Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Nebraska Department of
DATE: August 24, 1990
Social Services Docket No. 90-83
Decision No. 1187
DECISION
The Nebraska Department of Social Services (State) appealed a
determination by the Health Care Financing Administration (HCFA) that
disallowed Nebraska's claim for $560,017 in federal funds under Title
XIX (Medicaid) of the Social Security Act, as well as interest in the
amount of $74,284. The disallowance reflected the recapture of
depreciation included in the rates paid to a provider that realized a
gain on the sale of depreciated assets over their historical cost. The
interest disallowance was based on the amount of interest accrued on the
recapture amount, allegedly owed by the provider, while that alleged
debt was held in an escrow account.
For the reasons stated below, we uphold disallowance of the recapture
amount and reverse disallowance of the interest.
Background
St. Joseph Hospital (provider) had been a participant in the Nebraska
Medicaid program since 1977 under the ownership of Creighton Omaha
Regional Health Care Corporation (CORHCC) when it was sold in 1984 to
American Medical International, Inc. (AMI). State Exhibit (Ex.) 27.
During the years when it operated the provider, CORHCC included in the
costs used to determine its rate of payment under Medicaid a portion of
the depreciation which was presumed to be occurring to its assets as a
result of their use in providing services to recipients. However, the
price which CORHCC received from AMI upon sale reflected a gain over the
original basis, thus indicating that the assets had actually appreciated
in value. 1/
The State Medicaid agency determined in 1985 that the gain that
represented excess depreciation payments should be recaptured and issued
a notice to the provider claiming $937,580.87 on October 21, 1986. 2/
CORHCC filed a state administrative appeal of this determination on
November 21, 1986. State Ex. 16. CORHCC and the State agreed to place
the disputed amount in escrow during the appeal process. State Ex. 17.
Meanwhile, the Medicare intermediary, Mutual of Omaha, asserted a claim
for recapture of depreciation payments made by Medicare during the
provider's participation in that program, finding that the gain
demonstrated that the presumed depreciation had not occurred. This
claim was appealed by CORHCC to the Provider Reimbursement Review Board
(PRRB). 3/ The State and CORHCC agreed to stay the Medicaid appeal
pending the PRRB decision on the Medicare appeal, on the basis that the
issues were overlapping. State Exs. 18, 19 and 20.
On June 14, 1989, the PRRB ruled in the Medicare proceeding that
CORHCC's cost report had been adjusted properly by the intermediary to
recapture excess depreciation. State Ex. 27. In so deciding, the PRRB
rejected CORHCC's arguments that recapture should be applied only to the
portion of gain that could be shown to result from excessive
depreciation allowances, as opposed to the effects of inflation or
market forces. 4/
In May 1987, while the Medicare case was still pending, HCFA performed a
SPECTRUM review of the State's Medicaid reimbursement practices,
including the dispute between the State and CORHCC. The State indicated
to HCFA at that time that it was monitoring the Medicare proceeding then
underway and would press the Medicaid claim, if the intermediary
prevailed under Medicare. See Affidavit of Carl Hawkins at 1, dated
July 27, 1990, attached to HCFA reply br. HCFA's evaluators recommended
that the subject remain open to "verify appropriate action by the State
and the return of Federal financial participation." Finding 87, SPECTRUM
C, State Ex. 21. The State Medicaid director concurred with this
finding by letter dated August 18, 1987. HCFA Ex. 5.
Nevertheless, the State consented to the release of the escrow funds on
January 24, 1989, without awaiting the outcome of the Medicare appeal.
See State br. at 2; State Ex. 26. HCFA was not a party to the escrow
agreement and did not participate in the decision to terminate the
escrow. HCFA br. at 19. The State's letter effectuating the release
provided no reasoned basis for the action, but simply referred to a
letter from CORHCC's counsel to which the State was responding. 5/
CORHCC's letter argued that recapture of depreciation did not become
available under Nebraska's state plan until it was amended by a
regulation which took effect in the State on November 18, 1985 and that
its application to a 1984 sale was a retroactive regulation beyond
statutory authority, citing Bowen v. Georgetown University Hospital,
U.S. , 109 S.Ct. 468 (1988). On that basis, the letter asserted
that the State could not prevail in its recapture claim under Medicaid,
regardless of the result under Medicare, and that therefore the escrow
should be terminated without further stay. State Ex. 25 at 2.
After the State released the escrow, HCFA sought the federal share of
the excess depreciation payments by a disallowance dated March 28, 1990,
amounting to $560,017 in FFP, as well as interest accumulated on that
sum in the escrow account in the amount to $74,284. State Ex. 28. That
disallowance led to the appeal before us.
Discussion
This case centers on whether Nebraska's state plan authorized recapture
of depreciation in the event of a gain at sale. Under Medicaid, states
submit plans to HCFA for approval and these plans then form the basis
for federal funding. See sections 1902 and 1903 of the Social Security
Act. Once a plan is approved, the state is bound by its provisions
until it is amended. While states have considerable flexibility in
establishing the methods and standards to be used in setting payment
rates for inpatient hospital services, a state must pay for such
services using rates determined in accordance with the methods and
standards in the approved state plan. 42 C.F.R. 447.253(g).
Authority for Recapture of Depreciation under 1984 State Plan
The State stressed that no provision in its plan at the time of the sale
specifically authorized recapture of depreciation. State br. at 3.
Therefore, the State reasoned, no authority existed for recapture until
it was explicitly asserted by an amendment approved by HCFA to be
effective July 1, 1985 (and only incorporated into State regulations on
November 23, 1985). State br. at 4; State Exs. 10 and 11. Thus, the
State argued, it had no legal basis for recapturing depreciation
payments from CORHCC based on gain in the 1984 sale, despite its
abortive attempt to do so.
We turn first to the language of the 1984 state plan. State Ex. 7. The
parties agreed that no explicit provision governing recapture was
included in the plan in effect at the time of the sale. The inquiry
does not end here, however, because HCFA argued that the state plan
adopted Medicare principles of reimbursement, which necessarily included
the Medicare regulation on recapture. That regulation provided that
"[i]f disposal of a depreciable asset results in a gain or loss, an
adjustment is necessary in the provider's allowable cost. The amount of
a gain included in the determination of allowable cost shall be limited
to the amount of depreciation previously included in Medicare allowable
costs." 42 C.F.R. 405.415(f)(1) (1980-85). The regulation also
specified methods of calculating recapture amounts to adjust allowable
costs. HCFA thus argued that recapture was part of the state plan by
implication, since the plan used Medicare cost reports compiled in
compliance with Medicare cost principles.
The State rejected the characterization of its plan as adopting Medicare
principles of reimbursement, but acknowledged that its prospective
provider rates are determined by reference to the Medicare cost reports.
State br. at 3-4. The 1984 plan described the computation of
prospective rates for each facility using the Medicare cost reports
filed with the Medicare intermediary the previous year as the starting
point in calculations. 6/ No provision was made to alter the cost
reports to avoid the application of any Medicare cost principle. In
particular, nothing in the plan appears to provide any exception to
prevent the application of recapture provisions in the Medicare cost
reports used for calculating Medicaid rates. Adjustment of the rates is
contemplated where an error, audit or investigation justifies it. The
plan specifically permits audits to be performed by the hospital's
Medicare intermediary, and no indication is made that the intermediary
should use different principles in audits affecting Medicaid rates.
State Ex. 7. Although these provisions are less clear than an express
adoption of Medicare principles would have been, they can be most
reasonably interpreted, taken together, to result in the application of
Medicare cost principles in determining allowable costs to be used in
calculating rates under the state plan. The State offered no
explanation of how the Medicare cost reports could be used as described
in the plan without recapture of depreciation affecting Medicaid rates
through the required adjustments to Medicare cost reports.
When confronting conflicting interpretations of state plans, the Board
generally will give greater weight to a state's interpretation of its
own plan, if it is reasonably supported by the language of the provision
involved. See, e.g., Georgia Dept. of Medical Assistance, DAB No. 987
at 6-7 (1988); Massachusetts Dept. of Public Welfare, DAB No. 730 at 5
(1986). Here, however, the State itself has offered two conflicting
interpretations at different times.
In 1984, the State agency director stated flatly in a letter to HCFA
providing assurances under DEFRA that "Medicare principles of
reimbursement are the basis of the Department's inpatient hospital
reimbursement plan." State Ex. 8. 7/ In a follow-up conversation in
which HCFA sought clarification of whether the State had indeed
considered recapture of depreciation, the State Medical Services
Division administrator is reported to have responded that "they had
considered this to be a part of the Medicare principles that they
followed . . . ." HCFA Ex. 12. 8/ Thus, all the evidence available
about the State's contemporaneous understanding of its 1984 plan
contradicts the interpretation the State offered here.
In appropriate cases, the Board has also looked at consistent
administrative practice in seeking to interpret state plans. "The
importance of administrative practice is in part determining whether the
state was in fact applying an official interpretation of a plan
provision or has advanced an interpretation only as an after-the-fact
attempt to justify acting inconsistently with or simply ignoring its
plan." South Dakota Dept. of Social Services, DAB No. 934 (1988) at 4.
The only example offered here of the State's practice in implementing
its plan in this area is its effort to recapture depreciation from
CORHCC. The recapture process was begun in 1985 by a determination of a
State administrator. State br. at 1. The record does not include a
written determination by the administrator, but does include a letter to
him, dated July 25, 1985, from a consultant confirming discussions with
the administrator as follows: 9/ "Medicare regulations require a
recapture of depreciation related to the gain on the sale of the
facility. The Nebraska Department of Social Services also intends to
recapture its proportionate share of the gain." State Ex. 9. The
letter goes on to indicate that the Medicare cost report would be
revised, the recapture amount for Medicaid would be indicated, the State
would base its final recapture amount on an audit performed by the
Medicare intermediary, and the State would issue a demand for payment
after the final Medicare determination. These statements all support
the interpretation of the plan as using Medicare principles in handling
recapture of depreciation. A demand for payment for "Medicaid Recapture
of Depreciation" was made on October 21, 1986 by the State's controller.
State Ex. 14. Together these letters indicate that the State's
contemporaneous interpretation and its administrative practice both
treated the plan as authorizing recapture by incorporation of Medicare
cost principles. At the very least, no evidence of administrative
practice supports the State's current interpretation of its plan.
Furthermore, when HCFA expressed concern about the plan's lack of
clarity on this point, the State seems to have reassured HCFA at every
turn that it intended to apply recapture provisions. 10/ For example,
the SPECTRUM review found that the State "had not [as of that date]
recaptured depreciation as required by the state plan," that the
provider and the Medicare intermediary are in dispute "on the same
recapture of depreciation issue," and that after "a Medicare conclusion
is reached, the State will proceed with the Medicaid recovery process."
State Ex. 21 (emphasis added). The State, in its response, did not
suggest that it did not view the plan as requiring recapture or that
Medicare recapture issues were not relevant under its state plan. In
fact, the State affirmatively agreed in a letter with the finding as
written. HCFA Ex. 5.
The State did submit a proposed plan amendment on September 23, 1985 to
explicitly provide how to calculate recapture of depreciation on the
sale of a hospital. State br. at 8. The State argued here that
recapture became available only when this change became effective by
state regulation on November 23, 1985. However, the cover letter
submitted by the State with the transmittal of the amendment stated that
"[t]he State has found this plan amendment not to be a significant
change because the majority of the material is clarification. This plan
amendment clarifies . . . [t]he Department's policy on recapture of
depreciation following the sale of a hospital." State Ex. 10. HCFA had
no reason to understand from the submission of this clarifying amendment
that it had been wrong to understand the State plan to be based on
Medicare principles.
Hence, we conclude that HCFA reasonably relied on the interpretation
advanced to it by the State that recapture of depreciation was available
under its plan, although not addressed by an explicit provision as of
the date of this sale. We therefore hold that recapture of depreciation
was contemplated by the state plan in effect at the time of the sale.
11/
The Effect of DEFRA on Medicaid Recapture of Depreciation
Both parties devoted considerable attention to debating whether DEFRA
applied to the transaction here. The disallowance letter stated that the
"Medicaid and Medicare issue is based on section 2314" of DEFRA, and
proceeded to quote the provision regarding valuation of assets. State
Ex. 28 at 1-2. The State responded to HCFA's reliance on DEFRA by
strenuously asserting that an enforceable agreement to change ownership
existed before July 18, 1984, so that the clause in DEFRA exempting
sales pursuant to preexisting agreements would apply. The correspondence
provided to us by the State from the Medicare intermediary also
addressed the question of whether a preexisting agreement was in effect
so that DEFRA would not apply. State Ex. 12. Yet the State realized
that DEFRA was irrelevant to the availability of recapture of
depreciation, arguing that "Section 2314 . . . pertains to valuation of
assets after a change of ownership [and not] . . . recapture of
depreciation." State br. at 11. As the State further correctly pointed
out, "[t]he valuation of assets provision applies to future owners and
is not relevant as to recapture of depreciation which is to get money
back from a gain on a sale from the previous owner." Id. at 13.
DEFRA's only reference to recapture of depreciation is its ratification
of the existing Medicare regulation. DEFRA, section 2314. The State is
correct that DEFRA did not mandate that all states had to adopt
recapture provisions or use Medicare principles in calculating their
rates. State Br. at 11-13. However, the State erred in assuming that,
absent DEFRA, Medicare regulations regarding recapture would not apply
to a state that had chosen to make Medicare principles the basis of its
plan, as the State here had done.
Although the disallowance notice reflected confusion on the relevance of
DEFRA, it also relied properly on the calculation of recapture amounts
owed "in accordance with the State Plan," as reported in the SPECTRUM
finding. The State was thus accorded sufficient notice that HCFA was
relying on the provisions of the state plan. The adequacy of notice and
absence of surprise is further evidenced by the substantial briefing
devoted by both parties to contesting the interpretation of the plan.
See, e.g., State br. at 3-4, 7-9, 14; State reply br. at 4-8; HCFA br.
at 9-13. Therefore, we uphold the disallowance of $560,017 in federal
funds for payments which should have been reduced to recapture
depreciation.
The Claim for Interest from the Escrow Account
Finally, HCFA sought to recover a proportional share of the interest
accumulated during the existence of the escrow account and distributed
to CORHCC upon dissolution of the escrow. In so doing, HCFA disclaimed
any reliance on 42 C.F.R. 433.38, which provides for interest charges on
disallowances. HCFA br. at 18-19. A state normally would not owe any
interest to HCFA for an underpayment until HCFA formalized its findings
through the disallowance process. The Medicaid regulations provide no
authority for charging interest except when a state elects to retain
funds after a final disallowance has been appealed. 42 C.F.R. 433.38.
The interest sought here was accrued before any final disallowance was
issued by HCFA, much less any appeal from it filed with the Board.
HCFA cited four Board decisions that upheld disallowances of interest
earned by states on federal funds without prior federal disallowances of
the principal amounts. New York State Dept. of Social Services, DAB No.
962 (1988); Wisconsin Dept. of Health and Social Services, DAB No. 623
(1985); New Jersey Dept. of Human Services, DAB No. 480 (1983); North
Carolina Dept. of Human Resources, DAB No. 361 (1982). In North
Carolina, the Board held that HCFA was entitled to the federal share of
interest earned by the state on invested Medicare funds recovered from
providers, because it was, in effect, an overpayment under section
1903(d) of the Act. In Wisconsin, the Board reaffirmed this policy
despite a written agreement between HCFA and the state.
In New Jersey, we confronted two issues: whether HCFA could recover the
federal share of overpayments once they were identified by the state,
even if not yet recovered from the providers, and whether HCFA was
entitled to share in interest penalties imposed and collected by the
state from providers on overpayments. On the first issue, we held that
HCFA need not await the outcome of state collection efforts. Similarly
here, the State must repay the federal share of the recapture of
depreciation, regardless of its future success in pursuing collection
against CORHCC. On the second issue, we analyzed the providers' use of
state and federal funds through overpayment as a "loan," and the state
penalties as payments for use of those funds. To the extent that
federal funds were used, HCFA should share in the payments generated.
The facts in the present case differ significantly as to the interest
issue. The State has not had the use of these funds during the
existence of the escrow account and has not collected any interest on
them from CORHCC. Therefore, the State has no "profit" to share with
HCFA, nor any applicable credit from interest earned which it must
offset against its Medicaid costs. 12/
In New York, and a more recent follow-up case, New York State Dept. of
Social Services, DAB No. 1049 (1989), the state withheld payments from
providers suspected of fraud and deposited the funds in an
interest-bearing account pending resolution of claims against the
providers. The Board found that moneys placed in a state escrow account
were not funds expended for medical assistance and therefore did not
entitle the State to claim federal funds. The state retained control of
the funds, despite mechanisms for providers to seek access, and the
state kept the interest earned on the account even if funds were
eventually disbursed to prevailing providers. The Board held that
interest that the state earned using money that belonged to the United
States belongs to the federal government.
The State here has not earned any interest. The funds here were
indisputably disbursed to the provider. CORHCC placed the funds in an
independent escrow account to which the State would have had access only
if it finally prevailed or obtained CORHCC's release, neither of which
ever occurred. In fact, the funds were returned to CORHCC, along with
the accrued interest. The State has not gained any windfall by having
retained use of funds belonging to the federal government to accrue
interest.
HCFA offered no authority to support its claim to interest which CORHCC
earned while its funds were in the escrow that the State released.
Therefore, the disallowance is overturned as to the interest at issue.
Conclusion
For the reasons set forth above, the disallowance of $560,017 is upheld
but the disallowance of $74,284 in interest payments is reversed.
_____________________________ Donald F. Garrett
_____________________________ Norval D. (John)
Settle
_____________________________ Judith A. Ballard
Presiding Board Member
1. The sale was consummated through a series of documents, as
reflected in the parties' exhibits. See State Exs. 1, 4, and 6; HCFA
Exs. 1 and 2. The transaction was initiated by an "Agreement in
Principle" executed on May 24, 1984 and was completed by a "Bill of
Sale
and Assignment" dated November 19, 1984. The parties devoted
considerable effort to debating when an enforceable agreement existed.
For reasons discussed below, we do not consider resolving that issue
necessary to our decision and therefore do not attempt to disentangle
the legal effect of the various documents.
2. The notice was initially sent to the provider, then owned by the
buyer, AMI, but the State accepted the position that responsibility for
the recapture of excess depreciation lay with the seller, CORHCC, as a
pre-sale liability. See State Brief (Br.) at 1; State Exs. 4 and 15.
3. The exhibits presented to the Board do not make clear when the
intermediary's claim for recapture of depreciation was actually
asserted. The record did not contain any intermediary claim or
reopening notice relevant to the recapture of depreciation claimed for
the period before the sale. Cf. State Ex. 12; HCFA Ex. 6; HCFA Ex. 7;
HCFA Exs. 8 and 9. Nevertheless, the PRRB found that the intermediary
did audit the provider's cost report for that period and relied on 42
C.F.R. 405.415(f) in demanding recapture of depreciation. Obviously the
intermediary did issue a claim relevant to the dispute here at some
point before the June 1989 PRRB decision, although it is not clear when.
4. The State did not attempt to limit recapture on these grounds, but
contended here only that no recapture was authorized by the state plan
at the time of the sale. State reply br. at 7-8.
5. The State letter stated that "[a]s soon as the escrow funds are
received [by CORHCC], the matter of the recapture of depreciation appeal
shall be considered dismissed." State Ex. 26. However, it is not clear
whether the State can still reopen its claim against CORHCC for
recapture of depreciation.
6. The instructions to HCFA Form 2552 (the Medicare cost report form
in use in 1984) indicated that adjustments should be made as required by
the Medicare Principles of Reimbursement and specifically referenced
adjustment when depreciation expenses computed in accordance with the
principles differ from those shown on the provider's books. [Transfer
Binder/Cost Reporting Forms] Medicare and Medicaid Guide Para. 9322.
7. This letter was submitted to comply with the requirement of the
Deficit Reduction Act of 1984 (DEFRA), Public Law 98-369, that states
"provide assurances . . . that the payment methodology utilized by the
State for payments to hospitals . . . can reasonably be expected not to
increase such payments, solely as a result of a change of ownership, in
excess of the increase which would result from the application of
[DEFRA's provisions]." DEFRA, section 2314(b)(3). HCFA's implementing
rule provides that, in order to make such assurances, states must
consider, among other factors, Medicare's treatment of recapture of
depreciation. The rule then points out that the statute would be
satisfied automatically if the State used, and would continue to use,
Medicare principles. State Ex. 22. The State's letter was an
unqualified response that it did use those principles, despite the
State's attempts here to claim that the letter should be considered only
for purposes of the required assurances.
8. HCFA was concerned that the State plan used Medicare principles,
but did not have an explicit reference to recapture of depreciation in
its plan. This concern was expressed in a memorandum from HCFA to its
Regional Administrator, instructing that office to seek clarification
about whether recapture had been taken into account. HCFA Ex. 11.
9. Since the State provided this letter, apparently from a firm
working with CORHCC, and nowhere indicated that its representation of
the administrator's position at the time was not accurate, we accept it
as evidence of the State's contemporaneous position on recapture of
depreciation as regards this sale.
10. We have rejected interpretations proffered after-the-fact by a
state that had previously failed to confront HCFA with its suggested
interpretations when given an opportunity to do so. See Louisiana Dept.
of Health and Human Resources, DAB No. 731 at 8 (1986).
11. This conclusion also disposes of the State's argument that the
state regulation cannot be applied retroactively. The plan in effect at
the date of the sale can be given effect without regard to the later
clarifying regulatory amendment.
12. Section 1903(d) of the Social Security Act provides in relevant
part that federal payments are to be "reduced or increased to the extent
of an overpayment or underpayment which the Secretary determines was
made under this section . . .