DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: Tennessee Department DATE: May 4, 1989 of Health
and Environment Docket Nos. 88-137, 88-194 and 89-32
Decision No. 1047
DECISION
The Tennessee Department of Health and Environment (State or Tennessee)
appealed three disallowances by the Health Care Financing Administration
(Agency or HCFA) of a total of $16,512,355 in federal financial
participation (FFP) claimed under Title XIX (Medicaid) of the Social
Security Act (Act). Following a review of the State use of
contributions from hospitals as the State share of Medicaid
expenditures, HCFA determined that the transferred funds could not
qualify as the State's share of financial participation under standards
set forth in 42 C.F.R. 433.45. HCFA concluded that rather than qualify
as the State share, the funds instead constituted a discount in claims
from the hospitals for payments that otherwise would be due. HCFA
accordingly declared that these funds must be deducted from the State's
program expenditures as applicable credits in accordance with Office of
Management and Budget Circular A-87.
The central issue in these appeals is whether the funds received from
public and private non-profit hospitals met the criteria to qualify as
the State share under standards set forth in 42 C.F.R. 433.45. For the
reasons described below, we find that the funds qualify as the State
share under the regulations. We conclude that the funds from public
facilities (representing approximately $10 million of the disallowance)
were transferred to the State Medicaid agency and placed under its
administrative control as required by the regulations. We find that the
funds from the private non-profit facilities, in addition to meeting the
requirements applicable to public funds, qualified as "donations"
under
the regulations. Accordingly, we reverse the disallowances in full.
In reaching our decision, we have given careful consideration to the
Agency's central argument that the disallowances should be upheld
because the facts here resemble the situation considered by the Board in
West Virginia Dept. of Human Services, DAB No. 956 (1988). As we
discuss at length below, we find that the circumstances here are clearly
distinguishable from those considered in West Virginia. The
transactions here meet HCFA's regulation on its face. The issue here --
indeed, HCFA's case in large -- concerns whether the nature of the
donations, and the circumstances surrounding them, take the transactions
wholly outside the fundamental concept of the regulation -- as was the
case in West Virginia. The record suggests that HCFA may have had
second thoughts about the wisdom of the regulation; we, of course, are
bound by it. 45 C.F.R. 16.14. And unlike the case in West Virginia,
HCFA has not proven that Tennessee has taken any action ultra vires the
words or purpose of the regulation. Our reasons are as follows:
o In West Virginia, the Board considered only whether funds
transferred from private providers could qualify as "donated funds"
under the regulations. Here, approximately $10 million of the
disallowances involved funds from public providers. The regulation
does not require that funds from public agencies be "donated." It
merely requires that they be transferred from the public provider
to the state Medicaid agency and placed under its administrative
control. The Agency did not contest that the funds from public
providers had been transferred to the Medicaid agency. Thus, the
West Virginia decision provides no basis on which to uphold the
disallowances for the public transfers.
o The remaining portion of the disallowances (approximately $6.5
million) involves transfers from private, non-profit facilities.
The facts surrounding the transfer of these funds are clearly
distinguishable from the facts in West Virginia and justify our
finding that the transfers here qualify as voluntary donations.
o The Board found in West Virginia that West Virginia's donations
program had been inherently coercive and abusive, providing, among
other things, preferential treatment and increased interim funding
in order to induce fund transfers from providers representing the
State share for a substantial backlog of pending claims. In the
instant appeals, the State did not provide any form of preferential
treatment to the 13 public and 14 private non-profit hospitals that
made donations following the implementation of three State plan
amendments that became effective at the time of the donation
program. Although only 27 hospitals transferred funds to the
State, 92% of the 150 hospitals in Tennessee benefited in some
degree from these amendments. Moreover, of the hospitals that
benefited from the amendment increasing the Medicaid
Disproportionate Share Allotment (MDSA), which the Agency alleged
was the primary factor in determining which hospitals were expected
to make a donation, 9 hospitals out of 36 did not make any
donation. Moreover, there is absolutely no evidence in the record
that the State advised private non-profit hospitals that it would
not implement particular program changes unless a specific amount
of funding was donated or transferred. Thus, the key element of
coercion or abusive inducement to donate has not been demonstrated
to be present here. o The State's program enhancements that
led to donations were all carefully designed to meet critical needs
in the State's Medicaid program and were expressly recognized in
recent amendments to Title XIX. All of the enhancements were
approved by HCFA in State plan amendments. The record does not
demonstrate that there was anything untoward in the way the
amendments were implemented by the State while the donation program
was in effect. The State indicated that it would not be able to
withdraw any of the plan changes on an expedited basis even if
provider funding had not materialized.
o HCFA approved a Tennessee State plan amendment which specified
that donated funds could be used "to the extent allowed by the
regulations." Since we find that the donations in question here
clearly comply with HCFA's regulations, the claims here comport
with the State plan.
o The House Budget Committee, in considering an amendment that
would have enacted the donation regulation into statute,
specifically recognized the Tennessee program as an "appropriate"
use of the donation regulations (in contrast to a program from an
unnamed state that closely resembled West Virginia's). In the
following year (while this disallowance was pending), Congress
enacted a provision that required the Department to keep the
existing regulation on donations in effect until May, 1989. These
two actions by Congress provide additional evidence that
Tennessee's donation program furthered the overall purposes of
Medicaid and was within the scope of the regulations.
Accordingly, these and other factors discussed below cause us to
conclude that the fund transfers at issue here qualify under 42 C.F.R.
433.45 as the State share.
Applicable Regulation
The Medicaid program was designed as a cooperative federal-state
venture. Each state participating in the program shares in its costs
along with the Federal Government. The federal contribution is an
amount equal to a state's federal medical assistance percentage of the
total amount expended by the state as medical assistance under the state
Medicaid plan. Section 1903(a)(1) of the Act.
The only Medicaid regulation that contains the conditions for
determining which funds may qualify as a state's share of Medicaid
expenditures is 42 C.F.R. 433.45. This regulation provides:
Sources of State share of financial participation.
(a) Public funds as the State's share. (1) Public funds may be
considered as the State's share in claiming FFP if they meet
the conditions specified in paragraphs (a)(2) and (3) of this
section.
(2) The public funds are appropriated directly to the State
or local Medicaid agency, or transferred from other public
agencies (including Indian tribes) to the State or local
agency and under its administrative control, or certified by
the contributing public agency as representing expenditures
eligible for FFP under this section.
(3) The public funds are not Federal funds, or are Federal
funds authorized by Federal law to be used to match other
Federal funds.
(b) Private donated funds as the State's share. (1) Funds
donated from private sources may be considered as the State's
share in claiming FFP only if they meet the conditions
specified in paragraphs (b)(2) and (3) of this section.
(2) The private funds are transferred to the State or local
Medicaid agency and are under its administrative control.
(3) The private funds do not revert to the donor's facility
or use unless the donor is a non-profit organization, and the
Medicaid agency, of its own volition, decides to use the
donor's facility.
This regulation was promulgated on November 12, 1985 and replaced 42
C.F.R. 432.60, which authorized the use of donated funds as a state's
Medicaid share for training expenditures. The new regulation made two
significant changes. It expanded the use of donated funds as a state's
share to cover all types of Medicaid expenditures and it eliminated the
old condition on private donations that the funds be donated "without
any restriction which would require their use for . . . particular
individuals or at particular facilities or institutions."
In the preamble to section 433.45, HCFA explained its reasons for
expanding the allowability of donated funds as a state's share for all
Medicaid expenditures. Noting that states' budgets had become more
austere, HCFA declared that "State legislatures have looked increasingly
to alternative sources for funding a larger portion of the Medicaid
program." 50 Fed. Reg. 46652, 46657 (November 12, 1985). HCFA stated
that its previous regulation, section 432.60, had placed an
administrative burden on states in terms of cost allocation. Id.
Section 433.45, permitting donations to be used for all Medicaid
expenditures, would allow the states more flexibility in administering
their Medicaid programs and would reduce record keeping. Id.
HCFA also stated that in formulating the previous version of the
regulation, it had been concerned about potential for abuse. HCFA
specifically wanted to prevent donations that could be conditioned on
some benefit to the donor. For example, HCFA was concerned that a
"kickback" situation could result from private donations made by a
proprietary organization. HCFA noted, however, that up until then:
Experience has shown no abuse of public and private funds
through conditional donations or kickbacks. Generally donated
funds are commingled with all other Medicaid funds under the
State agency's administrative control. Id.
Furthermore, in response to one commenter's concern that opportunities
for abuse would result under the amended regulations, HCFA stated that
it would be able to identify any major violations of the regulation
through the HCFA financial management review.
The West Virginia Decision
The Board extensively examined the subject of section 433.45 donations
in West Virginia Dept. of Human Services, DAB No. 956 (1988). In 1986,
the State of West Virginia had a backlog of approximately $44 million in
unpaid claims filed by West Virginia hospitals for services the
hospitals had rendered to Medicaid beneficiaries. The backlog existed
because West Virginia had insufficient funds to pay its share of the
claims, and without state funds West Virginia was unable to draw down
federal funding for the claims. The Governor of West Virginia then
proposed a program to the West Virginia Hospital Association whereby
each member hospital could make a contribution to a special fund created
by the West Virginia legislature to help reduce the backlog of unpaid
hospital claims. Eventually 62 hospitals, not-for-profit and
for-profit, contributed $22,829,509 to the fund which was used to
generate $60,459,469 in federal funding. As the hospitals were making
their contributions, West Virginia increased the Medicaid interim
reimbursement rate to the hospitals, which had previously varied from
60% to 90%, to a flat 95% for the hospitals.
The practical effect of this program was that it enabled West Virginia
to generate its share to reimburse its outstanding Medicaid claims and
to receive matching federal funds for the claims. Almost immediately
after receiving contributions from the hospitals, West Virginia was in a
position to pay its backlogged claims at an increased interim rate with
hospital and federal funds.
HCFA disallowed the total amount of $60,459,469 in FFP, finding that the
hospital contributions did not meet the regulatory definition of donated
funds set forth in section 433.45.
In sustaining HCFA's determination that the section 433.45 requirements
for donated funds were not satisfied, the Board found that the funds
were not "donated" by the hospitals under the commonly accepted meaning
of that term. Rather, the Board found that the hospitals were
improperly induced by West Virginia to make contributions. The factors
that led the Board to that conclusion included:
o West Virginia provided preferential treatment for hospitals
participating in the program in that only those hospitals that made
contributions received Medicaid reimbursement in the months
following West Virginia's receipt of federal funds.
o An increase in the interim reimbursement rate to 95%
benefited only the contributing hospitals as West Virginia
intentionally did not make payments to non-contributing
hospitals while the increase was in effect.
o The interim rate increase to 95% was not justified by the
individual cost histories of the hospitals. West Virginia used
the increase as a means of inducing contributions, even though
it subjected its Medicaid program to the possibility of
substantial overpayments.
o Many of the participating hospitals did not view their
payments to the fund as contributions, but as expense items in
their records, which they intended to claim for Medicaid
funding.
The Board thus found that West Virginia's program contained abusive and
unauthorized practices that were incompatible with the goals of section
433.45 and that HCFA's interpretation of the regulation as requiring a
voluntary act not induced by coercive practices furthered the purposes
of the Medicaid program. While sustaining HCFA's interpretation of
section 433.45, the Board found that the amounts transferred by the
hospitals should be viewed as a discount in claims for services
previously rendered and, as such, should be deducted from West
Virginia's Medicaid program expenditures as an applicable credit; the
Board adjusted the amount of the disallowance accordingly.
Factual Background to the Instant Disallowances
In 1987 the State of Tennessee undertook steps to expand the scope of
its Medicaid program, increasing its Medicaid Disproportionate State
Adjustment, enhancing services and increasing the number of its citizens
eligible for Medicaid services. In this regard Tennessee submitted
three State plan amendments (SPAs) to HCFA, which HCFA approved with
effective dates of July 1, 1987. SPA 87-15 provided Medicaid coverage
to all pregnant women (and children up to age two) whose income was
equal to or below the federal poverty level. State Appeal File, Exhibit
(Ex.) B-5. SPA 87-5 increased from 14 to 20 the number of hospital days
covered under Medicaid per fiscal year for recipients over age 21.
State Appeal File, Ex. B-6. SPA 87-30 increased the Medicaid
Disproportionate Share Adjustment (MDSA) for hospitals with a high
volume of Medicaid patients from 22% of a hospital's per diem rate to a
maximum of 44%. State Appeal File, Ex. B-3. The MDSA is a product of
section 1902(a)(13)(A) of the Act which requires that states in their
Medicaid plans provide for payment through rates which "take into
account the situation of hospitals which serve a disproportionate share
of low income patient with special needs . . ." At approximately the
same time the State proposed the state plan changes, it also decided to
provide a substantial amount of funds for direct and indirect education
costs. For accounting convenience,the State placed the funding for all
four categories of program benefits in one cost center with the
allotment code 343.67 "indigent care."
Prior to the submission of these SPAs, the Tennessee General Assembly
passed and the Governor signed legislation, on March 19, 1987, which
became Tennessee Code Annotated, section 71-5-131:
71-5-131. Contributed funds. (a) For the purposes of this
part [Medical Assistance], political subdivisions may
appropriate funds directly to the department of health and
environment, other public agencies and private sources may
transfer funds to the department, and the department may accept
unconditional and unrestricted donations of such funds.
(b) Contributed funds shall be subject to the department's
administrative control and allocated as provided in the General
Appropriations Act, except such contributions shall not reduce
state general revenue funding.
(c) At the end of any fiscal year, the unobligated balance of
any such funds shall not revert to the general fund, but shall
be reappropriated for these purposes in the next fiscal year.
The same day section 71-5-131 became law, the State submitted a State
plan amendment to HCFA relating to donations (SPA 87-2). State Appeal
File, Ex. A-B2. SPA 87-2 proposed to change the alternative under State
Plan section 6.3, "State Financial Participation." In the State's
existing plan, the option designating that State funds are used to pay
all of the non-federal Medicaid share had been checked. State Appeal
File, Ex. A-A. Section 87-2 proposed the alternative block with local
participation being used as part of the State's share. Next to the
checked option, the State added an asterisk, which referenced a
statement at the bottom of the page: "We interpret this to mean donated
funds under the administrative control of the single state agency."
State Appeal File, Ex. A-B3. Next to this sentence was a citation to 42
C.F.R. 433.45.
After requesting additional information and clarification from the
State, HCFA disapproved SPA 87-2 on September 28, 1987. State Appeal
File, Ex. A-G. HCFA disapproved the amendment because it found that the
amendment would not implement any provision of section 1902 of the Act,
which specifies what should be included in a state Medicaid plan. The
State sought reconsideration of HCFA's decision. Negotiations between
the State and HCFA resulted in the State resubmitting SPA 87-2 with the
asterisked phrase now reading, "We interpret this to mean donated funds
under the administrative control of the single State agency to the
extent allowed by the regulations." HCFA approved this version of SPA
87-2 on June 22, 1988, with an effective date of July 1, 1987. State
Appeal File, Ex. B-1. In its brief in this appeal, HCFA stated that
approval of the amendment "was delayed over a year because questions had
arisen within HCFA regarding the practical effect of this amendment when
it was considered along with the plan amendments which authorized a
potentially significant increase in Medicaid expenditures." HCFA Brief
(Br.), pp. 2-3.
While the negotiations on the approval of SPA 87-2 were being conducted,
the State, on October 1, 1987, began implementing the other
aforementioned SPAs that had been approved by HCFA. Tennessee increased
payments to all hospitals qualifying for the MDSA, expanded Medicaid
eligibility to pregnant women and children up to age two, whose income
did not exceed the poverty level, and increased Medicaid covered
hospital days from 14 to 20. The State also provided its funding for
direct and indirect education.
At the same time the State began receiving transferred funds from
Tennessee hospitals. The first transfer was received on September 30,
1987, but not deposited into the State's account until October 1, 1987.
This transfer and others the State received were credited to Medicaid
Allotment Code 343.67 "Indigent Care," to ensure that the funds were
subject to the control of the State Medicaid program for Medicaid
expenditures. Frazier Affidavit, para. 5, State Appeal File, Ex. C.
After deposit the funds were available, and ultimately used for, payment
of Medicaid program assistance expenditures. For the period at issue,
27 hospitals made transfers; 13 were public hospitals, 14 were private
not-for-profit hospitals. State Appeal File, Ex. C-5. The transfers
were used to fund expenditures for the expansions of services and the
increase in the MDSA implemented under the SPAs, and for direct and
indirect education. Frazier Affidavit, para. 11, State Appeal File, Ex.
C.
An Agency exhibit suggests that the cumulative transfers approximated
the cumulative State share for the disproportionate share allotment
(MDSA) and the payment for direct and indirect education costs. HCFA
Appeal File, Ex. E. However, there were notable exceptions. Nine
facilities which received payments (including one which received
$774,955, representing a very large percentage increase in its MDSA
payment) made no transfers at all. In other instances, the transfers
were substantially less than the State share, as in the case of one
facility that transferred $320,034, but whose cumulative State share was
$471,343. The State also pointed out that in contrast to the 27
facilities that made transfers, 92% of the approximately 150 hospitals
in Tennessee participating in Medicaid received some benefits under the
three plan amendments. The remaining 8% either did not participate in
the expanded services at that time or did not qualify for the MDSA.
On June 24, 1988, just two days after giving its approval to SPA 87-2,
HCFA issued a disallowance regarding the funds contributed by the
hospitals. In its brief on behalf of the disallowance, HCFA declared
that the transfers from the hospitals were made under an agreement with
the State whereby the funds would be used to fund disproportionate share
payments and increased Medicaid covered bed days to those same
hospitals. HCFA claimed that the transfers had arisen out of a "deal"
arranged between the State and the Tennessee Hospital Association
whereby member hospitals would transfer all of the State's share of the
newly available benefits. As evidence of this deal, HCFA contended
that--
o Under the agreement a participating hospital received its
quarterly Medicaid reimbursement on the first day of the quarter
rather than at the end of the quarter. Grasser Affidavit, para.
4, HCFA Appeal File, Ex. A. This allegedly amounted to an
"advance" of funds for services that had not yet been rendered
by the hospitals and enabled the State to fund the hospitals'
donations.
o The amount of money the State claimed as its share of
the total reimbursement received by each of the hospitals
approximates, with some exceptions, the amount contributed by
each hospital. HCFA Appeal File, Ex. E.
o As a direct result of State plan amendment concerning MDSA
payments, those payments to all hospitals increased by an
overall rate of 239.41% from FY 1987 to FY 1988. HCFA Appeal
File, Ex. F.
o The financial records of some of the contributing hospitals
did not list the payments to the State as "donations" but as
debits to contractual adjustment accounts. Griffin Affidavit,
para. 3, HCFA Appeal File, Ex. G.
On the basis of these allegations, HCFA concluded that the funds were
not "donated" in the accepted meaning of the term, but were induced
by
the State. HCFA further alleged that as the agreement contemplated how
the funds were to be used, the State did not have the requisite
administrative control over the funds mandated by section 433.45.
Finally, HCFA argued that its application of section 433.45 to the facts
here furthers the overall purpose of the Medicaid program by denying the
State's attempt to substitute the hospitals for itself as the Federal
Government's partner in funding the Medicaid program and is consistent
with the Board's decision in West Virginia.
Tennessee denied HCFA's assertion that the transfers had occurred as a
result of an agreement between hospitals and the State whereby the State
would increase reimbursement for the hospitals. The State pointed out
that, contrary to HCFA's claims, the funds generated by the transfers
went not just for the increased MDSA, but for other Medicaid program
enhancements such as increased care for pregnant women and children and
increased hospital days. The State added that the MDSA is required by
section 1902(a)(13)(A) of the Act and that 36 hospitals in all received
the MDSA, not just the 27 that made transfers. The State produced a
detailed enumeration of how its program differed from a donations system
that the Board found abusive in West Virginia. See State's Br., pp.
55-62. Furthermore, the State argued that there is no evidence that any
type of "kickback" or other secret return of money occurred in the
donation program and that all the funds were under the administrative
control of the State with no restrictions on how the funds would be
applied. The State maintained that the facts show that its use of
transferred funds is consistent with congressional intent and in
compliance with section 433.45 and its preamble. Finally, the State
argued that the Agency completely ignored the different requirements in
the regulations concerning public and private funds and that a donation
is not a requirement for funds transferred from the public providers,
which represent approximately $10 million of the disallowances.
Analysis: The transferred funds qualify as the State share.
In view of the different treatment provided by regulation for public and
private fund transfers, we address the two categories of funding
separately.
I. Public Funds
42 C.F.R. 433.45 provides that public funds may be used by a state as
its share if they are appropriated directly to the state Medicaid
agency, or transferred from other public agencies to the agency and
under its administrative control, or certified by the contributing
public agency as representing expenditures made directly by it that are
eligible for federal funding. The State here alleged that the local
public hospitals transferred funds to the State Medicaid agency, that
the funds were under the agency's administrative control for use in the
State's Medicaid program and were in fact ultimately used to fund the
program enhancements authorized by three State plan amendments. The
State argued, moreover, that it is not necessary to determine whether
the transfers qualified as "donations" since such an issue simply
is not
relevant under the regulation for purposes of public fund transfers.
The Agency chose not to address the State's arguments concerning the
different treatment provided by the regulation for public fund
transfers.
We find that the regulation does not require consideration of whether
public fund were "donated" and that the funds here from public hospitals
met the limited requirements prescribed by regulation that 1) they be
transferred to the State Medicaid agency and 2) that they be under the
State agency's administrative control.
The regulation provides three methods by which public funds from local
governments or local public institutions may be considered the State
share. None of these methods require consideration of the motivation or
intent of the contributing agency, nor is there a reference anywhere in
this part of the regulation to "donations" or "donated funds."
Although
the preamble refers to both public and private "donations," this would
appear to be a general reference to funds qualifying under the
regulation and not an attempt to impose for public funds a requirement
that simply does not exist in the regulatory language.
The regulation on public funds implements section 1902(a)(2) of the Act
which requires states to share in the cost of medical assistance
expenditures but permits both states and local governments to
participate in the financing of the non-federal portion of the program.
Thus, the regulation recognizes that local governments or institutions
might step in as alternate funding sources for a state. Moreover, it
appears that the regulation permits public agencies to fund the very
assistance services they themselves provide. One of the recognized
methods by which the local public agency's funds may qualify is by the
agency's certification that it expended its own funds for activities
that would qualify for funding under the program.
Accordingly, we conclude that public funds need only be transferred to
the Medicaid agency and be under its control and need not meet any
donative requirements under the regulation. Since the funds in question
here were indisputably "transferred" to the Medicaid agency, the only
remaining issue with respect to the public fund transfers is whether the
funds came within the "administrative control" of the agency. HCFA
argued with respect to public, as well as private, non-profit transfers,
that because an agreement between the State and the hospitals
contemplated how the transferred funds were to be used, the Medicaid
agency lacked the requisite degree of administrative control over the
funds as required by the regulation.
We find that the Agency's position is untenable in view of the history
of the current regulation. Prior to 1985, the regulation on private
donated funds contained both the administrative control requirement and
the requirement that funds be donated without restrictions on their use.
When the Department amended the regulation in 1985, it deleted the
requirement prohibiting restrictive donations, which had been a part of
the prior regulation and the proposed new version in the notice of
proposed rulemaking. 50 Fed. Reg. 46652 (November 12, 1985). The
Department's decision to delete this requirement leaves the inescapable
impression that the regulation would no longer prohibit restrictive
donations. The Agency cannot now reasonably reinstate the very
requirement that was deleted by applying the "administrative control"
requirement to preclude restrictive fund transfers either in the public
or private context.
Furthermore, although the term "administrative control" may be subject
to more than one interpretation, it would be unreasonable to apply the
term to preclude donations, such as the ones in question here, which
merely commit the Medicaid agency to use the funds within a broad
category of authorized program activities. These are uses which the
Medicaid agency might reasonably have selected independently of any
restrictions that may have been associated with the fund transfers.
Here, the facts suggest that the hospitals and the State intended the
donations to be used to fund certain plan amendments to increase
statewide program coverage and an increased percentage in the MDSAs, as
well as the costs of direct and indirect education. The State was
obligated in any event to fund these services for all qualifying
facilities in the State. The record demonstrates that the hospitals in
question transferred funds to the State and that the State placed these
very funds into an account under an allotment code that enabled it to
use the funds for six different program areas including the program
activities authorized by the State plan amendments. Clearly, then, the
funds at issue came within the State's "administrative control" under
any reasonable interpretation of that term.
Thus, on the basis of the foregoing analysis, we conclude that the
transferred funds from public hospitals met the limited requirements
specified in the regulation to be considered the "state share."
II. Private Funds
The Agency's primary argument concerning funds transferred from private,
non-profit hospitals is that the transfers were induced by the State,
and therefore cannot qualify as "donated funds" under the regulations.
The Agency pointed to four factors that demonstrated that the donations
had arisen out of a "deal" arranged between the State and the Tennessee
Hospital Association.
The State has never denied that it entered into conversations with the
Hospital Association about the possibility of donations from members of
the association in response to the State's program enhancements. Nor
has the State denied that it contemplated receiving transfers,
particularly from public hospitals, when it implemented its program
changes. While it would appear that the donating hospitals (both public
and private non-profit) were motivated to make their fund transfers in
order to support the State in its decision to expand program coverage
and increase the MDSA, we have no evidence, as we did in West Virginia,
that the donations were involuntarily extracted or that the State
applied abusive practices to ensure that donations were made, such that
no donation within the ambit of the regulation occurred. Clearly, none
of the factors identified by the Agency demonstrate the existence of an
abusive arrangement similar to what we found in West Virginia.
Accordingly, we conclude, on the basis of the record before us, that the
transfers of the private non-profit hospitals were not coerced or
involuntary, and hence were not prohibited from qualifying as "donated
funds" under the regulations. Our detailed analysis of these points as
well as our response to specific Agency arguments follows.
A. The record here demonstrates that the transfers were "donated"
within the meaning of the regulation.
The circumstances of the State's donation program are clearly
distinguishable from the circumstances considered by the Board in West
Virginia and these differences in our view justify a different result in
the application of the "donation" requirement in the regulation. The
record in this appeal contains the following evidence that the donations
were voluntary.
o In all, only 14 private, non-profit hospitals made donations
under the State's program. Yet, potentially every one of
Tennessee's 150 hospitals stood to benefit from the State plan
amendments expanding program coverage and increasing the MDSA. In
fact, after completion of the first fiscal year for the plan
amendments, it appears that 92% of the hospitals received some
benefit from the amendments that expanded program coverage and 49
hospitals received either an increased MDSA payment or a payment
for direct or indirect education costs.
o Of the 36 hospitals that received an increased MDSA payment,
which the Agency alleged was the primary factor for determining
which hospitals would be expected to make a fund transfer, 25% of
the benefiting facilities did not make a donation at all. One
facility in particular, whose MDSA payment increased from $32,000
to $775,000 (a 2300% increase), did not make any fund transfer.
Thus, contrary to the situation in West Virginia, we do not have a
one-on-one relationship between benefiting and donating providers
that provided compelling evidence of abuse or coercion.
o The State's Commissioner of Health and Environment stated on
July 30, 1987 with respect to the State Plan Amendment 87-2 that no
agreement between the State and providers existed "as to possible
changes in the area of reimbursement that is based on the donation
of a set amount of money." State Appeal File, Ex. A-F, p. 2. There
is absolutely no evidence in the record that the State advised
private non-profit providers that it would not implement particular
program changes unless a specific amount of funding was donated or
transferred. Nor is there evidence that the State advised
providers that it would discontinue changes if a set level of
funding was not received. The State share for all of the program
enhancements considerably exceeded the amount of transfers received
from both public and private providers and the State through its
own statute on contributed funds committed itself not to reduce
general revenue funding for the program as a result of fund
transfers.
o The evidence strongly suggests that the State's commitment to
the program enhancements extends well beyond the receipt of any
particular fund transfers from providers. The State indicated that
it would not have been able to withdraw any of the plan changes on
an expedited basis even if provider funding (public and private
non-profit) had not materialized. Any decision to change the
program due to lack of funding must be made by the Commissioner of
Health and Environment pursuant to Tennessee Code Annotated,
section 71-5-106, after consulting with the federally mandated
Medicaid Medical Care Advisory Committee, with input from the
public and subject to gubernatorial and legislative approval.
State Reply Br., p. 4. The amicus brief provided extensive
evidence and argument concerning the necessity for these particular
plan changes as part of the long-term needs of the State's Medicaid
program.
o The inclusion of an MDSA in the rate of hospitals that serve a
"disproportionate number of low income patients with special needs"
is a requirement of section 1902(a)(13) of the Act. In order to
increase the percentage of the MDSA, which is an ingredient in a
provider's rate, the State has to make assurances satisfactory to
the Secretary that the rate was 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 . . .laws, regulations, and . .
.standards." Once the State has given assurances to the Secretary
that an enhanced MDSA is necessary for a "reasonable and adequate"
rate, the State could not justify a sudden change in the MDSA
percentage without relying on the relevant factors specified in the
regulations, such as changes in the costs of health care delivery
within its provider community. Clearly the State would not be able
to justify a change simply on the basis that it had not received
fund transfers from hospital providers.
o Although the Agency was critical of the State because its MDSA
payments for all 36 eligible hospitals increased in the fiscal year
following the donations by an overall rate of 239.41%, the Agency
did not explain why such a payment increase was in and of itself
inconsistent with a donation. The Agency overlooks the fact that
it approved the State plan amendment that authorized the increase
in the MDSA. The Agency has not alleged that the amendment was
inappropriate under the standards set out in section 1902(a)(13) or
that the increase was in some respect an abuse of the State's
ratesetting process.
o The Agency pointed to the treatment of the funds in the
financial records of certain hospitals as a basis for concluding
that they were not true donations. The five hospitals in question
made transfers that represent approximately $385,000 of a $16
million disallowance. The Agency asserted that information
obtained from these hospitals revealed that they treated their
transfers as "adjustments to revenues or anticipated revenues for
services performed on Medicaid beneficiaries." The Agency alleged
that this treatment suggested that the hospitals viewed their
transfers as "write-offs against the anticipated receipt of Federal
funds." HCFA Br., p. 6.
The Agency seems to be arguing that these five hospitals did not have
the intent to treat the transfer of funds as donations, and that we
should impute the same lack of donative intent to all the hospitals
which purported to make donations. In the first place, the Agency does
not even attempt to distinguish between public and private hospitals.
As to the public providers, as we have shown above, there is no
requirement that their funds be "donated"; all that is required is
that
their funds be appropriately transferred to the control of the State
Medicaid agency.
As to the private non-profit hospitals, there is no basis for judging
them all on the basis of these five hospitals, whose contributions
represented a small fraction of the total. As to the five hospitals
themselves, the record is, to say the least, murky.
The Agency's brief relies on the affidavit of an Agency accountant, who
in turn relies on a review by Tennessee Blue Cross of certain
financial data submitted by the five hospitals. Griffin Affidavit, HCFA
Appeal File, Ex. G. We were not furnished with any copies of the
hospital records, nor indeed with any report by Blue Cross. The
description in the affidavit of what Blue Cross found in the records was
that these hospitals treated the fund transfers to the State as
"contractual adjustment accounts." This leads to a conclusion by the
affiant that "[c]ontractual adjustments are not donations." Id.
(Emphasis in original) A reference is given to "Chart of Accounts for
Hospitals, American Hospital Association, and Provider Reimbursement
Manual, Section 328." The Chart of Accounts is not identified further.
There is nothing in the record, however, to show that any of the
hospitals involved were bound by Medicare principles of reimbursement in
setting their rates. More importantly, the record simply does not
demonstrate that what the five hospitals did in their financial records
(which were never introduced) was necessarily inconsistent with a
donative intent. This is especially so, where, as the State argued,
there appear to be no explicit program guidelines explaining how donated
transfers were to be treated in financial records. The hearsay
statements in the affidavit, and the conclusory statements from the
Agency's brief, do not constitute persuasive evidence that the hospitals
never intended to make donations.
Again without citing any authority, the Agency states that under
generally accepted accounting principles, a true donation is an
"expense." HCFA Br., pp. 6-7. In West Virginia, supra, we stated that
[p]robably a majority of the hospitals that made fund transfers hoped to
recoup the transfers ... by claiming the transfers as expense items on
their cost reports." p. 3 (emphasis supplied). The Agency has not
shown that the hospitals here hoped to recoup their donations, whatever
their financial records showed.
In West Virginia we considered that how individual facilities
characterized their transactions was a factor in determining whether the
facilities had made donations, although we did not view that factor in
and of itself to be decisive. The Agency argues that the
characterization of the transfer of funds by the five hospitals shows an
intent not to treat the transfers as donations. On the record as it now
stands, however, we simply cannot find that any of the transfers here
failed to qualify as the State share based on the treatment of the
transfers in financial records of the hospitals.
o Contrary to the situation in West Virginia, there is absolutely
no evidence in the record that the State gave preferential
treatment of any kind to hospitals that provided fund transfers or
that the State engaged in any form of abusive practice. All
aspects of the State plan amendments were applied consistently and
uniformly throughout the State to all hospitals with Medicaid
patients. Thus, the evidence in the record here suggests that while
private non-profit providers may have been encouraged to support
the State's program enhancements, the State did not coerce the
providers, nor did it use abusive program practices to induce the
transfers. Therefore, we find that the circumstances here are
clearly distinguishable from those in West Virginia and justify a
different result under the Agency's regulation.
B. The State's donation program is consistent with the overall purposes
of Medicaid and has been recognized by Congress as an appropriate
application of the regulation.
In the amicus brief filed in this appeal, THCC identified in detail the
factors that led the State to expand its program coverage and increase
its MDSA. As of 1980, Tennessee had reduced hospital coverage under
Medicaid from 20 to 14 days. In the following years budget pressures
led to further cuts in services to the point that by 1985 Medicaid
covered only one-third of Tennessee's poverty population at any one
time. Infant mortality was at a high level and Tennessee ranked near
the bottom of states in terms of number of children born in 1985 at low
birth weights. Public hospitals providing care for indigents were
closing down for lack of funds.
These circumstances led the State to undertake plans for the improvement
and expansion of its Medicaid program. THCC's brief convincingly
demonstrates how the program enhancements adopted by the State in 1987
and funded by the donations--the increase in the MDSA, the expansion of
coverage to pregnant women and children at 100% of the poverty level,
and the restoration of hospital coverage to 20 days--either implemented
or furthered recent statutory amendments to the Medicaid program. Thus,
the donated funds were used by the State for areas of its program that
had all received explicit congressional recognition in recent statutory
amendments. The brief was unrebutted by the Agency.
The State, and THCC in its brief, also pointed to specific evidence of
congressional support for Tennessee's donation program itself. This is
shown in a report from the House Budget Committee accompanying the
Omnibus Budget Reconciliation Act (OBRA) of 1987. Public Law 100-203.
The 1987 OBRA would have included express statutory authorization for
the use of donations as the state share in the Medicaid program. In
commenting on that provision (which was deleted in the conference
agreement) the Committee discussed several states' donation programs:
In Tennessee, the Volunteer State, funds donated by nonprofit
hospitals have enabled the State to extend Medicaid coverage to
low-income pregnant women and infants with incomes up to 100
percent of the Federal poverty level, to increase the scope of the
inpatient hospital benefit for all Medicaid eligibles from 14 to 20
days, and to provide a payment adjustment to disproportionate share
hospitals. The Committee is also informed that the Alabama
legislature has created a Mothers and Babies Indigent Care Trust
Fund to receive donations from hospitals and other sources.
Donations to the Trust Fund would be used to extend Medicaid
coverage to low-income pregnant women and infants, and to finance
other program expansions, such as an increase in the number of
hospital days covered.
In the view of the Committee, the use of donated funds by
Tennessee, Alabama, and other States to pay the State share for
expansion of Medicaid eligibility or services, or for the increased
reimbursement to disproportionate share hospitals, is entirely
appropriate, for it promotes the basic objective of the Medicaid
program--to make quality health care accessible to the poor. In
order to facilitate the continuation of such arrangements, the
Committee amendment would clarify that the financial participation
required of the State under Medicaid may include private funds
donated to, and subject to the unrestricted control of, the State.
For this purpose, private funds would include donations from county
or municipal hospitals, but would not include contributions from
the sponsoring county or city governments.
The Committee emphasizes that, in order to qualify as State
expenditures for Federal matching purposes, the donations must be
voluntary, and the donations, once made, must be under the State's
unrestricted control. The Committee is troubled by reports that
one State, having exhausted its revenues and unable to meet
legitimate claims already submitted for payment by its Medicaid
program, induced one class of providers to "donate" funds which the
State used to draw down Federal Medicaid matching funds which were
in turn used to make payment on the claims that had already been
submitted by those same providers. These reports, if accurate,
represent a clear abuse of the current regulations, and the
committee does not intend that its amendment legitimize such
conduct.
H.R. Rep. No. 301, 100th Cong., 1st Sess., pt. 1, at 531 (Oct. 26, 1987)
in State Appeal File, Ex. H.
We find it noteworthy that this same excerpt was introduced in the West
Virginia proceedings by HCFA for purposes of contrasting the abusive
nature of the unnamed state's donation program (the clear implication
being that it was West Virginia's) with the commendable use of donations
by Tennessee and Alabama to expand their programs.
Congressional intent to preserve donation programs is additionally shown
by section 8431 of Public Law 100-647 (enacted November 10, 1988) which
prohibits the Secretary of Health and Human Services from issuing any
final regulation, prior to May 1, 1989, changing the treatment of
voluntary contributions used by states to receive FFP under the Medicaid
program. State Reply Br., Ex. C.
In light of the above we cannot accept HCFA's argument that its
application of section 433.45, disqualifying the donations made by the
Tennessee hospitals, furthers the overall purpose of the Medicaid
program. On the contrary, the State's donation program expanded
Medicaid services, explicitly favored by Congress, to a greater segment
of Tennessee's indigent population without any indication that abusive
practices resulted. A House Report considering an amendment that would
have enacted the donations regulation into statute commented favorably
on the Tennessee program. Although that amendment was deleted by the
Conference Committee (H.R. Conf. Rep. No. 495, 100th Cong., 1st Sess.
760 (1987)), in less than a year's time (while Tennessee's disallowance
was pending), Congress prohibited the Secretary by statute from changing
the treatment of voluntary contributions in the regulations. These two
actions by Congress give evidence that Congress viewed the donation
regulations as furthering the overall purpose of the Medicaid program
and that the Tennessee contributions should come within the scope of the
regulations.
Thus, on the basis of the foregoing, we conclude that the donations from
private non-profit hospitals here qualify under the regulations and that
the circumstances here are distinguishable from West Virginia.
Conclusion
For the reasons stated above, we reverse the disallowance of
$16,512,355.
________________________________ Norval D. (John) Settle
________________________________ Alexander G. Teitz
________________________________ Donald F. Garrett Presiding
Board