DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: Missouri Department of DATE: April 11, 1989 Social Services
Docket No. 88-138 Audit Control No. CIN A-07-87-00023
Decision No. 1035
DECISION
The Missouri Department of Social Services (State) appealed a
determination by the Health Care Financing Administration (HCFA)
disallowing $5,416,707 in federal financial participation (FFP) claimed
by the State under Title XIX (Medicaid) of the Social Security Act. The
State had claimed FFP in payments the State made to 23 nursing
facilities for services provided during the period March 1, 1982 through
March 31, 1987. HCFA disallowed the federal share of the difference
between the amounts the State paid to these facilities and the amounts
HCFA found should have been paid under the approved Medicaid State plan.
HCFA found that the State had reimbursed these facilities based on "new
provider" rates set pursuant to a court order, but had not corrected the
rates when an appeals court reversed the lower court's order and held
that the facilities were not "new providers" under the plan.
The State did not deny that its own interpretation of its State plan was
that the facilities were not "new providers," nor that this
interpretation had been ultimately upheld in the State courts. The
State argued nonetheless that the disallowance should be reversed
because (1) for the period March 1, 1982 through May 31, 1985, the
payments had been made pursuant to a court order and thus were allowable
under 42 C.F.R. 431.250(b)(2); and (2) for the period after May 31,
1985, the payments were authorized under a provision of the State plan
permitting rate adjustments for extraordinary circumstances.
For the reasons stated below, we conclude that the amounts in question
here were not "made pursuant to a court order" within the meaning
of 42
C.F.R. 431.250(b)(2), nor were they made as adjustments for
extraordinary circumstances under the State plan. Accordingly, we
uphold the disallowance.
Below, we first set out the general legal requirements related to state
plans and rate-setting systems. We then provide a detailed discussion
of the factual background of this case since the circumstances are
important to our decision. Finally, we address each of the arguments
raised by the State, explaining our reasons for rejecting those
arguments.
Legal Requirements
In order to qualify for FFP, a state's claims for the costs of medical
services must be in accordance with an approved Medicaid state plan.
Section 1903 of the Social Security Act (Act). The plan must fulfill
certain statutory and regulatory requirements, and be approved by HCFA.
Since 1980, state plans must provide for payment for long-term care
facility 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. . . .
Section 1902(a)(13)(A) of the Act. This provision, known as the Boren
Amendment, was intended to provide states with greater flexibility in
developing methods of provider reimbursement than under the provisions
previously in effect.
While states have flexibility to develop reimbursement methods, however,
those methods must be specified comprehensively in the state plan, and
the state must pay for services "using rates determined in accordance
with methods and standards specified in an approved State plan." 42
C.F.R. 447.202; 447.252; 447.253(g).
Factual Background
The following facts are undisputed. Effective July 1, 1982, the
Missouri State Medicaid plan established a system to reimburse long-term
care facility services through use of a per diem rate (i.e., an amount
paid for each day of service provided to a Medicaid recipient)
established for each facility using a prospective reimbursement system.
Under this system, the rate was to be the lowest of (1) the average
private pay charge; (2) the Medicare per diem rate if applicable; and
(3) the rate paid to the facility on June 30, 1982, as adjusted by a
"negotiated trend factor." The plan specifically provided that "changes
in ownership, management, control, operation, leasehold interests by
whatever form for any facility previously certified for participation in
the Medicaid program at any time that results in increased costs for the
successor owner, management or leaseholder shall not be recognized for
purposes of reimbursement." State's Ex. 3, unnumbered pp. 1-2. For a
provider which did not have a rate on June 30, 1982, and whose facility
met certain conditions (that is, for a "new provider"), other
rate-setting provisions of the plan applied. The plan also permitted
adjustments to the prospectively determined reimbursement rate under
certain specified conditions.
In 1982, leases for 31 facilities in the State of Missouri were
purchased by Angell Group, Inc. (AGI). In March 1982, these facilities
filed requests with the State for increased per diem rates, on the basis
that they were "new providers" within the meaning of the State plan.
The State denied the increases for 23 of the 31 facilities on the basis
that they did not qualify as "new providers." These 23 facilities
then
filed suit against the State, seeking a declaratory judgment ordering
the State to set a new rate for each of the facilities. On April 16,
1982, the Missouri Circuit Court for Cole County entered an
interlocutory order finding that the facilities were "new providers."
State's Ex. 5. On June 14, 1982, after entering two supplemental
orders, the same court entered a permanent injunction and declaratory
judgment (later amended), finding that each of the facilities was a "new
provider" under the State plan and setting higher per diem rates for the
facilities effective March 1, 1982. State's Exs. 9A, 9B, and 10.
The State appealed the lower court order to the Missouri Court of
Appeals, which reversed the lower court on July 24, 1984, in
AGI-Bloomfield Convalescent Center, Inc. v. Toan, 679 S.W.2d 294 (Mo.
App. 1984). State's Ex. 12. AGI's petition for review by the Missouri
Supreme Court was denied on November 20, 1984. State's Ex. 13. The
mandate subsequently issued by the Court of Appeals stated that Missouri
should "be restored to all things lost by reason of" the lower court's
judgment. State's Ex. 14.
The State then notified the facilities, by letters issued January 7,
1985, that their rates would be reduced to the rates in effect on March
1, 1982, plus any trend factors granted since that time. State's Ex.
15. AGI then filed a complaint in federal district court alleging,
among other things, that the State's action would violate the Boren
Amendment. AGI obtained a temporary restraining order (TRO) from that
court restraining the State "from effecting a reduction in the rate paid
or payment due" any of the facilities. State's Exs. 17 and 18. The
State then entered into negotiations with AGI's counsel which resulted
in a settlement and a dismissal of the lawsuit, pursuant to stipulation
by the parties, on May 31, 1985. State's Exs. 19 and 20.
The precise, final terms of the settlement were apparently not
memorialized in a written, signed agreement and are now the subject of
further litigation between the State and Beverly Enterprises, Inc.
(Beverly), which later purchased the facilities from AGI. The record
here shows, however, that, as a result of the settlement, AGI was to
make substantial, periodic payments not to the State treasury, but
instead to a non-profit corporation called the Missouri Research
Institute, which was established with State officials as members of the
Board of Directors. AGI's counsel had explained to State officials that
this arrangement would permit AGI to claim the payments as charitable
deductions for income tax purposes and "would prevent any recoupment by
the Health Care Financing Administration . . . ." State's Ex. 2, App.
F.
The correspondence between the State and AGI's counsel indicates that,
under the settlement, the State would continue to pay the facilities at
the court-ordered rates (although it appears that the State would
subsequently apply a lower trend factor than it applied to other
facilities' rates). State's Ex. 2, App. F; see also State's brief, p.
10. The record also indicates that AGI financed the payments to the
Missouri Research Institute through purchase of an annuity at an amount
substantially less than the amount the State had told AGI it would owe
the State for excess payments made under the lower court order.
Missouri Research Institute ultimately received $900,000 from AGI (and
its successor, Beverly). This amount earned interest, but apparently
was not spent. In 1988, after HCFA had begun its audit of the case, the
Missouri Research Institute Board of Directors voted to dissolve the
corporation and to transfer the funds, and any right to further payments
from the annuity, to the State treasury. HCFA's Ex. 4.
In determining the disallowance amount, HCFA calculated the rates which
would have been paid using the June 30, 1982 rates, as adjusted by the
appropriate trend factors and also as adjusted to take account of other
factors (with some minor modifications) which the State had suggested
during the negotiation process might have been applied to increase the
rates even in the absence of the court orders. The State did not here
challenge HCFA's calculation.
Discussion
Whether payments were made pursuant to a court order
The State's argument with respect to payments made to the facilities at
the "new provider" rates prior to May 31, 1985 (the date the federal
district court dissolved its TRO) is essentially as follows. According
to the State, HCFA is precluded from disallowing the excess amounts
because they were "made pursuant to a court order" and are therefore
allowable under HCFA's regulation at 42 C.F.R. 431.250(b)(2). The State
cited Board decisions referring to that regulation for the proposition
that FFP is available in the payments, even though the circuit court
order was reversed on appeal in the State courts and the federal TRO
ultimately dissolved. The State argued that, since the State had
properly paid the facilities pursuant to the court orders, there was no
overpayment of FFP to the State until the State actually recovered the
excess amounts from the facilities. The State recognized that it had
recouped part of the excess amounts, once the payments from AGI and
Beverly had been transferred from Missouri Research Institute to the
State treasury; the State argued nonetheless that part of this recovery
was attributable to other disputes it had with AGI which were resolved
by the settlement, so that HCFA was entitled only to a pro rata share of
the recovery attributable to the litigation with the 23 facilities which
had sought "new provider" rates (referred to as the Bluff Manor case).
As indicated above, the State did not dispute that the proper
interpretation of its State plan is that the 23 AGI facilities did not
qualify as "new providers." This is the interpretation of the State
plan which was ultimately upheld in State court. The complaint in
federal court was not a further challenge to this interpretation, but
sought to prevent reduction of the rates on other grounds, including an
allegation that the resulting rates would violate the Boren Amendment.
Thus, it is clear that the rates paid were not rates determined in
accordance with the methods and standards set out in the State plan, as
required by the statutory and regulatory provisions cited above. The
key issue here is whether 42 C.F.R. 431.250(b)(2) provides an exception
permitting FFP in these payments, even though they were in excess of the
rates set under the State plan. We conclude that it does not.
The regulations at 42 C.F.R. Part 431, Subpart E, establish a process
for fair hearings to be provided to applicants for, or recipients of,
medical assistance if their claims for assistance are denied or not
acted upon promptly, or if a state Medicaid agency "takes action to
suspend, terminate, or reduce services." 42 C.F.R. 431.200. In this
context, the regulations provide that FFP is available in expenditures
for payments made to carry out hearing decisions and for payments made
for "services provided within the scope of the Federal Medicaid program
and made under a court order." 42 C.F.R. 431.250(b). As HCFA pointed
out, this authorization for FFP in payments which are not otherwise
authorized under a state plan, but which are made under a court order,
is limited by its context to court orders obtained by applicants or
recipients challenging the actions specified in the regulation. When
recodifying this provision in 1980, HCFA stated that section 431.250
concerns FFP "for expenditures in services for individuals who are
successful in their appeals." 45 Fed. Reg. 24881 (April 11, 1980).
In arguing that the court-ordered payments provision had broader
application, the State relied on a series of Board decisions involving
court orders obtained by providers who were appealing actions which
would have ended their participation in the Medicaid program based on
findings related to applicable health and safety standards. (See the
cases cited in the State's brief, pp. 13-14.) The State's reliance on
these cases is misplaced. HCFA itself chose to adopt a policy allowing
FFP in court-ordered payments where the court order effectively extended
the provider facility's participation in the program and the facility
continued to provide services to Medicaid recipients. Nothing in HCFA's
regulations or the statute, however, requires FFP in payments under
court orders resulting from provider appeals related to reimbursement
rates, rather than to continued participation in the program. Absent
any regulation or policy specifically applying the court-order provision
to rate appeals there is no basis for FFP in court-ordered payments in
excess of the amount authorized by the rate-setting methods in the State
plan.
We disagree with the State that the rate dispute in question here was
one which could have had the effect of reducing services to the facility
residents and which therefore comes within the scope of 42 C.F.R.
431.250(b)(2). A facility participating in the program is required to
maintain a level of services to Medicaid recipients irrespective of the
amount of the rate it receives. Moreover, the State here gave
satisfactory assurances to HCFA that the rates set under its plan would
be reasonable and adequate to reimburse an efficiently and economically
operated facility for costs incurred in providing services in conformity
with applicable standards. Thus, these rates should have been adequate
to provide the level of services to which the recipients were entitled
under the State plan. Although the residents of the 23 AGI facilities
did apparently file a class action which was joined with the federal
court case here, most of the payments in question here were not
initially made pursuant to any order of that court. The TRO in federal
court was based on allegations that reducing then current rates to the
amount allowed by the State plan (and even further to recover the
previous overpayments) would result in rates which were insufficient
under the Boren Amendment and State law; the federal court case would
not have altered the Missouri Court of Appeals conclusion that the AGI
facilities were not entitled to "new provider" rates under the State
plan.
Moreover, as HCFA pointed out, even if the excess payments here were
initially made pursuant to court order, it was no longer reasonable to
consider them payments made pursuant to court order after the State
Court of Appeals had reversed the lower court decision and the federal
TRO had been dissolved. At that point in time, there was no court order
precluding the State from recovering the overpayments to the providers;
the only barrier was the settlement agreement. As this Board has
previously held, HCFA is not precluded from recovering the federal share
of amounts paid in excess of what is permitted under a state plan simply
because the state has entered a settlement agreement with a provider.
See, e.g., California Dept. of Health Services, DAB No. 1015 (1989). A
state may negotiate a settlement for reasons that have nothing to do
with the issue of whether the provider has, in fact, been overpaid for
federal purposes.
We also reject the State's argument that HCFA is precluded by the
statutory provision at section 1903(d)(3) of the Act from recovering the
federal share of overpayments to the 23 AGI facilities which the State
has not itself yet recouped. That section provides:
The pro rata share to which the United States is equitably entitled
. . . of the net amount recovered . . . with respect to medical
assistance furnished under the State plan shall be considered an
overpayment to be adjusted . . . .
This Board has previously addressed the effect of this provision and has
held that this section does not preclude HCFA from adjusting a state's
grant award under section 1903(d)(2) of the Act when HCFA determines
that a provider has been paid more than what it is entitled to under a
state plan, even if the state has not yet recovered the amount from the
provider. (For a summary of the Board's reasoning on this question, see
New York State Dept. of Social Services, DAB No. 311 (1982), pp. 4-6.)
This analysis has been upheld by three U.S. courts of appeals.
Massachusetts v. Secretary, 749 F.2d 89 (1st Cir. 1984), cert. denied,
472 U.S. 1017 (1985); Perales v. Heckler, 762 F.2d 226 (2nd Cir. 1985);
Department of Social Services v. Bowen, 804 F.2d 1035 (8th Cir. 1986).
Specifically, the Board and the courts have addressed the situation
where a state plan permitted reimbursement at an interim rate based on
estimated costs, but also provided for the state to establish a final
rate based on actual costs, and have held that it is the final rate
which established the proper amount of "medical assistance furnished
under the State plan" within the meaning of section 1903(d)(3) of the
Act. In other words, that section does not apply to amounts in excess
of the final reimbursement permitted under the State plan.
The State here would have us hold that the excess payments to the 23 AGI
facilities were "medical assistance furnished under the State plan"
because they were made pursuant to court order and therefore were proper
when made. Even if the lower court decision may be viewed as
authorizing the payments when made, however, the subsequent Court of
Appeals decision clearly established that the payments did not meet the
State plan requirements. When the appeal of that decision was rejected,
the State should have adjusted the federal share, irrespective of
whether it recovered the excess amounts from the facilities.
We recognize that states may sometimes be placed in a difficult position
when they are litigating with providers and HCFA takes a disallowance,
and that there may be circumstances in which a state reasonably
determines that it should settle its litigation with a provider rather
than pursuing it. Yet, to permit the State to delay repaying the
federal share of amounts admittedly in excess of the amounts properly
payable under the State plan under the circumstances here, where the
State has already recovered a substantial part of the excess amounts and
possibly gave up its right to recover the remaining amounts under very
questionable circumstances, would clearly be detrimental to the Medicaid
program.
In sum, we find that the fact that the excess payments here were
initially made pursuant to a court order does not mean that FFP is
available in the payments, nor does it preclude HCFA from adjusting for
the federal share of the excess payments prior to the State's recovery
of the full amount from the provider facilities.
Whether payments made after May 31, 1985 were authorized under the State
plan provision for extraordinary circumstances
As noted above, the State continued to pay the AGI facilities using the
"new provider" rates, even after the TRO was dissolved on May 31,
1985
(although the State may not have used the same trend factors in
subsequent years as it applied to other facilities). The State argued
that it was justified in paying these rates because its State plan
permitted a rate adjustment for a "significant and extraordinary
circumstance." Although most rate adjustments had to follow a process
of review and recommendation by a rate advisory commission, the State
argued that the Director of the Department of Social Services had the
discretion to grant an adjustment for a "significant and extraordinary
circumstance" without invoking this process. According to the State, it
was permissible for the Director to conclude that there were
extraordinary circumstances shown by the AGI facilities since AGI's
representatives argued in the Bluff Manor appeal that they had enhanced
their facilities and staffs in reliance on the higher rates being paid
under the court order and would go bankrupt if the rates were lowered,
forcing the State to find new placements for 1700 facility residents.
The State cited Board decisions which it said supported its position
that the Board should defer to the Director's determination here and
find that the rates paid after May 31, 1985 were set in accordance with
the State plan.
HCFA argued that adjustments for extraordinary circumstances were
limited, under the State plan, to prescribed circumstances where a
facilities' costs had increased. HCFA pointed to an amended version of
the State plan which specified that such rate adjustments could be made
only where a facility experienced a unique circumstance beyond its
control with a substantial cost effect. HCFA's Ex. 5, p. 53b. HCFA
said that the circumstances here would not meet this criteria.
The State replied that the amended plan was described as a "change,"
so
that HCFA's reliance on the amended plan provision was misplaced. The
State also argued that the circumstances here did include an increase in
the providers' costs since the facilities had increased facilities and
staff based on the higher rates they were receiving.
The major flaw in the State's argument is that the State would have us
presume that payment to each of the facilities after May 31, 1985, was
at a rate higher than it otherwise would have been because the rates had
been adjusted for extraordinary circumstances. The record here simply
does not support a finding that such adjustments were made. We have no
evidence that the Director in fact considered whether the rate
adjustment provision would apply or whether the specific circumstances
of each of the facilities (including any alleged increased costs) in
fact justified the amounts which were paid. To the contrary, the record
indicates that the payments resulted from the settlement, which was
entered into under circumstances which suggest motivations on the part
of State officials other than recognizing increased costs. The plan
envisions a process for evaluating a requested rate adjustment; even if
the Director was not required to use that process for making a rate
adjustment, the plan language clearly contemplates that a
"determination" must be made before a rate adjustment may be granted,
and that determination would at a minimum have had to include a
determination that extraordinary circumstances did exist and did justify
the particular adjustment requested.
In the absence of any evidence that the rate amounts here were based on
such a determination, we must conclude that the State's argument is
simply an after-the-fact attempt to justify paying rates in excess of
what the plan authorized. Moreover, even if the Director had officially
interpreted the State plan to permit payment of the rates here under the
provision for extraordinary circumstances, we would not defer to that
interpretation since the State did not show that that interpretation is
a reasonable one, consistent with the language and purpose of the
provision. See South Dakota Dept. of Social Services, DAB No. 934
(1988), pp. 4-5. The State provided no evidence that it had ever
previously interpreted its plan to consider as extraordinary
circumstances the circumstances allegedly present here, nor did the
State provide evidence concerning the intent of the provision. The
wording of the provision permits an adjustment only when --
the facility experiences extraordinary circumstances including an
act of God, war or civil disturbance . . . .
State's Ex. 3. As HCFA pointed out, even if this can include
circumstances other than the ones specifically listed, generally
accepted principles of construction would require that the other
circumstances be similar in nature to the listed ones. The later
amended provision indicated that the circumstances had to be beyond the
facility's control. Although the State argued that this was part of an
amendment which was described as a change, the State provided no
evidence that, with respect to the extraordinary circumstances
provision, the amendment was a change rather than a clarification. On
the other hand, the wording of the unamended provision is consistent
with the later version, supporting a conclusion that the later version
is simply a clarification and that neither provision authorized
adjustments for cost increases within a facility's control.
Finally, we note that to permit a rate adjustment for the AGI facilities
simply because they alleged that they had increased staffing and other
costs in reliance on the court-ordered rates would be contrary to the
whole thrust of the State's prospective reimbursement system. The
purpose of a prospective system is to provide to facilities an incentive
to keep costs low not present in a retrospective system which reimburses
based on actual costs. The particular system adopted by the State here
holds providers to the 1982 rates, as adjusted by the trend factors and
for necessary increases in the costs of providing services.
Thus, we conclude that the rates paid subsequent to May 31, 1985 were
not in accordance with the State plan.
Conclusion
For the reasons stated above, we uphold the disallowance in full because
we conclude that HCFA properly determined that the disallowed amount
represents payments in excess of the amounts the facilities were
entitled to under the State plan and that the fact that the State
originally made some of these payments under a court order does not
preclude HCFA from adjusting the federal share prior to the State's full
recovery from the providers.
________________________________ Cecilia Sparks Ford
________________________________ Norval D. (John) Settle
________________________________ Judith A. Ballard Presiding
Board