Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Washington Department of Social and Health Services
DATE: March 17, 1993
Docket Nos. A-93-11, A-93-12
Decision No. 1397
DECISION
The Washington Department of Social and Health Services (DSHS)
appealed
two disallowances by the Health Care Financing Administration (HCFA)
of
a total of $2,604,208 in federal financial participation (FFP)
claimed
under Title XIX of the Social Security Act (Medicaid). The
disallowed
claims were $1,582,579 for services provided in fiscal year (FY)
1988
and $1,021,629 for services provided in FYs 1988 and 1989. The
claims
represented increases in the reimbursement rates for services
provided
by six State-owned intermediate care facilities for the
mentally
retarded (ICF/MRs). HCFA disallowed the claims on the grounds
that they
were inadequately documented and were filed beyond the two-year
time
limit for claiming FFP specified in the law and regulations. At
the
parties' request, the Board agreed to consider here only the issue
of
the timeliness of Washington's claims, since a determination that
the
claims were untimely would render moot the question of the adequacy
of
Washington's documentation.
Washington argued that the disallowed claims fell within an exception
to
the two-year deadline for "adjustments to prior year costs." Under
HCFA
policy and past Board decisions, this exception applies only if a
state
has previously submitted a claim for particular Medicaid services
using
an interim reimbursement rate and is merely adjusting the rate
to
reflect the provider's actual costs, consistent with the
state's
approved retrospective reimbursement system. The narrow issue
here is
whether the particular rate adjustments were permitted
under
Washington's retrospective system. HCFA determined that,
under
Washington's system, the rates had become final before these
adjustments
were made and that the adjustments were not permitted. We
reverse this
determination because Washington's evidence demonstrates that,
at the
time of these adjustments, its rates were not final.
Washington
reasonably interpreted its system to permit the adjustments here,
based
on amended reports of actual provider costs.
As we note below, the specific statutory exception to the two-year
time
limit recognizes that in retrospective reimbursement systems
a
reasonable (and exceptional) period of time is needed to adjust
interim
rates as actual cost information is received and reviewed.
Here, the
adjustments were made within a short period after the corrected
cost
information was received and within the reasonable period established
in
the approved State plan. HCFA did not show that permitting
the
adjustments here would encourage tardiness, or that Washington
was
attempting to avoid the timely filing requirement by expanding
its
retrospective system to cover costs not properly considered
as
adjustments to interim rates. Had that been the case, our decision
may
have been different.
Accordingly, for reasons stated more fully below, we conclude
that
Washington's claims were timely filed. Our decision does not
preclude
HCFA from issuing a further disallowance based on lack of
adequate
documentation.
Applicable federal law
Section 1132(a) of the Social Security Act (Act) requires that a claim
for
FFP for Medicaid expenditures made by a state during a calendar
quarter must
be filed within two years of the first day of the following
quarter.
Section 1132(a) provides an exception to this two-year time
limit for "any
expenditure involving . . . adjustments to prior year
costs." The
implementing regulations define this exception as "an
adjustment in the
amount of a particular cost item that was previously
claimed under an interim
rate concept and for which it is later
determined that the cost is greater or
less than that originally
claimed." 45 C.F.R. . 95.4. The HCFA
State Medicaid Manual limits the
exception to public providers and
adjustments to expenditures that are
based on an interim rate which is
subject to final cost settlement,
provided that the interim rate is claimed
within two years after the
quarter in which the expenditure was made.
Section 2560.4(D)(1)(c)(1).
Background
DSHS is the single State agency responsible for administering the
Medicaid
program in Washington. The DSHS Division of Developmental
Disabilities
(DDD) operates six ICF/MRs. Washington calls its
State-owned ICF/MRs
residential habilitation centers, or RHCs. The RHCs
are paid for
allowable Medicaid services at a per diem rate established
by DDD using the
RHCs' costs as well as other "departmental" costs,
including those at issue
here, which consisted of indirect costs
reported to DDD by the DSHS Office of
Accounting Services, and
depreciation expenses and bond interest costs
reported by the DSHS
Office of Capital Programs.
Washington uses a retrospective system to reimburse its RHCs for
Medicaid
services, in which payments during a year are later adjusted to
reflect
actual costs. Washington pays its RHCs during the course of its
fiscal
year at an interim reimbursement rate based on the RHCs' costs
from a
previous fiscal year. (Washington's fiscal year is from July 1
through
June 30). The interim rate is also reported by DDD to the DSHS
Office
of Financial Recovery (OFR) and used to claim FFP during the year
on
quarterly expenditure reports. After the end of the year,
Washington
conducts a settlement process to determine the amount of
reimbursement
to which the RHCs were entitled by reviewing their actual costs
for the
year (as well as allocable costs reported by other DSHS
divisions,
including those at issue here), and adjusts the RHCs'
reimbursement to
reflect the difference between the amount paid during the
year through
the interim rate, and the amount that the RHCs were entitled to
based on
actual costs.
The relevant provisions governing the settlement process are found in
the
following portions of the Washington Administrative Code (WAC),
which is
incorporated by reference into the State Medicaid plan:
WAC 275-38-535 Due dates for
reports. . . . (2) State
facilities' annual cost reports for a fiscal year shall
be
submitted by December 31 of that
year.
WAC 275-38-892 Final
payment. (1) A settlement shall
be
determined to establish a state
facility's final payment. . . .
(2) The settlement process shall consist of a
preliminary
settlement and a final
settlement. (3) The
preliminary
settlement process shall be
as follows: (a) State facilities
shall submit a proposed settlement report with their cost
report.
(b) Within one hundred
twenty days after receipt of the
proposed
settlement, the department
shall verify the accuracy of the
proposal and shall issue a preliminary settlement
substantiating
the settlement
amount. (4) The final settlement process
shall
be as follows: (a) After
completion of the audit process, the
department shall submit a final settlement report to the
state
facility substantiating disallowed
costs, refunds, underpayments,
or
adjustments to the contractor's financial statements,
cost
report, and final settlement.
(b) A preliminary settlement as
issued by the department shall become the final settlement if
an
audit is not to be conducted pursuant
to WAC 275-38-620.
WAC 275-38-620 Deadline for
completion of audits. . . . (2)
For state IMRs, the department shall complete field audits
within
three years after a properly
completed cost report is received by
the
department, provided field auditors are given timely
access
to the facility and all records
necessary to audit the report.
DDD reported preliminary settlements for the six RHCs to OFR in
memoranda
dated August 22, 1989 for FY 1988, and June 5, 1990 for FY
1989, and
Washington subsequently claimed FFP based on the settlements.
Washington
Exhibits (Exs.) I, L. The preliminary settlements included
amounts for
indirect costs, depreciation expenses and bond interest
costs, but these
costs had been mistakenly underreported to DDD. In
October 1990, the
Office of Accounting Services reported corrected
departmental indirect costs
for FY 1988, and DDD provided adjustments in
the settlements to OFR.
Washington Ex. O. The inaccurate information
was caused by human error
in recording indirect cost data onto the
worksheets provided to DDD.
Washington Ex. Q. Also in October 1990,
the DSHS Office of Capital
Programs provided corrected depreciation
expenses and bond interest costs for
FYs 1988 and 1989 to DDD, after
discovering that deficiencies in its
inventory system had caused
interest and depreciation to be
understated. Washington Exs. N, R. DDD
reported corresponding
adjustments to the RHC settlements to OFR in May
1991. Washington Ex.
P.
Washington subsequently filed the disputed claims with HCFA for FFP in
the
rate increases. Its claim for FFP in increased rates to reflect
revised
indirect costs of RHC services provided in FY 1988 was dated
November 1,
1990. Its claim for FFP in increased rates to reflect
revised
depreciation expenses and bond interest costs of RHC services
provided in FYs
1988 and 1989 was dated August 5, 1991. Washington did
not dispute that
both claims were filed beyond the two-year deadline
specified in section
1132(a) of the Act, but asserted that they fell
under the exception for
adjustments to prior year costs in section
1132(a) and 45 C.F.R. . 95.4.
HCFA's position
The following facts are not in dispute: 1) Washington provided
services
to Medicaid-eligible individuals residing in the RHCs; 2)
Washington
submitted timely claims for those services using interim rates;
and 3)
Washington's retrospective rate-setting system contemplates
the
establishment of a final rate that will reflect the actual costs
of
providing Medicaid services. For the purposes of this appeal, it
is
also not contested that the indirect costs, depreciation expenses
and
bond interest costs used to recalculate the rates were allowable
costs
of providing RHC services. Instead, HCFA argued that
Washington's
revisions to the preliminary settlements to reflect those costs
were not
adjustments to prior year costs, excepted from the two-year
filing
requirement, because they were not reasonably encompassed
by
Washington's Medicaid regulations under the WAC.
The WAC provides that cost reports from State-owned facilities, such
as
RHCs, are due six months after the end of the fiscal year,
that
Washington is required to complete audits of cost reports within
three
years after they are received, and that a preliminary settlement
becomes
the final settlement if an audit is not to be conducted.
WAC
275-38-535, 275-38-620, 275-38-892(4)(b). HCFA argued that
the
preliminary settlements of August 22, 1989, and June 5, 1990 became
the
final settlements because Washington never intended to audit the
RHCs
(and thus audits were "not to be conducted" within the meaning of
the
WAC), and also because Washington failed to complete audits of the
RHCs
within the time provided by the WAC.
HCFA further argued that the preliminary settlement dates became the
dates
of the final settlements after which no adjustments could be made,
since the
WAC does not provide for revisions to final cost settlements.
Consequently,
HCFA asserted, Washington's claims for FFP in increased
indirect costs,
depreciation expenses, and bond interest costs
reflecting the revisions to
the preliminary settlements were not
adjustments to prior year costs excepted
from the two-year filing
deadline.
Analysis
A. The evidence demonstrates that the
adjustments were not made to
final settlements.
HCFA's contention that Washington never intended to conduct audits of
the
RHCs was based on a schedule for auditing ICF/MRs and RHCs,
contained in a
July 10, 1988 memorandum from the DDD Residential
Reimbursement Program
Manager to the Chief of the DSHS Office of Nursing
Home Audits.
Washington Ex. T, Attachment. HCFA pointed out that this
schedule gave
the RHC audits the lowest priority. HCFA also asserted
that none of the
six RHCs had been audited since 1984, and noted that an
affidavit from the
recipient of the memorandum, prepared December 17,
1992, stated only that the
Office of Nursing Home Audits was preparing
to audit the RHC for FYs 1989
through 1991 and was silent on FY 1988
audits. HCFA also provided a
January 14, 1993 affidavit of one of its
accountants which indicated that
there was not sufficient time to
complete audits of those RHCs for which
Washington asserted audits were
planned. It was thus reasonable, HCFA
argued, to view Washington's
inaction as showing little or no intent to audit
the RHCs within the
time period required by the WAC.
However, the issue is whether there were final settlements at the time
the
adjustments were made. Washington submitted affidavits from the
DDD
Residential Reimbursement Program Manager and the Chief of the Office
of
Nursing Home Audits, the parties to the July 10, 1988
memorandum.
Washington Exs. S, T. They disagreed that the memorandum
showed a lack
of intent to conduct audits, and stated that there had been no
decision
at that time that audits would not be conducted, and no intention
that
no audits occur. They also explained that the memorandum was
merely a
recommendation regarding scheduling of audits which was not binding
on
the auditors. The DDD Residential Reimbursement Program Manager,
who
sent the memorandum, explained that her office did not have
the
authority to decide whether or when audits would be conducted.
The
Chief of the Office of Nursing Home Audits further indicated that
her
office had intended to conduct audits of the six RHCs every two
years
for the prior biennium. She stated that the reason that no RHC
had been
informed that an audit would occur (as HCFA pointed out) was that it
had
been office practice to send notices of intent to audit only as
a
courtesy to private ICF/MRs, whereas State-operated facilities
were
expected to be prepared to receive auditors at any time. 1/
Washington
Ex. T.
We note that the July 10, 1988 memorandum cited by HCFA, while giving
RHC
audits lower priority than ICF/MR audits, does not state that the
RHCs were
not to be audited. Unlike the affidavit of the HCFA
accountant, the
memorandum and the statements of Washington's employees
go directly to the
relevant time period subsequent to the issuance of
the (unrevised)
preliminary settlements. This evidence as a whole
demonstrates that
Washington had not determined at the time not to
conduct audits of the
RHCs. At the time of the adjustments, the
possibility still existed
that Washington would audit the RHCs for FYs
1988 and 1989 and would complete
such audits within the deadline set in
the WAC.
HCFA erred to the extent it read the WAC to require that a
preliminary
settlement become final whenever there is a general lack of
intent to
conduct an audit. The WAC provides that a preliminary
settlement
becomes final if "an audit is not to be conducted."
Washington
presented two interpretations of this language: that a
preliminary
settlement becomes final either when a decision is made that no
audit
will be conducted, or when notice is given to the provider that no
audit
will be conducted. Washington Brief (Br.) at 15; Washington Reply
Br.
at 2. Both interpretations of the WAC are consistent in requiring
an
affirmative act before a preliminary settlement becomes final,
whereas
HCFA would have the preliminary settlement become final based on a
mere
uncertainty about whether an audit would occur. Interpreting the
WAC to
require one of these affirmative acts before establishment of the
final
settlement permits Washington leeway to conduct an audit (within
the
period permitted by the WAC) if it discovers that it has the
necessary
resources, or if it receives information which indicates that an
audit
of a particular facility should be given a higher priority. HCFA
did
not point to anything in the WAC or federal requirements showing
when
Washington was required to make a decision as to whether audits would
be
conducted. Consequently, we conclude that Washington's two
slightly
different but consistent interpretations of the WAC are more
reasonable
than HCFA's. The Board will defer to a state's
interpretation of its
own plan if it is reasonable in light of the language
and purposes of
the provisions and the program requirements. South
Dakota Dept. of
Social Services, DAB No. 934 (1988).
Thus, we conclude that there were no final settlements at the time
these
adjustments were made.
B. The fact that audits were not conducted is irrelevant.
HCFA also argued that the preliminary settlements were now final
because
Washington was unable to complete audits within the time provided by
the
WAC. Washington conceded that audits of the RHCs' cost reports were
not
completed within three and one-half years after the end of FYs 1988
and
1989. 2/ Washington Ex. W. Consequently, it is not disputed
that the
passage of time would make a preliminary settlement final under the
WAC.
However, there is no basis for HCFA's apparent position that
the
preliminary settlements of August 22, 1989, and June 5, 1990
became
final settlements, and that no adjustments made after those dates
would
be considered part of the final settlements. Rather,
Washington
established that, under its reasonable interpretation of
its
reimbursement system, revisions were permitted and the settlements
which
became final were the preliminary settlements as revised to account
for
the increased facility costs.
While the WAC provides that a preliminary settlement becomes final if
an
audit is not to be conducted within three years after receipt of
a
provider's cost report, it does not limit Washington to one
preliminary
settlement which then becomes the final settlement. As
Washington
noted, under HCFA's interpretation, a decision not to conduct an
audit
made some time after the preliminary settlement, or the passage of
the
time provided to complete an audit if no such decision is made,
would
retroactively establish the date of the preliminary settlement as
the
final settlement date. Any revision to the preliminary settlement
made
in the interim, no matter how obvious or necessary, would be void,
since
final settlements are not open to adjustment. HCFA's
interpretation
would cancel any corrections to a preliminary settlement made
prior to
the time that a determination not to conduct an audit was made,
even
though the preliminary settlement was not final during that time.
HCFA's position that the date of the preliminary settlement becomes
the
final settlement date if an audit is not timely completed means that
an
audit is the sole mechanism by which Washington may adjust a
preliminary
settlement. However, as Washington noted, audits of RHC
cost reports
are not required, as WAC 275-38-892(4)(b) recognizes the
possibility
that an audit of an RHC's cost report might not occur.
Precluding
revision by any means short of an audit would have the effect of
barring
Washington from correcting an error discovered immediately
after
preliminary settlement, if an audit was not subsequently
conducted.
HCFA's interpretation of the WAC would even bar Washington from
claiming
minor adjustments to preliminary settlements within the
two-year
deadline in section 1132(a) of the Act, if those adjustments were
made
by any means other than a completed audit.
We agree with Washington that the WAC should not be interpreted to
compel
these illogical results. HCFA has pointed to nothing in the WAC
which
precludes revisions to a preliminary settlement based on corrected
cost
information. Washington pointed out that the receipt of the
corrected
information on the costs at issue here is analogous to the
receipt of amended
cost reports, which the WAC specifically permits
private ICF/MRs to
file. WAC 275-38-570, 275-23-900; Washington Ex. W.
Washington may,
based on an amended cost report, revise a preliminary
settlement to more
accurately reflect costs incurred by a facility in
providing Medicaid
services. Here, Washington revised its initial
preliminary settlements,
which had not become final, to reflect amended
cost information consistent
with the WAC. 3/
HCFA further stated that Washington was unreasonably interpreting the
WAC
to provide unlimited time to make increasing claims, instead of the
deadlines
specified therein. However, Washington did not claim that the
WAC
provided unlimited time to adjust preliminary settlements, and we
find here
that the adjustments reflected in Washington's claims for FFP
were made
within the time provided by the WAC. HCFA did not contend
that the
WAC's time limits for final settlement of cost reports
were
unreasonable. Additionally, as Washington pointed out, the time
limits
in the WAC for reaching final settlement are comparable to those
that
the Medicare program provides for amending cost reports. Although
HCFA
dismissed this comparison, we think that the Medicare requirements
for
retrospective reimbursement systems have some relevance since
states
have generally designed their retrospective systems based on
the
Medicare model. The fact that Washington's interpretation is
consistent
with what is permitted under Medicare supports the reasonableness
of
that interpretation. Thus, we conclude that Washington
reasonably
interpreted the WAC to permit revised preliminary settlements
based on
amended cost reports, even where no audit is conducted.
C. HCFA's reliance on past Board decisions is misplaced.
Since we find that the revisions to the preliminary settlements
were
permissible under the WAC, we reject HCFA's contention that
Washington's
claims for FFP did not qualify as adjustments to prior year
costs under
the Board's holding in South Carolina State Health and Human
Services
Finance Commission, DAB No. 943 (1988), aff'd, South Carolina Health
and
Human Services Finance Commission v. Sullivan, 915 F.2d 129 (4th
Cir.
1990). In that case, HCFA stated, the Board limited the exception
to
adjustments reasonably encompassed by the state's retrospective
system,
where the state's retrospective rate-setting process permits it
to
reopen a final rate. As Washington noted, however, South
Carolina
involved claims for which final settlement had already been made and
for
which the cost reports had been closed for several years; here,
there
were no final settlements. Moreover, Washington did not reopen a
final
rate when it made the adjustments since the preliminary settlements
of
August 22, 1989, and June 5, 1990 had not become final.
HCFA also asserted that the delay in filing the disallowed claims was
not
the result of an "extreme situation," as required by the Board's
holding in
New York State Dept. of Social Services, DAB No. 521 (1984).
HCFA asserted
that the Board held in that decision that the exceptions
to the claiming
deadline are intended for those cases where it would be
patently unfair to a
state to outlaw its claim merely because of the
passage of time, and not for
situations where a state simply did not get
around to getting its data
together in time to file its claim. Here,
HCFA argued, the delay in
filing the disallowed claims was due solely to
Washington having given RHC
audits the lowest possible priority.
However, the delay that HCFA refers to
was not due to Washington's audit
priorities. Rather, the timing of the
disallowed claims was the result
of Washington's development of more accurate
information concerning the
indirect costs, depreciation expenses, and bond
interest costs
associated with the provision of Medicaid services through the
RHCs.
The statutory exception (and our holding in New York) recognized
that
subsequent adjustments of claims based on interim rates are
often
unforeseen and unavoidable, and that in many cases two years might
well
elapse after the original expenditure before the rate was
finally
adjusted to reflect actual costs. Such was the case here, where
the
settlements that Washington adjusted had not become final under
its
Medicaid regulations.
As Washington noted, this Board held in Pennsylvania Dept. of
Public
Welfare, DAB No. 703 (1985), that as long as the type of adjustment
at
issue was contemplated by a state's retrospective rate-setting
system
and was not prohibited by the state plan, we have no basis to find
that
the claims were not adjustments to prior year costs. Here, we find
that
the increasing adjustments Washington made were permissible under
its
State plan and Medicaid regulations, and thus qualify as adjustments
to
prior year costs excepted from the two-year filing limit under
section
1132(a) of the Act.
Conclusion
For the foregoing reasons, we conclude that these claims were not
barred
by the applicable time limits. Our decision does not preclude
HCFA from
consideration of the documentation issue. If HCFA
disallows
Washington's claims on the basis of inadequate documentation,
Washington
may appeal that disallowance to the Board within 30 days after
receiving
it.
Cecilia Sparks Ford
Norval D. (John) Settle
Judith A. Ballard Presiding Board Member
1. Washington attributed the failure to timely complete audits of
the
RHCs to limited staff resources, the more pressing audit requirements
of
the 37 private ICF/MRs, and the need to perform audits of
certain
community facilities which seemed to be having fiscal problems.
2. Washington's statement that the time for completion of audits
had
expired was based on its interpretation of the WAC as providing
three
and one-half years from the end of the fiscal year to complete an
audit
(six months for submission of the cost report, and three years
to
complete the audit). Washington Reply Br. at 2. Under
this
interpretation, the time for adjustments to FY 1989 settlements
expired
December 31, 1992. However, HCFA provided a schedule for RHC
audits
which showed that, as of the date of its brief, time remained
to
complete audits for four RHCs for FY 1989. HCFA Br. at 7.
HCFA's
schedule allowed more time for audits of these facilities than three
and
one-half years from the end of the fiscal year because their
cost
reports were received beyond the six-month deadline provided by the
WAC.
For these facilities, HCFA asserted that there was a reasonable basis
to
conclude that audits could not be timely completed. We note
that
Washington did not subsequently provide information showing that
audits
of these facilities were completed or in progress. Accordingly,
we
accept for the purposes of this decision that, as conceded by the
State,
the time for completion of audits of the RHCs expired for FYs 1988
and
1989 on December 31, 1991 and December 31, 1992, respectively.
3. We note that this is not a case where Washington is interpreting
its
State plan to give preferential treatment to public providers
by
permitting adjustments that would not be available for private
ICF/MRs.
Compare Massachusetts Dept. of Public Welfare, DAB No. 730, at
5-6
(1986) (Rates for state-owned facilities subject to greater scrutiny
to
determine whether the state has a consistently applied interpretation
or
is simply giving preferential treatment to
state-owned