See Ex. U, p. 1, and Ex. N, pp. 6-8.
From March through June 1985 HCFA conducted a reimbursement and
financial review of California's ICF-DD program. One purpose of the
review, which focused on FY 1985, was to determine if the State had
complied with its State plan by accurately calculating its rates, making
payment in accordance with the rates, and making the required assurances
and findings required by statute. HCFA's draft report was issued on
August 5, 1985. Ex. M. The report concluded that the State was:
paying for several classes of ICF/DD providers at rates above the
rate developed under the State plan methodology. When DHS
[Department of Health Services, the Medicaid State agency] computes
the class rates under the State plan methodology they compare the
rate to the rate paid in the prior year. If the new computed rate
is less than the prior year's rate, the state continues to pay the
prior year's higher rate. The State plan has no provision for
paying the higher rate. As such they are paying more than the
State plan provides for, which results in an overpayment.
Ex. M, p. 13.
In a letter dated September 12, 1985, the State acknowledged that during
the previous five years, as a matter of "administrative policy," the
State had paid ICF-DD rates higher than those computed under the State
plan where the rates projected in accordance with the State plan
methodology were less than current rates. Ex. Z, p. 1. The State
contended that HCFA had agreed to this "each year" and then went on
to
state as follows:
DHS [the Medicaid Agency], through consultation with HCFA, has
ascertained that an amendment to the State Plan could have resolved
this issue. DHS intends to pursue this option, and since HCFA has
given its approval to resolution used by DHS in previous years,
without recommending a State Plan amendment, the State must take
exception to the [recommended disallowance] at this time.
Ex. Z, p. 1.
HCFA's final report of the review, issued October 28, 1985, Exhibit N,
incorporated the findings of the draft report and made the following
response to the State's comments regarding HCFA's alleged authorization
of the State's actions:
[w]hen this issue was first raised [with] HCFA several years ago,
the amounts involved were small and DHS assured HCFA the problem
would be resolved in the following year. We agreed to allow DHS
time to correct the problem without immediately pursuing a
disallowance. This Regional Office position did not eliminate the
State's risk of having to repay any overpayments as a result of not
complying with the approved State plan. Rather, it allowed the
State time to correct its problem without immediate disallowance
action. (Emphasis added)
Ex. N, p. 14.
Following subsequent communications between the parties concerning the
review finding, the State ultimately submitted an amendment that was
approved by HCFA. HCFA, however, decided to proceed with a disallowance
for two fiscal years (ending July 31, 1984 and July 31, 1985) preceding
the effective date of the State's amendment.
The State's arguments in opposition to the disallowance were summarized
by the State itself as follows:
o . . . [T]he State plan does not require the unthinking,
mechanical application of the formula in rate development. It
allows sufficient flexibility to pay rates that take into account
possible flaws in the arithmetic computation and that are
"reasonable and adequate" as required by law. In fact, the rates
paid by DHS were authorized by the State plan and were approved by
HCFA, when the rate studies and assurances were submitted to it.
o Second, the notice of disallowance for payments made during
1983/1984 fiscal year is untimely. HCFA gave no notice to DHS of
any challenge to those payment rates until almost four years after
the close of the State's fiscal year. This was well beyond the
record retention period, and in fact, significant documents
concerning that fiscal year are missing. It is inequitable to
allow HCFA to challenge these rates so belatedly.
o Finally, HCFA has been well aware of the payment rates being
used by DHS. When rate studies and assurances were submitted to it
and when the matter was discussed with HCFA staff, no one gave DHS
any indication that HCFA believed the rates were not authorized by
the State plan. HCFA had an affirmative duty to do so. Yet, it
did not give DHS any notice, until it was too late to make changes
to the State plan for the fiscal years at issue herein. The
doctrines of waiver and estoppel should both be applied, because
HCFA's actions have been so unfair.
State's Br., pp. 19-20.
We discuss each of these arguments separately below.
Analysis
1. Did the State's existing plan for the years in question give the
State the option to continue the prior year's rate?
The State does not challenge the requirement that the rates must be
"determined in accordance with methods and standards specified in an
approved State plan." 42 C.F.R. 447.253(g). The Board has held in
several prior cases that where the State pays a provider at a rate that
is higher than that authorized by the State plan, the federal share of
the excess amount is an overpayment that is properly disallowed by the
Agency. See Ohio Dept. of Public Welfare, DAB No. 637 (1985); New York
State Dept. of Social Services, DAB No. 909 (1987).
The State here, however, contended that its plan provides a "degree of
flexibility" and does not require the mechanical application of the
rates as computed. The State argued that the State plan authorizes
adjustment of the rates to consider specific relevant factors and that
since the State gave appropriate assurances that the rates in question
satisfied the "reasonable and adequate" standard in the statute and
regulations (see footnote 2), the use of the rates was proper.
While it is true that the State's rate setting methodology incorporated
several adjustment factors to be applied after initial calculations had
been made on the basis of audited cost reports, the State was unable to
demonstrate that the excess rates at issue here were specifically
authorized through the use of these factors. Instead, as the Agency
argued, the State apparently determined that the prescribed procedures
did not yield satisfactory results and, consequently, decided to
maintain the rates established under the plan for prior years. See
Agency Br., p. 10; Ex. W, pp. 3-7. Thus, there is no basis in the
record here to conclude that specific language already in the plan
relating to adjustments authorized the payments in issue. Moreover, the
fact that the plan may have given the State flexibility in specific
areas to make adjustments does not mean that the plan can be read to
give the State general discretion to depart from the methodology it has
adopted.
The foregoing conclusion is bolstered by the fact that the State in its
correspondence leading to an amendment to the State plan (that expressly
authorized the State's retention of a prior year's rate) failed to point
to any specific provision of the plan that expressly authorized this
practice for the period prior to the disallowance. Moreover, in State
comments on the draft audit report leading to the disallowance, the
State said that it retained the prior year's rates "as an administrative
policy." Ex. Z, p. 1. Thus, while this Board has in the past given
deference to States in their interpretation on provisions of a State
plan, the State here has not shown why we should accept its
interpretation when it is unsupported by specific language in its plan.
See Louisiana Dept. of Health and Human Resources, DAB No. 731 (1986)
and decisions cited therein. The first time the State argued that the
practice was supported by particular provisions of its plan was in its
appeal brief before this Board.
In conjunction with its argument that its plan supported its practice,
the State argued that the Agency's true concern here was solely the
procedural issue of whether the State was actually following what it had
put in its plan (and not whether the rates derived from the plan were
wrong from a substantive policy perspective.) State Reply Br., p. 3.
Even if the State is correct concerning the Agency's motivation, this in
no way detracts from the validity of the disallowance. While the State
is given considerable discretion in proposing the terms of its rate
setting methodology in its plan, once that plan has been approved by the
Agency, the Agency may reasonably expect, consistent with the statute
and regulations, that the State's claims will be consistent with the
plan. (Under 42 C.F.R. 447.253(g), the State may only claim Federal
funding for rates "determined in accordance with methods and standards
specified in an approved State plan.") Thus, the Agency should not have
to be placed in the position of making new substantive judgments about
the appropriateness of a State's rate every time a State decides for
reasons of its own that it would be better to depart from the prescribed
terms of its plan for whatever reason the State may choose. The chosen
vehicle for departures from the plan methodology under both the statute
and the regulations would be a change in the State's plan. This
generally gives the Agency the opportunity to consider the change on a
prospective basis and in a considered and careful way. To allow a state
unilaterally to engage in ad hoc revision of the rate setting
methodology set forth in its own Medicaid plan "would seriously
undermine the desired Federal supervisory role regarding [Federal
funding]." Massachusetts Department of Public Welfare, DAB No. 853
(1987) at p. 7, n. 7, quoting State of Arkansas v. United States, No.
150-85C (Ct.Cl., February 20, 1986). Moreover, the State apparently had
departed from its plan for one or more years prior to the years covered
by the disallowance. Thus, this is not an instance where the Agency is
disallowing for an initial year where the State had just discovered the
full implications of the rate it had proposed.
2. Was the disallowance for payments made during FY 1984 untimely?
The State argued that HCFA gave no notice to it of any potential
disallowance for FY 1984 until almost four years after the close of the
fiscal year. The State alleged that it received notice approximately
six months beyond the record retention period, and that significant
documents concerning that fiscal year were in fact missing. The State
concluded that it was inequitable to allow HCFA to challenge these rates
so belatedly.
We conclude, however, that HCFA's disallowance for FY 1984 was not
untimely and that the doctrine of laches does not apply. Our reasons
are as follows:
o As the State itself recognized, HCFA is not limited by statute
or regulations in the amount of time it may take in issuing a
disallowance.
o HCFA's draft program review issued August 1985, which proposed a
disallowance for FY 1985, focused on the State's claims for that
year in particular. Neverthe-less, the State in its comments on
the draft conceded that it had been following the same practice for
five years (which would include FY 1984.) Thus, the State was on
notice in 1985 that there might be a disallowance for FY 1984 since
in that year it had followed the same practice that the Agency had
indicated for a subsequent year might subject the State to a
disallowance. Certainly, if the State had documents in 1985 that
would indicate that its practice for the earlier years was
justifiable or distinguishable, the State reasonably should have
retained those documents until a disallowance for FY 1985 had been
resolved.
o The only documents the State alleges it lacks are assurances it
purportedly prepared for FY 1984. Since evidence of the assurances
is missing, the State is unable to demonstrate whether assurances
were actually made, what they contained, and whether they were
submitted to the Agency. The State implies that in communications
concerning other years (in particular, FY 1985) it placed the
Agency on notice of its practices through its assurances and that
similar statements would have been made for FY 1984. Even if it
could be demonstrated that assurances similar to those for FY 1985
had been prepared for FY 1984 and had been submitted to HCFA, such
statements alone, unaccompanied by a proposed plan amendment, could
not have served to amend the State plan methodology for
establishing ICF-DD payment rates during that fiscal year, nor, as
we discuss in the next section below, make HCFA responsible for the
State's failure to amend its plan to conform to its practice.
Thus, the assurances would have been irrelevant as to whether the
State was in violation of its plan and whether the doctrine of
laches could be applied here. Furthermore, the Agency official
with the responsibility for conducting reviews of the State's
Medicaid institutional rate development and payment systems
declared in an affidavit that the Agency never received any
assurances or findings from California concerning FY 1984 rates.
Ex. Y, p. 2.
o It has become well-established in Board precedent that grantees
have "a fundamental obligation to account for federal funding which
is not defeated per se by the passage of the record retention
period." See California Department of Social Services, DAB No. 855
(1987) at p. 3. A disallowance may only be deemed untimely where
the grantee can show by substantial evidence that it was prejudiced
by the delays involved due to the innocent loss or destruction of
essential documents after expiration of the record retention
period. Id. Even if we assumed that the record retention period
here had expired, in spite of the notice received by the State in
1985 that its practice might subject it to a disallowance, the
State has failed to present any evidence that specific documents
relevant to its appeal for the fiscal year 1983/1984 actually
existed, were retained for the full three-year record retention
period and then were innocently destroyed by the State to the
State's prejudice.
Accordingly, on the basis of the foregoing, we find that the Agency's
disallowance notice for FY 1984 was not untimely.
3. Should the doctrines of estoppel or waiver be applied on behalf of
the State?
The State also argued that when rate studies and assurances were
submitted to HCFA and when its payment practices were discussed with
HCFA staff, no one gave the State any indication that HCFA believed the
rates were not authorized by the State plan. The State asserted that
HCFA had an affirmative duty to do so. The State added that HCFA did
not give the State any notice until it was too late to make changes to
the State plan for the fiscal years at issue.
The State has clearly misconstrued the burden placed upon it by the
statute and regulations concerning payments made to providers under the
State plan. It is the State, not HCFA, that has the primary
responsibility to monitor the rates paid to providers to insure that the
rates are consistent with the plan methodology. The State is the
administrator of its own program, making the payments to the providers
and implementing its plan on a day-to-day basis. Once HCFA approves the
plan, it reasonably assumes that the State will be in full compliance
with the terms. See 42 C.F.R. 447.253(g). While HCFA staff in regional
offices clearly have a role in assisting the states in reviewing
amendments and giving advice to the states relating to proposed
amendments, 45 C.F.R. 201.3(b), the State itself must initiate a change
in its plan. Thus, when either HCFA or the State identifies an instance
where the State has not complied with the actual terms of the plan, it
is the State's responsibility to propose an amendment to the plan if the
State decides that it no longer wishes to follow its existing plan. The
State of course would also have the option of changing its practice so
that it would be in compliance with its existing plan. Only the State
can make the decision to change the plan or change the practice that is
inconsistent with the plan.
Moreover, there is nothing in the record that would indicate that HCFA
provided the State with improper or misleading advice during the period.
The record suggests that when HCFA first became aware of the problem, it
indicated to the State that it would give the State an opportunity to
amend its plan before "immediately pursuing a disallowance." Ex. N.,
p.
14. And in fact the State appears to have had at least one and possibly
more years, preceding the years in question, where it was following this
practice and HCFA had not pursued a disallowance. Nevertheless, it
would clearly be unreasonable to interpret HCFA's actions and statement
to mean that it was waiving any right to disallow for subsequent years
in the event the State failed to take timely action to amend its plan.
The pertinent HCFA official declared that:
To the best of my knowledge and belief, no HCFA official ever
informed the State that the retention of rates from a prior year
was consistent with the methodology incorporated into the State
plan . . . or that such an action would be accepted for any rate
year after [FY 1983] absent a State plan amendment expressly
incorporating this procedure into the rate setting methodology.
* * *
Beginning as early as 1982 and continuing through and beyond the
1985 on-site review, I expressed my concerns to the State that the
practice of retaining LTC [long-term care] rates from one year to
the next was inconsistent with the rate setting methodology
contained in the State plan and advised responsible State officials
that it would be necessary to amend the State plan to accurately
and comprehensively reflect the LTC rate setting methodology
actually in use.
Ex. Y, pp. 2-3.
Thus, the State's evidence here is clearly insufficient to estop HCFA
from taking the disallowance or to demonstrate that HCFA waived its
right to take a disallowance for the years in question.
Under the Supreme Court case of Heckler v. Community Health Services of
Crawford County, 467 U.S. 51 (1984), it is clear that for estoppel to
apply against the federal government, the private party must at least
demonstrate that the traditional elements of estoppel are present.
These elements are (1) the estopped party must have made a definite
misrepresentation of fact to any other person having reason to believe
that the other will rely upon it, (2) the party asserting the estoppel
must have reasonably relied upon it and (3) must have changed his
position in reliance upon the misrepresentation, and (4) must have
suffered a detriment as a result.
We find that the State did not meet its burden of establishing any of
the traditional elements of estoppel. We note, moreover, that Supreme
Court decisions on estoppel suggest that, if estoppel applies at all to
the federal government, at the very least it requires a showing of
"affirmative misconduct" on the part of federal officials. See, e.g.,
Schweiker v. Hansen, 450 U.S. 785 (1981). The State clearly has not
established that standard.
Finally, there is no evidence in the record that HCFA formally waived
its right to disallow for the years in question.
Conclusion
Based on the foregoing analysis, we uphold this disallowance in
entirety.
________________________________ Norval
D. (John) Settle
________________________________
Alexander G. Teitz
________________________________ Donald
F. Garrett Presiding Board