DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: North Carolina
DATE: February 13, 1990
Department of Human Resources Docket No. 89-162
Decision No. 1133
DECISION
The North Carolina Department of Human Resources (North Carolina/State)
appealed a determination by the Health Care Financing Administration
(HCFA) disallowing $2,739,372 in federal financial participation (FFP)
claimed by the State for Medicaid services under Title XIX of the Social
Security Act (Act). The disallowed claim resulted from an adjustment to
the reimbursement rates for State-owned intermediate care facilities for
the mentally retarded (ICFs/MR). The adjustment was based on a change
in accounting methodologies, from cash to accrual, for recording
vacation leave costs. 1/
In the disallowance, HCFA asserted generally that the State's claim was
unallowable because it violated the applicable financial management
principles for state and local governments contained in Office of
Management and Budget (OMB) Circular A-87. HCFA asserted that the
State's claim was not consistent with the cash basis of accounting the
State used generally for vacation leave, was not necessary and
reasonable (but, rather, resulted in a "windfall" for the State),
did
not conform with generally accepted accounting principles, and,
therefore, was unallowable under OMB Circular A-87, Attachment A,
C.1.a., C.1.d., and C.1.e. The State asserted that it was using an
accrual basis of accounting for all vacation leave, that Medicare
reimbursement principles applied rather than OMB Circular A-87, and,
alternatively, that even if OMB Circular A-87 applied, the State had
satisfied the applicable cost principles.
Based on the following analysis, we conclude that the State's claim does
not violate the provisions of OMB Circular A-87. First, the Circular
does not apply in determining what costs can properly be used in
calculating reimbursement rates for Medicaid facilities. North
Carolina's Medicaid State plan adopts Medicare reimbursement principles
and specifically permits a one- time adjustment for accrued vacation
leave expenses. This adjustment is consistent with generally accepted
accounting principles appropriate to the circumstances, and does not
result in the type of inconsistent treatment of costs prohibited by the
Circular. Moreover, we reject HCFA's argument that the State received
an improper windfall. We rejected a similar argument in New York State
Dept. of Social Services, DAB No. 452 (1983). HCFA not only failed to
distinguish New York on the law, but also failed to allege facts showing
that the State's cash flow system here gave rise to the problems HCFA
identified in New York. Finally, even if HCFA was correct that the
State could properly claim FFP for rates reflecting vacation leave only
to the extent that leave is recognized as an "expenditure" of the
State's general government fund, this would at most raise a question of
timing and it appears that under the State's system the State would have
by now so recognized the amounts at issue. Accordingly, we reverse the
entire disallowance of $2,739,372.
I. HCFA's Rationale for the Disallowance
HCFA asserted that OMB Circular A-87 contains the cost principles which
should control here. HCFA asserted that the State's reliance on
Medicare rather than Medicaid cost principles was misplaced in that
Medicaid provides funds to the states, while Medicare deals directly
with hospitals and providers. HCFA pointed out that Medicare providers
generally operate on a business accounting methodology, while Medicaid
grantees operate on a general government model. HCFA asserted that the
State's adoption of the Medicare principles in the approved State plan
was rendered inoperative by HCFA's "caveat" in the approval stating
that
FFP would be unavailable for vacation costs due to the State's failure
to comply with OMB Circular A-87. HCFA Brief (Br.), pp. 11-12. HCFA
recognized that OMB Circular A-87, Attachment A, A.3.b. excepts
"publicly-owned hospitals and other providers of medical care" from
the
Circular's principles, but noted that the Medicaid grant was made to the
State, not the facilities. As further support for its position, HCFA
relied on the rationale in three Board decisions which touched upon
somewhat similar questions regarding the application of OMB Circular
A-87. See Arkansas Dept. of Human Services, DAB No. 998 (1988);
Missouri Dept. of Social Services, DAB No. 676 (1985); and New York.
Assuming the applicability of OMB Circular A-87, HCFA maintained that
the costs which the State claimed were inconsistent with those cost
principles.
HCFA also asserted that the State's change in accounting methodology was
inconsistent with generally accepted accounting principles (GAAP). 2/
OMB Circular A-87, Attachment A, C.1.e. requires that claimed costs must
be consistent with GAAP, appropriate to the circumstances. HCFA's
discussion of the proper accounting principles to be employed was based
on commissioned reports from two individuals purported to have a
thorough understanding of this field. See HCFA Exs. C, D, and E.
HCFA indicated that the Governmental Accounting Standards Board (GASB)
promulgates the GAAP applicable to state governments, while the
Financial Accounting Standards Board (FASB) sets out the GAAP applicable
to business enterprises. HCFA indicated that while FASB guidelines
recognize that a business may report accrued vacation leave as a
liability when earned, the GASB standards do not have a similar
provision. In fact, HCFA argued, the GASB's forerunner specifically
rejected that principle and GASB adopted its predecessor's stance. HCFA
presented the following analysis of how government accounting should
work relative to this situation and how the State's system fit within
that scheme.
"Modified accrual accounting" for governments employs "fund"
and
"account group" categories. The two categories of funds relevant here
are governmental, i.e., those which typically finance most government
functions, and proprietary, i.e., those which are used to account for
governmental activities similar to private business. Account groups
function to record general fixed assets and the unmatured principal of
long-term debt. A government accounting system is often labeled as a
dual model because, by nature, it must employ two different accounting
approaches. A government uses a business model when engaged in a
profit-making function. However, the government is routinely concerned
with measuring the flow of funds or determination of financial position,
rather than the profit or loss determination made relative to the
business model. According to HCFA's analysis, in the general government
model current assets and liabilities are accounted for in the
governmental funds while fixed assets and long-term liabilities are
recorded in the nonfund account groups. 3/ HCFA Br., pp. 8-9.
HCFA pointed out that under modified accrual accounting, vacation leave
which was earned in the present period and was or would be paid during
that period, or soon after, from current assets is properly recognized
as a current expenditure of the governmental fund. HCFA asserted that
other accrued vacation liability should be recorded in the general
long-term debt account group and not recorded as a current expenditure
until paid. HCFA argued that while it is the practice of business
institutions (using the regular accrual methodology) to recognize an
expense when incurred, even if the related liability will not be paid
until much later, the State's operation of ICFs/MR is clearly a
governmental function. Therefore, HCFA concluded, the general
governmental model of accounting should apply.
When the State provided evidence that it adjusted its accounts at the
end of each year from a cash to a modified accrual basis, HCFA did not
deny this but asserted that the State's accounting methodology for
ICFs/MR is inconsistent with what the State's evidence showed about the
methodologies used elsewhere within the State system for recording
vacation leave. HCFA argued that the State was recording leave for
ICFs/MR using the accrual methodology appropriate to a business function
as opposed to the modified accrual methodology, which should have been
used. Id. at 9-11.
Finally, HCFA argued that North Carolina's claim was neither necessary
nor reasonable, but would simply represent a windfall to the State.
Based on this reasoning, HCFA took the position that, even though a
one-time adjustment to Medicaid reimbursement rates to account for
vacation leave was specifically permitted under the State plan, no FFP
is available in such rate adjustments.
II. Requirements for Reimbursement for ICF/MR Services
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 specifically provides --
the Secretary . . . shall pay to each State which has . . . [an
approved] plan . . . an amount equal to the Federal medical
assistance percentage . . . of the total amount expended during
such quarter as medical assistance under the State plan . . . .
Section 1905(a) of the Act defines the term "medical assistance"
to
include ICF/MR services.
Prior to 1980, states were required under section 1902(a)(13) of the Act
to reimburse ICF services (including those in an ICF/MR) at rates
determined on a "reasonable cost-related" basis, using methods and
standards approved by the Secretary.
The implementing regulations, applicable at that time, addressed
cost-finding methods and provided that the State plan must specify the
providers' cost-finding methods. See 42 C.F.R. 447.276(a) (1980). That
regulation also provided --
(c) The cost-finding methods must be approved by the Regional
Medicaid Director. Medicare cost-finding methods . . . will be
approved automatically . . . .
Section 962 of Public Law 96-499, known generally as 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 . . . 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 in order to avoid burdening states with unnecessary
paperwork requirements. See 48 Fed. Reg. 56047 (December 19, 1983),
citing S.REP. No. 96-471. Following enactment of the Boren Amendment,
the regulation at 42 C.F.R. 447.276 was removed. See 46 Fed. Reg. 47971
(September 30, 1981). Clearly, however, if the pre-Boren Amendment
regulation provided for automatic acceptance of a Medicaid cost-finding
methodology based on Medicare principles, a state could reasonably adopt
these principles under the more liberal Boren Amendment requirements.
As North Carolina noted, while Medicare reimbursement principles permit
governmental institutions to operate on a cash accounting basis, they
show a decided preference for the accrual basis of accounting,
recognizing that method as "the most accurate basis for determining
costs." See 42 C.F.R. 413.24(e). The Provider Reimbursement Manual
(HIM-15), which sets out the principles for reasonable cost
reimbursement under Medicare developed by HCFA, specifically permits
facilities to change their method of accounting for vacation leave from
the cash to the accrual method, and provides a formula for that process.
See HIM-15, section 2146 at North Carolina Ex. 3.
III. North Carolina's Provider Reimbursement System
North Carolina's State plan sets out a prospective rate-setting system.
Under this methodology, North Carolina establishes per diem rates
applicable to the institutions. The per diem rates are based on the
costs incurred and reported by the facilities with certain limits. In a
prospective rate-setting system a rate is generally set for the rate
period based on the historical costs of the facility for a prior year
(adjusted for inflation), rather than on the actual costs of providing
the services for which the rate is claimed.
North Carolina's approved State plan indicated that --
The allowable reasonable, and necessary costs of any services are
determined in accordance with regulations (HIM-15) establishing the
method or methods to be used and the items included.
North Carolina Ex. 1, p. 1.
Thus, the State plan adopts by reference the Medicare cost-finding
methods.
In 1987, North Carolina submitted to HCFA a State plan amendment which
provided that --
(g) A special payment in addition to the prospective rate shall be
made in the year that any provider changes from the cash basis to
the accrual basis of accounting for vacation leave costs. The
amount of this payment shall be determined in accordance with Title
XVIII allowable cost principles . . . .
North Carolina Ex. 1, p. 4. 4/
North Carolina asserted, and HCFA did not deny, that the formula for
converting vacation leave costs outlined in its State plan was based on
the HIM-15 formula. North Carolina Br., pp. 4-6.
On October 20, 1987, HCFA signed the "Transmittal and Notice of Approval
of State Plan Material" for North Carolina's plan amendment. The cover
letter to North Carolina stated that "we have approved your plan
amendment with an effective date of April 1, 1987." HCFA Ex. B. HCFA
admitted that it had approved the amendment as meeting the requirements
of section 1902(A)(13) of the Act and HCFA's implementing regulations at
42 C.F.R. Part 447, Subpart C. HCFA Br., p. 3. HCFA nonetheless
contended that no FFP was available for rate adjustments under the plan
amendment, citing the following statement in the cover letter --
We must advise you, however, that this State Plan Amendment does
not meet certain requirements governing allowable costs;
accordingly, FFP would not be available for costs claimed under
this amendment. Specifically, we find that this amendment is in
violation of . . . Circular A-87 . . . .
HCFA Ex. B.
HCFA's alleged "caveat" to its approval was based on its "understanding
that the North Carolina State government operates on a cash, rather than
an accrual basis of accounting." Id. at 2.
IV. The Medicare Principles Apply in Determining the Rates
In general, support for North Carolina's use of Medicare cost principles
for determining its reimbursement rates can be found in both the facts
of this case and the applicable law. The fact that North Carolina had
adopted Medicare reimbursement principles was evident in its approved
State plan, even prior to the 1987 amendment. That amendment merely
clarified how the adjustment permitted under the Medicare principles
would work in the context of the State's prospective rate-setting
system. Clearly this was within the State's discretion under the Boren
Amendment, and HCFA recognized this by indicating its approval. The
history of reimbursement systems for Medicaid and Medicare shows that
HCFA considered the Medicare principles appropriate for determining the
reasonable costs of provider facilities, including public providers.
See, e.g., 42 C.F.R. 447.276(a) (1980).
HCFA argued that the "caveat" in the transmittal letter approving
North
Carolina's 1987 State plan amendment required the State to use the cost
principles in OMB Circular A-87, rather than the Medicare reimbursement
principles. We do not agree. First, a statement in such a transmittal
letter clearly cannot impose requirements on a state which are
inconsistent with the terms of an approved state plan amendment and of
HCFA's own regulations, which require a state to follow the methods and
standards in its plan in determining reimbursement rates. See 42 C.F.R.
447.253(g).
Second, HCFA's statement in the letter is premised on the unsupported
assertion that North Carolina uses a cash basis of accounting. North
Carolina challenged this statement, asserting that it used governmental
modified accrual accounting on a statewide basis. Under that
methodology, state departments operate on a cash basis but assets and
liabilities are converted to the accrual method at the end of the year.
Specifically, North Carolina offered an excerpt from its 1988
Comprehensive Annual Financial Report which showed that its financial
status for Governmental Funds (which would include vacation leave) had
been prepared based on modified accrual accounting. The State noted
that, in New York, this Board had recognized governmental modified
accrual accounting as a form of accrual accounting. HCFA did not
dispute this.
HCFA's reliance on its "caveat" is also unreasonable because that
"caveat" is merely a conclusory statement that FFP would be unallowable
under the OMB Circular A-87 provisions, and, as we discuss below, is
based on a misunderstanding of how those provisions apply and what they
require. Also, HCFA cited these same Circular provisions in New York,
and the Board held there that these provisions did not by themselves
provide a basis for disallowing this type of rate adjustment. In light
of New York, HCFA's mere recitation of these provisions cannot be
considered sufficient to preclude North Carolina from receiving FFP in
such an adjustment. We discuss New York, and HCFA's efforts to
distinguish it from this case, in the last two sections of our decision.
V. OMB Circular A-87
HCFA is correct that this Board has held in New York and in other cases
that the principles of OMB Circular A-87 apply in determining costs that
may be claimed under a Medicaid grant. HCFA errs, however, by confusing
the question of what costs may be included in calculating a Medicaid
reimbursement rate with the issue of what costs may be claimed under a
Medicaid grant. The State does not charge the salaries and benefits of
the employees of State-owned ICFs/MR to Medicaid, but merely uses them
in calculating a reimbursement rate according to the State plan.
An analysis of the uniform administrative requirements for HHS grants at
45 C.F.R. Part 74 and of OMB Circular A-87 supports our conclusion that
the Circular principles cannot be used to override principles made
directly applicable for determining rates under the State plan. Part 74
provides that it applies to Medicaid grants, "[e]xcept where
inconsistent with Federal statutes, regulations, or other terms of a
grant." 45 C.F.R. 74.4. Section 74.17l adopts the cost principles set
out in OMB Circular A-87 in general for determining allowable costs of
activities conducted by state or local governments. OMB Circular A-87
states, however, that its principles apply in determining costs incurred
by state governments under federal grants and cost reimbursement type
contracts (including subgrants and subcontracts) "except those with . .
. publicly owned hospitals and other providers of medical care subject
to requirements promulgated by the sponsoring Federal agencies." OMB
Circular A-87, Attachment A, A.3. (emphasis added).
The ICFs/MR in North Carolina are not the Medicaid grantees, but provide
services to Medicaid recipients under provider agreements with the State
Medicaid Agency, just as private facilities do. Thus, these ICFs/MR are
publicly-owned providers of medical care subject to requirements
promulgated by HCFA for Medicaid rate- setting, which clearly control to
the extent they are inconsistent with OMB Circular A-87. 5/
The "cost" the State claims under Medicaid is for the ICF/MR services,
generally calculated by multiplying a per diem rate times the number of
patient days of service provided. The OMB Circular A-87 principles do
apply in determining whether the State has in fact incurred a cost for
services in the full amount of the rates and thus are relevant to
determining whether the State is entitled to FFP in that amount. 6/ We
recognized this in New York and thus considered questions raised there
by the fact that New York did not actually make payments to its public
facilities based on the applicable Medicaid rates, but simply paid the
operating costs of the facilities and used the rates only for purposes
of claiming FFP. We concluded in New York that the state's claim for
the full amount of the rates did not violate OMB Circular A-87. As we
discuss next, HCFA attempted to distinguish New York here, but failed to
do so.
VI. HCFA Failed To Distinguish New York
In New York, this Board reversed a HCFA determination disallowing a
one-time adjustment to Medicaid reimbursement rates made by New York to
account for vacation leave that had been earned by employees of State
facilities providing Medicaid services. Like North Carolina, New York
had adopted Medicare cost principles for calculating Medicaid
reimbursement rates, and had changed its accounting system from a cash
basis to a modified accrual basis. HCFA did not argue here that the
Board's decision in New York was wrong, but argued that it should not be
controlling. HCFA attempted to distinguish this case on the basis that
the New York decision had not considered "whether use of a method of
accounting which records the liability when the leave is earned violates
GAAP [generally accepted accounting principles]." HCFA Br., p. 5
(emphasis in original).
HCFA pointed to generally accepted accounting principles adopted in the
early 1980s which require that states use modified accrual accounting
for activities which are general government activities (rather than
proprietary activities). HCFA relied on discussions of modified accrual
accounting in a report by a consultant hired by HCFA, as well as a
memorandum by this same consultant and a memorandum by a second
consultant. HCFA Exs. C, D, and E. These documents do not, however,
support HCFA's statement that it violates GAAP to report vacation leave
as a liability when earned. To the contrary, these documents describe
the development of principles for governmental accounting to require
states to record vacation leave as liabilities in the year earned, which
most states had not been doing previously.
The gist of these documents is that now, under GAAP, earned vacation
leave attributable to general government activities may be recognized as
a current period "expenditure" in a general government fund only when
the state has paid the leave during the current period or reasonably
expects to pay the costs from existing resources soon after the fiscal
year; all other accrued vacation liabilities properly recognized should
be recorded as a liability in a long-term debt accounting group. HCFA
Ex. D, pp. 18-19; HCFA Ex. E, p. 4. 7/ We find HCFA's reliance on its
consultants' opinions as a basis for distinguishing New York to be
misplaced, for the following reasons:
o The question posed by HCFA to these consultants was: "Are accrued
vacation liabilities of state and local governments properly recorded as
governmental fund expenditures in conformity with generally accepted
accounting principles?" The issue here, however, is whether such
liabilities may be considered costs to be used in calculating Medicaid
reimbursement rates for public facilities (even if they were not yet
recorded as "expenditures"), and, if so, may the State receive federal
funding for the full amount of the rates prior to the time the State
actually pays the vacation leave.
o In New York, the Board addressed HCFA's argument that the modified
accrual accounting used by the State did not call for recognizing all
vacation leave as an expenditure in the general government fund during
the fiscal year in which the leave was earned. The Board concluded
nonetheless that modified accrual accounting could be considered a form
of accrual accounting and that the State was certainly not using a cash
basis of accounting as HCFA had alleged.
o One HCFA consultant seems to be saying that New York was wrongly
decided, but he clearly misunderstood what was at issue in that case.
He discusses the case as though it involved the indirect cost rates used
by New York to charge overhead costs of administering programs, rather
than the Medicaid reimbursement rates for services provided by State
facilities. See HCFA Ex. E.
o The mere conclusion that GAAP require states to record some vacation
leave liabilities as long-term debt does not necessarily preclude a
state from treating that vacation leave as an accrued expense for
purposes of calculating a reimbursement rate. The rules adopted for
reimbursement of medical provider facilities should control as the most
appropriate principles under the circumstances. Those rules
specifically provide for an accrual basis of accounting under which ".
.
. expenses are reported in the period in which they are incurred,
regardless of when they are paid." 42 C.F.R. 413.24(b)(2). Moreover,
they contemplate a process of "cost-finding" which HCFA described
as the
"process of recasting the data derived from the accounts ordinarily kept
by a provider to ascertain costs of the various types of services
rendered." 42 C.F.R. 413.24(b)(1).
o HCFA's consultant concluded: "If the activities in question are
'general government activities properly accounted for through
governmental funds and account groups -- which appears to be the case --
then expenditures (not expenses) are the appropriate measure of accrued
vacation 'cost.'" HCFA Ex. D, p. 12. This conclusion is not based on a
GAAP but on a statement from a cited accounting book that
"'Expenditures' is a term that replaces both the terms costs and
expenses used in accounting for profit-seeking entities." Id. at 13.
However, the consultant's report also contains a chart from another
accounting book reconciling "expenditures" with "total cost or
expense."
This chart indicates that the total cost or expense for a particular
period would include "expenditures" which benefit that period even
if
not recorded as an expenditure until a later period. The report also
cites an earlier statement of the American Institute of Certified Public
Accountants that "it is appropriate to disclose the estimated amounts of
such commitments in a footnote, if material, and not record the costs as
expenditures at the time the leave is accumulated." In other words, the
consultant's conclusion is based on the premise that the activities
should be treated as general government activities rather than
proprietary activities, and is based on a concept of cost which is not
fully consistent with statements the report itself cites.
Even if the GAAP discussed by the consultants clearly provided that
vacation leave may not be considered an accrued cost for purposes of
rate calculation until recognized as an expenditure in the general
government fund, this would not be a basis for the disallowance here.
HCFA's position is that application of the GAAP supports a conclusion
that no FFP is available for the State's adjustment to its rates for
accrued vacation leave. Yet, the GAAP discussed by the consultants at
most raise a question of the timing of FFP. The GAAP clearly permit
recognition as an expenditure in the general government fund of vacation
leave previously recorded as long-term debt at the point in time when a
state reasonably expects that leave to be paid from existing resources.
See, e.g., HCFA Ex. D, p. 19. The State here explained that it pays
leave on a first in first out basis and limits the maximum amount of
leave which can be earned. Thus, it is likely that the amounts in
question here have been recognized as expenditures in the State's
general governmental fund in the periods following the period in
question here.
We do not think that permitting the State to treat vacation leave as an
accrued expense for purposes of calculating a Medicaid reimbursement
rate for public facilities leads to the type of inconsistency prohibited
by OMB Circular A-87, Attachment A, C.1.d. and e. 8/ First, any
inconsistency arising from treating accrued vacation leave as a cost or
expense for purposes of Medicaid rate calculation, before that leave
would be recognized as an expenditure in a general government fund,
results because use of regular accrual accounting is specifically
permitted (indeed preferred) by HCFA for that purpose. Second, under
modified accrual accounting, vacation leave is not treated the same for
all purposes. Vacation leave is recorded as an accrued expense in
proprietary funds when it is attributable to activities of a state
government which are similar to those of a business, such as where the
state charges a users' fee. HCFA's own rules permit public facilities
to report costs on an accrual basis for purposes of Medicaid
reimbursement. Finally, we note that OMB Circular A-87 specifically
provides for use of cost principles for subgrantees or subcontractors
that are appropriate to the nature of the entity, even if different from
the principles applicable to the grantee. Thus, it is unreasonable to
consider inconsistencies arising from those differences as the type of
inconsistencies prohibited by OMB Circular A-87.
VII. There Is No Improper Windfall Here
HCFA argued here that the State would receive a "windfall" from its
claim. This is similar to an argument that HCFA raised in New York, but
HCFA did not here articulate the reasoning behind this argument as it
did in New York. In this section we explain why we rejected it there,
as well as our additional reasons for rejecting HCFA's "windfall"
argument here.
In New York, HCFA acknowledged (as it effectively did here) that the
approved state plan permitted the adjustment in question and that there
was no issue raised concerning whether the adjustment had been properly
calculated and represented reimbursement for services which had in fact
been provided by the facilities. HCFA there explained its reasons why
the amount in question should not be considered an amount expended for
medical assistance under 1903(a)(1). Essentially, HCFA said that New
York would get an improper "float" of federal funds because New York
received the federal share of the rates in advance of either paying the
full amount of the rates to the public facilities or accruing vacation
costs in such a way that the State's share of the rates was set aside at
the time the State received the federal share. This argument was based
on the fact, acknowledged by New York, that the State Medicaid Agency
did not actually pay the full amount of the rates to the public
facilities at the time the facilities billed for the number of patient
days of service provided; instead, New York claimed FFP for the services
provided and placed the federal share in an account that was used to pay
operating costs of the facilities such as employees' salaries. State
funds were also provided for that account but would be used to pay
vacation leave for facility employees only when the leave was actually
taken.
This Board rejected HCFA's improper float argument, concluding that,
even if New York did receive some cash flow benefit from how its system
worked, this was not a basis for HCFA's disallowance. This conclusion
was based on a number of considerations, including that --
o Private Medicaid facilities may likewise receive some benefit from
being paid a rate which reflects accrued vacation expense which the
provider has neither paid nor funded. Once the private facilities
provide the services, they are entitled to the full rates and do not
need to earmark federal funds received to cover accrued costs used in
calculating the rates. Similarly, there is no requirement that public
facilities account for federal funds on this basis. To the contrary,
funds paid to states for allowable costs incurred or services rendered
lose their character as federal funds once they are deposited in a
state's treasury. 43 Comp. Gen. 697, 699 (1964).
o Since the State covered all operating costs of the facilities,
including some which may not be allowable as costs for rate calculation
purposes, the State may in fact have provided funds to the facilities in
the amount of the State share of the rates. 9/
o Since the State paid leave on a first in first out basis and followed
HIM-15 guidelines on the maximum amount which may be accrued, the State
had minimized the time between receipt of the federal funds and their
disbursement. See 45 C.F.R. 74.61(e); 74.92.
o There is no requirement that a state match of Medicaid funds must be
satisfied by a cash payment. Part 74 provides that a matching
requirement may be met by "allowable costs incurred by the grantee . .
.
." that are "verifiable from the records . . . ." 45 C.F.R. 74.52(a);
74.53(d).
o The State could have avoided the problem noted by HCFA by arranging
for a different cash flow system or by appropriating funds to cover the
full state share of the rates, if it had notice of HCFA's position.
The Board further noted that HCFA had --
not put forth any policy reasons for concluding that the State's
cash flow system should have any relevance to whether the State may
receive the federal share of the full per diem rates to which
public facilities are entitled. Nor is there any evidence that the
State had had notice that such a requirement existed in this
context.
New York, p. 21.
The Board concluded that the federal principles of financial management
do not require a state to make a cash disbursement before it can claim
FFP for Medicaid reimbursement of its public facilities. The decision
noted that it did not preclude HCFA from clearly providing, on a
prospective basis, that states must either restrict their accounting to
a cash method or appropriate the state's full share of the rates prior
to claiming them for FFP.
Here, HCFA did not allege that it has given such notice. Neither the
consultants' reports nor the GAAP discussed in those reports directly
address the issues raised in New York concerning the use of leave in
calculating Medicaid reimbursement rates and the funding of such rates.
Moreover, HCFA did not allege that it had issued the consultants'
reports as guidance to the states. Moreover, after the GAAP described in
the reports had been adopted, HCFA nonetheless allowed a similar
one-time adjustment made by the State of Missouri. Missouri, p. 2. 10/
Finally, we note that, even though HCFA argued generally that North
Carolina would receive a windfall if it received the full amount of the
rates prior to actually paying the vacation leave, HCFA did not even
allege that North Carolina used the same cash flow system as that used
by New York. Thus, it is possible that the North Carolina Medicaid
agency does make a payment for the amount of the rates to the
facilities, in which case it could clearly be considered as having made
an expenditure for Medicaid purposes.
Moreover, HCFA made no finding here that North Carolina did not provide
funds to cover liabilities recorded in its long-term debt accounting
group, and one of the State's exhibits suggests that the State may set
aside assets for the retirement of its general long-term debt. North
Carolina Ex. 7. If the State sets aside State funds for retiring the
debt at the same time it claims FFP, then the major objection HCFA
raised to New York's cash flow system simply would not apply here.
In sum, HCFA not only failed to distinguish New York on the law, but
failed to allege here facts which HCFA considered critical in New York.
Thus, we find no reason for reconsidering that decision, nor for
reaching a different result here.
Conclusion
Based on the above analysis, we find that the State's claim was proper
and consistent with the generally accepted accounting principles
appropriate to these circumstances. Accordingly, we reverse the entire
disallowance of $2,739,372.
_____________________________ Cecilia Sparks
Ford
_____________________________ Alexander G.
Teitz
_____________________________ Judith A.
Ballard Presiding Board Member
1. The change involved including in the rate calculation all costs
paid during the year for vacation leave accumulated for current and
prior years, plus vacation costs accrued up to June 30, 1987, minus
vacation costs paid after entry into Medicaid, but earned prior to entry
into Medicaid. The lump sum claim represented the difference between
reimbursable costs using an accrual versus a cash basis of accounting.
See Notice of Disallowance (June 26, 1989) at North Carolina Exhibit
(Ex.) A.
2. As HCFA noted, GAAP is a technical term used within the accounting
profession "to encompass the rules, conventions, and procedures defining
accepted accounting practices." HCFA Br., p. 7; see also HCFA Ex. D, p.
2.
3. Current assets are those collectible in the current fiscal year or
soon after. Likewise current liabilities are payable during the current
fiscal year or soon after from presently existing assets.
4. While this amendment contemplates reimbursement of an amount in
addition to the prospective per diem rates for the facilities, it is
nonetheless considered part of the rates. HCFA said in the preamble to
the regulations implementing the Boren Amendment that "the term 'rates'
as used in the revised regulations refers to the payment amounts
produced under whatever specific payment method the State adopts for a
particular type of facility." 46 Fed. Reg. 47970 (September 30, 1981).
5. In New York, in response to New York's argument that OMB Circular
A-87 exempted grants to publicly-owned providers, the Board noted that
the language of the exemption did not specifically apply to
reimbursement of Medicaid providers because the Medicaid grant was
awarded to the State, not the providers. New York, p. 11, n. 4. The
Board did not consider there the fact that the State had a subcontract
with the providers. (This oversight may have occurred because the
exemption is stated in two places in the Circular and only one refers to
subcontracts.) In any event, the point in New York, as here, is that
the Circular provisions clearly do not override the specific principles
applicable to rate calculations under Medicaid. We also note that, in
New York, the focus of HCFA's argument was on the question of whether
New York had, in fact, accrued a cost in the full amount of the rate
adjustment. As discussed below, the Circular does apply to the rate,
claimed as a Medicaid cost.
6. In Missouri and Arkansas, where the State plans did not
specifically address the issues raised, the Board found that the OMB
Circular A-87 provisions supported HCFA's position that the States were
unreasonably interpreting their plans as providing authority for the
rate increases at issue there. In Missouri, the Board found that an
artificially inflated prospective rate violated the Circular principle
that costs be reasonable and necessary. In Arkansas, the Board found
that the prohibition in the Circular against charging general costs of
government supported the conclusion that Arkansas could not reasonably
include the costs of housing prisoners in its rate calculation.
7. The liability for compensated absences which can be recognized
must meet certain conditions from FASB Statement 43, incorporated by
reference into GASB Statement l. See HCFA Ex. E, p. 4. The State
alleged that it applied these conditions. North Carolina Br., pp. 7-8.
8. OMB Circular A-87, Attachment A, C. 1. sets out factors affecting
the allowability of costs. In relevant part, it provides that costs
must --
d. Be consistent with policies, regulations,
and procedures that apply uniformly to both federally assisted and other
activities of the unit of government of which the grantee is
a part.
e. Be accorded consistent treatment through
application of generally accepted accounting principles
appropriate to the circumstances.
9. We also note that, in implementing the Boren Amendment, HCFA noted
that states were not prohibited from providing for some profit for
facilities (including state-owned facilities). See 46 Fed. Reg. 47968
(September 30, 1981). This is hard to reconcile with a position that a
state may not claim FFP in a rate unless the state has made a
corresponding entry of an expenditure in its general government account.
Also, HCFA has recognized in its State Medicaid Manual provisions on
timely claims that states may not actually pay public providers, but may
instead simply record the amount due for FFP purposes. See New Jersey
Dept. of Human Services, DAB No. 1016 (1989).
10. In Missouri, the Board agreed with HCFA that the Missouri State
plan could not reasonably be read as including all of this one-time
adjustment in base year costs for purposes of calculating prospective
rates for all future years. The Board noted that the Medicare rules had
been amended to clarify that when an accounting change occurs during a
base year for a prospective reimbursement system, only costs under the
new accounting method relating to the base year may be included in the
base year adjustment. Missouri, p. 4. Here, North Carolina
specifically drafted its plan to provide for a one-time adjustment which
would not be reflected in calculating the per diem rates for future