DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: Texas Department of DATE: March 1, 1989 Human Services
Docket No. 88-103 Decision No. 1022
DECISION
The Texas Department of Human Services (State) appealed a determination
by the Health Care Financing Administration (HCFA) disallowing
$6,541,143 in federal financial participation (FFP) claimed by the State
under the Medicaid program of the Social Security Act (Act). HCFA
disallowed part of the cost of the per diem rates paid to State-owned
intermediate care facilities for the mentally retarded (ICFs/MR) for the
period January 1 through March 31, 1987. Section 1902 of the Act and
implementing regulations require that a state include in its Medicaid
state plan methods and standards for determining rates of reimbursement,
and pay for services using those methods and standards. The
disallowance was based on HCFA's determination that the State's
prospective reimbursement rate was not established in accordance with
the approved Medicaid State plan provisions because the State used
projected patient days in calculating the rate.
HCFA did not find here that the State failed to follow the appropriate
rate-setting procedure, nor that the resulting rate exceeded the amount
necessary to reasonably reimburse the costs of an efficient and
economically operated facility. The sole basis for the disallowance was
HCFA's view that the State plan required use of base year patient days
rather than projected patient days in the rate calculation. For the
reasons discussed below, we find that the prospective rate at issue was
set in accordance with the methods and standards set out in the Medicaid
State plan. The State plan specifically gave the State flexibility to
anticipate how changes in the rate year would affect the adequacy of the
per diem rate; the State reasonably interpreted this as including
consideration of an anticipated decrease in patient days as part of its
process of determining an appropriate per diem rate. Accordingly, we
reverse the disallowance.
Federal Requirements
In order to qualify for FFP, a state's claim for the costs of medical
services must be in accordance with the approved Medicaid state plan.
Section 1903(a) of the Act. The plan must fulfill certain statutory and
regulatory requirements and be approved by the Secretary. Prior to
1980, states were required under section 1902(a)(13) of the Act to
reimburse ICF services (including those in a ICF/MR) at rates determined
on a "reasonable cost-related" basis, using methods and standards
approved by the Secretary. Section 962 of Public Law 96-499, the
Omnibus Reconciliation Act of 1980, amended section 1902(a)(13)(A) of
the Act to require that state plans provide for payment of such
services--
through the use of rates (determined in accordance with methods and
standards developed by the State . . .) 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 in conformity with applicable State and Federal laws,
regulations, and quality and safety standards. . . .
This provision, known as the "Boren Amendment," was intended to provide
the states greater flexibility in developing methods of provider
reimbursement. The legislative history indicates that Congress intended
to keep requirements on states to the minimum level necessary to assure
accountability, and not to burden states with unnecessary paperwork
requirements. 48 Fed. Reg. 56047 (December 19, 1983), citing S.REP. No.
96-471.
Section 1902(a)(30) of the Act requires that the state plan--
provide such methods and procedures relating to the payment for . .
. care and services available under the plan . . . as may be
necessary . . . to assure that payments are consistent with
efficiency, economy, and quality of care.
The implementing regulations require that the state plan specify
comprehensively the methods and standards used by the state to set
payment rates. See 42 C.F.R. 447.252. The regulations also require a
state Medicaid agency to pay for services "using rates determined in
accordance with methods and standards specified in an approved State
plan." 42 C.F.R. 447.253(g).
State Plan Provisions
The calculation of the per diem rates for the first quarter of 1987 was
governed by the Texas State plan, as amended effective August 16, 1985.
See Texas Exhibit (Ex.) A. The Texas Department of Human Resources
Board (DHR Board) was responsible under the State plan for using a
prospective rate-setting methodology to determine Statewide
reimbursement rates for ICFs/MR which were uniform by level of care and
provider type. The introductory language to the plan states: "Analysis
of financial and statistical information from annual cost reports which
must be submitted by each participating provider will be used to
facilitate the rate determination by the Board."
The cost reports used were from a "base year" two years prior to
the
year for which the rates were paid (the "rate year"). See Transcript
of
November 29, 1988 Hearing (Tr.), p. 79. Under "Cost Finding
Methodology," the plan states that "DHR adjusts reported expense data
using a cost finding methodology to determine per diem allowed costs."
Costs are to be determined by cost areas (five different areas for State
Schools which are ICFs/MR), unallowable costs excluded, and adjustments
made "to ensure that expenses used in rate analyses are required for
long term care, derived from the market place and incurred from economic
and efficient use of resources." Ex. A., section III. One adjustment
which may be made is an "occupancy adjustment," which is applied if
occupancy in a facility is below 85% of capacity. The last subsection
under "Cost Finding Methodology" provides:
Projected Costs. DHR projects each provider's costs so that
substantively equitable treatment is afforded all providers. DHR
determines a reasonable method for projecting the costs.
Id.
The final section in the plan, "Rate Setting Methodology," explains
how
the DHR Board determines the reimbursement rate for each class of
service and provider type. This section states:
The DHR Board will evaluate financial and statistical information
derived from the cost report and determine a reimbursement rate
which will reasonably reimburse the cost of an economic and
efficient provider.
In order to facilitate the rate determination process, a reference
point is provided to the Board. The reference point is the
provider's projected per diem expense associated with the median
Medicaid day of service times an appropriate percentage from each
cost area and provider type . . . which will be determined by DHR.
DHR totals the resulting cost area amounts to be used as a
reference point from which the reimbursement rate . . . is
determined by the Board.
Ex. A., section IV. A.
The DHR Board determines rates in an open meeting, at which providers
are given an opportunity to present testimony to aid the Board. The
rate determined by the Board may be lowered if the provider's customary
charge is less for similar services. Id.
Factual Background
At the hearing in this case, the State presented testimony about how it
determined the rate at issue here. That testimony established the
following facts.
Prior to the rate year in question here, State officials became
concerned about the effects on State School ICFs/MR of a court order
requiring the State to reduce resident population in the Schools
("deinstitutionalization") and to improve services provided to remaining
residents. Among other things, State officials discussed how this would
affect the adequacy of the rates for the facilities. The Director of
Economic Forecasting for the State testified that he was advised about
the court order and consulted about "how, in my judgment, within the
context of our current state plan and our methodology as is published in
the Texas Register, . . . we could incorporate these anticipated costs,
the changes in the program, which would be reflected in higher per diem
costs, . . . into our rates for 1987." Tr., pp. 48-49. The approach he
first recommended was to develop some cost factors based upon the
expected percentage decreases in patient days and to apply those
selectively to individual costs, depending on whether they were variable
costs (which could be cut as the population decreased) or fixed costs
(which could not be cut). Tr., pp. 49-50.
The State developed a preliminary rate analysis based on this
recommendation. Two State witnesses testified that they attended a
meeting in Dallas on February 4, 1987 at which this analysis was
discussed with HCFA regional officials. Both of these witnesses
testified that the State had prepared a briefing document which focused
on rate-setting issues, laying out the State's intended approach to deal
with the circumstances the State was facing and explaining why the State
believed its approach would comply with the State plan methods. Tr.,
pp. 19-20, 104. They further testified that, at the meeting, HCFA's
Deputy Regional Administrator suggested that, rather than developing the
cost center specific adjustment factors (about which HCFA apparently had
some concerns), a simple adjustment should be made to change the
denominator in the per diem calculation from base year patient days to
anticipated patient days. Tr., pp. 20, 105. When asked, one witness
said that no indication was given to the Texas delegation at the meeting
that this change in approach would require an amendment to the State
plan. Tr., pp. 22, 38-39.
One witness said that he was at first surprised at HCFA's suggested
approach, thinking that "at least at first blush it had the appearance
of creating a potential windfall for the State" since it did not
differentiate fixed and variable costs. Tr., pp. 105-106. He further
testified, however, that this was not ultimately the way it turned out
after the rate model was rerun using HCFA's suggestion, because of the
material impact of applying the occupancy adjustment factor. Tr., p.
106.
In March 1987, the DHR Board established the 1987 Medicaid per diem
rate, adopting the proposal to calculate a rate using (in the
denominator of the per diem calculations) days of service the facilities
expected to provide in 1987, rather than base year patient days. Even
though this rate was effective for the period beginning January 1, 1987,
HCFA agreed that the State was establishing a prospective rate, not
retrospectively adjusting a previously established rate as the State had
for its 1985 and 1986 rates. Tr., p. 14. A State witness testified
that the usual limits in the State plan, such as the occupancy
adjustment and the customary charge limit, were applied in this process
and that the plan procedures were followed. Tr., p. 55.
HCFA did not directly dispute the accuracy of the State's presentation,
nor provide any rebuttal evidence. At the hearing, however, HCFA stated
that it chose not to present any affirmative case on what happened at
the Dallas meeting because, in its view, the State "had a burden of
going forth and showing the Agency action wrong" and had not carried
that burden. Tr., p. 161. The State responded that it had more than
gone forward and that the burden had been shifted to HCFA.
We find that the State's evidence is sufficient to establish the facts
as presented above. Not only is the State's testimony unrebutted, but
the Board found the State's witnesses to be candid and to have a good
recollection of pertinent events. Moreover, with respect to the Dallas
meeting, the testimony from the two witnesses who attended was
corroborated by two other State officials who testified about what they
were informed before and after the meeting and what resulted from the
meeting. Tr., pp. 50-51.
The Parties' Legal Positions
HCFA asserted that a state's rate-setting process must conform to its
state plan, and that the Texas State plan in effect through the first
quarter of 1987 did not permit substitution of estimated patient days
for base year patient days in calculating the per diem rate. HCFA
argued that this Board had already ruled unfavorably on the
appropriateness of such a procedure in Texas Dept. of Human Services,
DAB No. 981 (1988). That decision rejected the State's contention that
retroactive rate increases for the 1985 and 1986 rate years
(substituting actual patient days for the base year days originally
used) had been set in accordance with the State plans in effect for
those years. (The plan in effect for the 1985 year differed from the
plan at issue here, in that the projected per diem expense was not
merely a "reference point," but determined the rate.) HCFA relied
primarily on the following statements in DAB No. 981, from pages 5 and
6:
The fact that neither state plan provision specifically states how
the patient day figure used in calculating the per diem rate is to
be derived does not mean that the State may use any figure it
chooses. . . . There is no mechanism in the plans, however, for
projecting any anticipated change in patient days from the base
year to the rate year. This indicates that the use of the base
year patient day figure throughout the rate calculation was
contemplated. Moreover, the use of other than base year patient
days is inconsistent with the provision in the plans for taking the
median per diem expense from each cost area to determine the
overall rate.
HCFA read this as a ruling by the Board that the State could not use
projected patient days in the per diem rate calculation. According to
HCFA, the phrase "per diem allowed expense" in the State plan must
be
interpreted as meaning base year allowed costs over base year patient
days.
HCFA also asserted that Texas' subsequent amendment (in 1987) to its
State plan to specifically permit the use of estimated patient days in
the per diem rate calculation was evidence that Texas did not interpret
the plan provisions at issue here to permit such a practice.
Texas asserted that the facts here differed significantly from those in
DAB No. 981, most notably because the earlier Board decision concerned
retroactive adjustments to established rates. The State also argued
that the Board was wrong in concluding that it was not logical to read
the State plan as permitting the State to use projected patient days.
The State presented testimony to the effect that, in prospective
rate-setting, the goal is to anticipate any differences between the base
year and the rate year which may affect the adequacy of the rates and to
make appropriate adjustments. Tr., pp. 78, 110, 135-136. The State's
witnesses also testified that, in their view, the concept of projecting
per diem expense included the possibility of adjusting patient days as
well as costs. Tr., pp. 53-54. These witnesses said that it makes no
difference whether (1) the costs used in the numerator of the rate
calculation are adjusted by a factor to account for an anticipated
decrease in patient days (as the State originally proposed to do); or
(2) the denominator is changed from base year patient days to projected
patient days. Tr., pp. 64, 126-130. One State witness also testified
that the intent of the plan language regarding evaluation of data "is to
allow the state adequate discretion to develop an appropriate rate for
these facilities based on . . . the best assessment of what's happening
in the rate year." Tr., pp. 135-136. Texas argued that its State plan
"clearly acknowledges the right of the State to adjust information
obtained from the facility cost reports to set an equitable rate . . . .
" Texas Brief (Br.), p. 5.
Finally, Texas asserted that its State plan amendment specifically
permitting the use of estimated patient days in the per diem rate
calculation was filed under protest in order to protect further claims,
not as an admission that its rate calculation for the first quarter of
1987 was improper. Texas said that HCFA's position that a plan
amendment was needed because the 1985 plan did not specifically
authorize use of projected patient days was inconsistent with HCFA's
previous interpretation, expressed at the Dallas meeting.
Analysis
As explained below, we find that, even though the State plan did not
specifically refer to projecting patient days, the plan provisions at
issue here afforded the State with discretion to consider anticipated
changes in the rate year, including a decrease in patient days, in
determining what rate would reasonably reimburse the cost of an
efficient and economic provider. The rate here was adopted by the DHR
Board, and was reasonable in amount. Also, while we do not base our
decision on a finding that HCFA was bound by the action of its regional
official at the Dallas meeting, the fact that the State did consult with
HCFA officials shows that the State was taking steps to comply with its
State plan, rather than to circumvent it, and supports our determination
that the State's use of projected patient days in the rate calculation
was reasonable.
In considering whether a state has followed its approved state plan, the
Board first examines the plan language itself. If the provision at
issue is ambiguous, the Board will consider whether the state's proposed
interpretation gives reasonable effect to the language of the plan as a
whole. The Board also considers the intent of the provision, which may
be evidenced by administrative practice. The Board will defer to a
state's interpretation of its own plan if it is reasonable in light of
the purposes of the provisions and the program requirements. In the
specific context of rate-setting, the Board has stated that the Boren
Amendment requires that greater weight be given to what the state
intended since HCFA will approve a state's proposed methods as long as
the state gives the requisite assurances. South Dakota Dept. of Social
Services, DAB No. 934 (1988), pp. 4-5. On the other hand, the Board has
said that it will subject rates set for state-owned facilities to
greater scrutiny to determine whether the state, in fact, has a
consistently applied interpretation or is simply giving preferential
treatment to state-owned facilities. See Massachusetts Dept. of Public
Welfare, DAB No. 867 (1987), and DAB No. 730 (1986). The Board has also
narrowly construed state plan provisions which permit retroactive rate
adjustments in a prospective rate-setting system, reasoning that the
purpose of setting rates prospectively (to give the providers an
incentive to keep costs down) is defeated "if adjustments to reflect
actual costs are available in any case where the prospective rate does
not reimburse the provider for all costs incurred." DAB No. 730, p. 5.
In DAB No. 981, the Board considered the State's retrospective changes
to prospectively established per diem rates for two years to be
unauthorized under the plan provisions then in effect. Texas had
indicated there that while it was aware that the court's
deinstitutionalization order would have a fiscal impact when it
originally set its ICF/MR rates, it had failed to take this factor into
account. The Board found that, where there were no Texas State plan
provisions authorizing subsequent adjustment of the rates, the concept
of prospective reimbursement required an interpretation that no
adjustments were permitted. See DAB No. 981, p. 7. The Board also
discussed the State plan provisions regarding "per diem allowed expense"
and calculation of median days of service, primarily focusing on
language in the plan in effect for the 1985 rate year. The Board stated
that the more logical reading of this language was that it contemplated
use of base year patient days and that there was no evidence that the
State had previously used other than base year days. Finally, the Board
noted that, in adjusting the 1986 rate, the State did not follow the
process of having the DHR Board determine a rate. Thus, the Board found
the State's action to be an "after-the-fact attempt to justify increased
payments to ICFs/MR." DAB No. 981, pp. 6-7. The Board specifically did
not reach the question of whether, by definition, a per diem rate equals
base year costs divided by base year patient days. Id. at 7.
The State's challenge to DAB No. 981 was primarily to the Board's
conclusion that the plan language logically contemplated use of base
year patient days. Essentially, the State's witnesses testified that,
in their experience, it is reasonable to consider patient days a "cost
factor" appropriately considered in setting a prospective rate and that
projecting "per diem allowed expense" can legitimately include
projecting patient days.
While we continue to think that the plan in effect for rate year 1985
contemplated that base year patient days would be used to determine a
rate, we recognize that there are significant differences in the plan in
effect for rate years 1986 and 1987. This plan, as amended in 1985,
uses the rate calculated from reported costs using median days of
service simply as a "reference point" to "facilitate" determination
by
the DHR Board of what will be an adequate rate. Moreover, the 1985
amendments to the plan eliminated language from the prior plan which
specifically mentioned types of projection factors (such as inflation),
all of which related to costs. Instead, language was added allowing the
State to determine an "appropriate percentage" by which it would
multiply the median values, once determined. On the whole, the 1985
changes to the State plan were clearly intended to provide the DHR Board
with flexibility to determine a reimbursement rate which would
reasonably reimburse the costs of an efficient and economic provider,
including consideration of any anticipated changes from the base year.
Thus, in view of the fact that nothing in the amended plan precludes
making an adjustment in the rate calculation to anticipate a decrease in
patient days, we find that the State reasonably determined that its plan
permitted such an adjustment.
This analysis does not cause us to reconsider the finding in DAB No. 981
that the State's retrospective increases made for 1986 without any
consideration by the DHR Board were not made in accordance with the
plan. It does, however, lead us to conclude that the rate set
prospectively for 1987 was set in accordance with the State plan.
Unlike the 1986 rate the Board considered in DAB No. 981, the rate here
was set after an evaluation process by the DHR Board, which determined
that this rate met the applicable standard.
Moreover, this is not a situation similar to that considered by the
Board in Massachusetts, DAB No. 730, where the circumstances called into
question the reasonableness of the rate, which resulted in a windfall to
Massachusetts. Here, there is no evidence that the rate at issue
resulted in reimbursement to the providers substantially exceeding the
providers' actual costs. The Board has previously noted that, in the
deinstitutionalization situation, a rate calculation should anticipate
that some costs could be reduced as patient days are decreased. See
Massachusetts, DAB No. 730, p. 7; South Dakota, supra, at 18-19. Here,
the calculation the State initially proposed took into account
differences between fixed and variable costs. The State's use instead
of projected patient days was reasonable, however; this approach was
adopted at the suggestion of a high level HCFA regional official, and
the change did not have any material impact on the amount of
reimbursement the State expected to receive.
Finally, we reject HCFA's argument that the fact that the State amended
its State plan in 1987 specifically to permit use of projected patient
days supports a finding that the previous version did not permit use of
projected patient days. The 1987 amendment was submitted after HCFA had
questioned use of projected patient days, and the State acted reasonably
to protect itself from future disallowances by making explicit the
option of using projected patient days in the rate calculation.
In sum, the evidence shows that the State followed the methods and
standards in its State plan and set a reasonable reimbursement rate.
Conclusion
Based on the foregoing analysis, we reverse this disallowance in its
entirety.
________________________________ Norval D. (John) Settle
________________________________ Alexander G. Teitz
________________________________ Judith A. Ballard Presiding
Board