California Department of Health Services, DAB No. 1495 (1994)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT: California Department of Health Services

DATE: September 16, 1994
Docket No. A-93-217
Decision No. 1495

DECISION

The California Department of Health Services (California) appealed the
determination of the Health Care Financing Administration (HCFA)
disallowing $5,350,772 in federal financial participation (FFP) claimed
by California under title XIX (Medicaid) of the Social Security Act
(Act). The disallowed costs were claimed for services provided to
persons aged 22 through 64 at East Valley Pavilion (EVP) from July 1,
1988 through March 31, 1991.

HCFA found that the overall character of EVP was that of a facility
primarily for the care and treatment of persons with mental diseases,
and, therefore, EVP was an institution for mental diseases (IMD) during
this period. FFP is not available under the Medicaid program for
individuals aged 22 through 64 who are in IMDs. See section 1905(a) of
the Act; 42 C.F.R.  435.1009 (1988- 1991).

Based on the evidence before us, we conclude that EVP was an IMD within
the meaning of title XIX. Below, we first summarize our decision. We
then provide background information, discuss HCFA's findings which
California disputed, and analyze the legal and factual issues presented.

SUMMARY

EVP is a 99-bed facility, located in Santa Clara County (County),
California, that was certified under Medicaid to provide first, skilled
nursing facility (SNF) services and later, nursing facility (NF)
services. HCFA determined that EVP was a "free-standing facility," made
findings about EVP using ten HCFA guidelines, and concluded from those
findings that the overall character of EVP was that of a facility
primarily engaged in providing care or treatment to persons with mental
diseases. California did not provide any evidence to contradict HCFA's
findings under the guidelines, but contested the application of three of
the guidelines to those findings. California also argued that EVP was a
distinct part of a larger institution, Santa Clara Valley Medical Center
(SCVMC), a general acute care hospital located nine miles away.
California argued that SCVMC did not have the overall character of an
IMD. California said that it did not have notice of HCFA's policy that
the IMD exclusion applies to "free-standing facilities" or, as HCFA
later stated, any entity that is "sufficiently distinct" from a larger
institution to be separately certified to participate in the Medicaid
program.

Thus, this case raises two major issues. The first issue is whether
EVP, considered separately from SCVMC, is an IMD. Although we agree
with California that not all of the guidelines HCFA used literally apply
to the facts here, we have previously held that the guidelines are
merely a means of gathering evidence concerning the overall character of
a facility. The evidence here clearly shows that, assuming EVP is an
institution, it is an institution meeting the statutory and regulatory
definitions of an IMD.

The second major issue is one of first impression for this Board:
whether the IMD exclusion applies to a facility (EVP) which the evidence
shows is primarily for the care and treatment of persons with mental
diseases, even if that facility is a distinct part of a larger
institution (SCVMC) which is not primarily for the care and treatment of
persons for mental diseases. We determine for the following reasons,
explained below, that HCFA properly applied the guidelines to EVP,
rather than to SCVMC:

o Contrary to what California argued, HCFA is not precluded from
taking this disallowance merely because HCFA did not timely
promulgate a policy specifically stating that distinct part
facilities participating in Medicaid will be examined separately
for IMD purposes. As the Supreme Court has held, the federal
government is not required to specifically identify and proscribe
in advance every improper expenditure, but may rely on statutory
and regulatory provisions that are not ambiguous as applied to
specific facts.

o An examination of the relevant statutory provisions as a whole, in
light of their history and context, supports a determination that
the IMD exclusion applies to EVP, even if it is a distinct part
facility. California could not reasonably interpret the statute to
authorize Medicaid funding for a distinct part facility like EVP
for services provided to individuals aged 22 through 64.

o The regulatory provisions in effect during the entire time period
defined "institution" as "an establishment that furnishes (in
single or multiple facilities) food, shelter, and some services. .
. ." The only reason California gave why EVP should not itself be
considered an "institution" is the reference in this definition to
"multiple facilities," which California said meant that SCVMC was
the relevant institution for IMD purposes since SCVMC has multiple
facilities. California did not deny that EVP was a single facility
(and the evidence clearly shows EVP was a facility), nor did
California deny that EVP was an establishment furnishing food,
shelter, and some treatment or services. The individuals in
question here were "in" EVP within the meaning of "in an
institution" in the applicable regulations because they were
admitted to live there.

o California's assertions about the relationship between EVP and
SCVMC are not fully supported and ignore the essential fact that
both EVP and SCVMC were County owned and operated. Much of the
relationship between EVP and SCVMC flowed from the fact that SCVMC
functioned as part of the County organization and the County had a
consolidated license for both SCVMC and EVP. EVP, however, was
operated on a day-to-day basis by the County Health Department,
Bureau of Mental Health, and SCVMC did not furnish food or shelter
to individuals admitted to live in EVP. Thus, California could not
reasonably consider SCVMC to be the appropriate institutional
entity for purposes of the IMD exclusion. More important,
permitting the County to evade the consequences of the IMD
exclusion through an arrangement like that between SCVMC and EVP
would invite other public agencies to structure how they provide
services in a way that would render the IMD exclusion meaningless
and contravene congressional intent.

APPLICABLE PROVISIONS

In this section we set out the basic IMD provisions, and HCFA's
guidelines for gathering evidence to apply those provisions. We discuss
the meaning and effect of the applicable provisions in detail in our
analysis below.

Section 1905(a) of the Act excludes from the definition of "medical
assistance," for which FFP is available under Medicaid, items or
services provided to patients between the ages of 22 and 64 in an IMD.
The definition of an IMD found in section 1905(i) of the Act, which
became effective on July 1, 1988 and was effective throughout the
disallowance period, is as follows:

[A] hospital, nursing facility, or other institution of more than
16 beds, that is primarily engaged in providing diagnosis,
treatment, or care of persons with mental diseases, including
medical attention, nursing care, and related services.

The longstanding regulatory definition adds that--

[w]hether an institution is an institution for mental diseases is
determined by its overall character as that of a facility
established and maintained primarily for the care and treatment of
individuals with mental diseases, whether or not it is licensed as
such.

42 C.F.R.  435.1009 (1988-1991). The regulations define an
"institution" as--

an establishment that furnishes (in single or multiple facilities)
food, shelter, and some treatment or services to four or more
persons unrelated to the proprietor.

Id.

During the relevant disallowance period, section 4390 of the State
Medicaid Manual listed ten guidelines for determining whether an
establishment is an IMD for Medicaid purposes. 1/ The section provides,
and prior Board cases have held, that no single guideline is
determinative. Instead, the Board has treated the guidelines primarily
as tools which HCFA uses to gather evidence about whether the regulatory
(and later statutory) definition of an IMD was met; the Board considers
the evidence regarding each facility as a whole, attributing more weight
to those types of evidence which the Board finds more probative of the
overall character of the facility. E.g., Minnesota Dept. of Human
Services, DAB No. 831, at 8 (1987).

HCFA's guidelines are as follows:

1. The facility is licensed as a psychiatric facility for the care
and treatment of individuals with mental diseases;

2. The facility advertises or holds itself out as a facility for
the care and treatment of individuals with mental diseases;

3. The facility is accredited as a psychiatric facility by the
JCAHO;

4. The facility specializes in providing
psychiatric/psychological care and treatment. This may be
ascertained through review of patients' records. It may also be
indicated by the fact that an unusually large proportion of the
staff has specialized psychiatric/psychological training or by the
fact that a large proportion of the patients are receiving
psychopharmacological drugs;

5. The facility is under the jurisdiction of the State's mental
health authority;

6. More than 50 percent of the patients in the facility have
mental diseases which require inpatient treatment according to the
patients' medical records;

7. A large proportion of the patients in the facility has been
transferred from a State mental institution for continuing
treatment of their mental disorders;

8. Independent Professional Review teams report a preponderance
of mental illness in the diagnoses of the patients in the facility
(42 CFR  456.1);

9. The average age is significantly lower than that of a typical
nursing home; and

10. Part or all of the facility consists of locked wards.

State Medicaid Manual,  4390(B) (1986-1994).


ANALYSIS

I. EVP is an IMD if examined separately.

HCFA performed a review of EVP and found that eight of the State
Medicaid Manual guidelines were met. See generally "Review of a
Medicaid Nursing Facility that was an Institution for Mental Diseases
(IMD) For the Period July 1, 1988 Through March 31, 1991," submitted as
California (CA) Exhibit (Ex.) 12 (Report). The Report summarized the
findings (using corresponding numbers from the guidelines) as follows:

2. [EVP] has a policy of admitting only patients with mental
diseases;

4. It serves chronically ill psychotic patients needing long and
short term care and has a staff that specializes in the care
of persons with mental diseases;

5. It is under the joint jurisdiction of the County's mental
health authority and the County Hospital;

6. Virtually all (93 percent) of the patients in the facility
have mental diseases (schizophrenic disorders) which require
inpatient treatment, according to the patients' medical
records and the State's Long-Term Care Treatment Authorization
Request. Also, our analysis of the State's computer payment
records showed that 92 percent of the Medicaid payments to EVP
was for the care and treatment of persons with mental
diseases;

7. It treats patients that have been transferred from the Santa
Clara County Medical Center's emergency room or psychiatric
facility (Don Lowe Pavilion), after having experienced acute
psychiatric episodes;

8. The State's Independent Professional Review teams report
showed that the patients have the diagnoses of mental diseases
(schizophrenic disorders);

9. It has an average patient age of 38 (1989) and 39 (1990)
years, which is significantly lower than the nationwide
average of 78 years of age for residents of nursing homes; and

10. It is locked, and is enclosed by a 12-foot chain link fence.

Report at 9-10.

Based on these findings, HCFA concluded that EVP had the overall
character of a facility primarily for the care and treatment of persons
with mental diseases.

In an Order to Develop the Record, the Board asked California whether it
conceded that EVP, if viewed separately, is an IMD. California
responded that "the State's case to exclude EVP from consideration as an
IMD would be less compelling if EVP were not a part of SCVMC," and
conceded that EVP, if considered separately from SCVMC, would meet
guidelines 4, 6, 8, 9 and 10. CA III at 5, 6 and n. 1. 2/ However,
stating that "it is clear that no single guideline will be determinative
of the overall issue," California stopped short of conceding that EVP
was an IMD. CA III at 5.

Because California did not challenge HCFA's findings related to
guidelines 4, 6, 8, 9 and 10, we uphold those findings. HCFA did not
find that EVP met guidelines 1 and 3. Thus, the only dispute is over
HCFA's findings under guidelines 2, 5 and 7.

HCFA found that EVP "has a policy of admitting only patients with mental
diseases." Report at 9. California argued that guideline 2 does not
apply because EVP "does not advertise as a psychiatric facility." CA
III at 5. Guideline 2, however, refers to a facility either advertising
or holding itself out as a facility for the care and treatment of
individuals with mental diseases.

HCFA relied on the EVP Policy and Procedure Manual. That Manual
contains the following policy with respect to admission of patients at
EVP:

B. Patients may be admitted who are in need of 24 hour Skilled
Nursing Care for the observation and treatment of mental illness or
other related behavioral disorders.

C. Patients with a diagnosis of a physical illness only may not be
admitted. Patients with a diagnosis of both physical and mental
illness may be admitted if in the opinion of the Medical Director
their care would be within the facilities [sic] capabilities.

HCFA Ex. 6, at 1. It is not clear whether this document is one that EVP
publicized. Even if HCFA did not reasonably view this document as EVP
"holding itself out" as an IMD, however, the document is convincing
evidence of the character of EVP as an IMD.

Moreover, there is other evidence in the record that EVP did hold itself
out to others as an IMD. On June 19, 1986, the District Administrator
for the Santa Clara County office of the State Department of Health sent
a memorandum to the Office of Statewide Health Planning and Development.
HCFA Ex. 5. That memorandum, sent in response to the State's "request
to have a document on file describing the Santa Clara County Skilled
Nursing Facility's program located at [EVP's address]," stated that
EVP--

will provide patient care to severely mentally ill County
residents. The facility is designed to serve . . . [t]hose needing
long-term care in a locked setting who are determined to be
unacceptable to other facilities due to their financial,
behavioral, and/or rehabilitative limitations.

Id. at 1. The memorandum states that "[p]atients with illness etiology
which is primarily medical or neurological" will not be admitted. Id.
Thus, we conclude that EVP met guideline 2.

Under guideline 5, HCFA found that EVP was under the joint jurisdiction
of the County's mental health authority and the County hospital. CA Ex.
12. California merely stated that EVP was not under the jurisdiction of
the State's mental health authority, but did not dispute HCFA's finding
on EVP's relationship with the County mental health authority. CA III
at 5. HCFA did not provide any evidence that EVP was under the State
mental health authority, so the literal language of guideline 5 does not
apply. The evidence shows, however, that EVP was administered by the
Director for Acute Services of the County Bureau of Mental Health. CA
EX. 4. In our view, evidence that a county mental health authority
actually administers a facility is more persuasive evidence that the
facility's overall character is that of an IMD than evidence that a
facility merely is within the jurisdiction of a state mental authority.

Finally, California challenged HCFA's application of guideline 7 (that a
large proportion of the facility's patients has been transferred from a
state mental institution for continuing treatment of their mental
disorders). CA III at 5. HCFA found that EVP treated patients who were
transferred from SCVMC's emergency room or SCVMC's acute psychiatric
unit after having experienced acute psychiatric episodes. CA EX. 12, at
9, 12. California did not dispute this, but stated that most of the
patients transferred into EVP come from the County mental health
facilities and not from a State mental institution.

We agree with California that the literal terms of guideline 7 were not
met, but do not think this undercuts HCFA's conclusion that EVP was an
IMD. The guideline may refer to transfers from state mental health
facilities because that would have some bearing on whether a state is
simply "dumping" patients from state mental institutions into nursing
homes to try to avoid the IMD exclusion (one of HCFA's concerns when it
initially issued guidelines in 1976). With respect to the probative
value of transfer from county rather than state mental health facilities
in determining IMD status, however, we see little difference in whether
the transferors were county-owned rather than state-owned mental health
facilities. The undisputed fact that these individuals were being
transferred after having had acute psychiatric episodes indicates that
their diagnoses of mental illness were not merely historical, but likely
the reason they needed nursing facility services. Thus, it supports the
conclusion that EVP was an IMD.

In sum, the undisputed evidence in the record clearly establishes that,
considered separately, EVP had the overall character of an IMD.

II. HCFA properly applied the IND exclusion to EVP, rather than to
SCVNC.

A. Whether EVP is considered a distinct-part or a free- standing
facility for some purposes is not determinative of this matter.

HCFA found that EVP was a "free-standing" facility that should be
evaluated separately for IMD purposes. California argued that EVP was a
"distinct-part" facility and a "hospital-based" facility and, therefore,
should not be considered independently from SCVMC, the hospital to which
it was attached, for purposes of applying the IMD criteria.

The record shows some confusion in how the parties were using these
terms. California said:

The terms "hospital based" and "distinct part" are used
interchangeably to describe a skilled nursing facility that is part
of a hospital as opposed to a "free-standing" facility. A
"free-standing" facility is commonly understood to be one that is
not part of an acute care hospital.

CA I at 2, n.3. However, the term "distinct part" is a term of art
used, among other places, in the definition of skilled nursing facility
as "an institution (or distinct part of an institution) . . . ." in
section 1819(a) of the Act. The term "institution" does not always
refer to a hospital (see below). Neither party cited any Medicaid
provision using the term "hospital- based." This term is used in
Medicare reimbursement provisions, however, which contrast
"hospital-based" and "free-standing" SNFs, permitting higher
reimbursement for hospital-based SNFs. See CA Ex. 13.

HCFA argued that both the guidance on when a facility is
"hospital-based" for Medicare reimbursement purposes and the provisions
on when a part of an institution qualifies as a "distinct part" that may
be certified to provide SNF services were irrelevant here. HCFA said
that EVP was "sufficiently distinct" from SCVMC so that the IMD
guidelines could be applied to EVP separately. HCFA I at 13. HCFA
provided evidence that its policy has always been that whatever entity
participated in Medicaid was the appropriate entity to which the IMD
guidelines should be applied. HCFA Ex. 14, at 2; HCFA Ex. 15, at 2, 3.
California objected that HCFA was unfairly shifting its rationale for
applying the guidelines to EVP from the rationale given in the
disallowance letter and that California did not have notice of HCFA's
alleged policy. CA II at 1, 2. California said that EVP should be
considered a "distinct part" of SCVMC, and, therefore, SCVMC was the
appropriate institution to which the IMD guidelines should be applied.
3/

An examination of how HCFA used the term "free-standing" in its review
indicates that HCFA was not using that term in juxtaposition to
"hospital-based" but merely to indicate that EVP was a facility which
should be examined separately from SCVMC for purposes of the IMD
exclusion. See Report at 14. Thus, we do not see HCFA's later
articulation of its basis for examining EVP separately as a change in
rationale prejudicial to California (which in any event had a full
opportunity to respond). On the other hand, HCFA did not show that it
had given California timely explicit notice of a policy to apply the IMD
exclusion to whatever entity participates in Medicaid.

California argued that, because the existing statutory and regulatory
provisions did not specifically and clearly state that distinct part
SNFs could be IMDs and because California did not have notice of HCFA's
policy, the disallowance here was improper. See CA I at 15-17; CA II at
4-5. California relied on Pennhurst State School and Hospital v.
Halderman, 451 U.S. 1 (1981), in which the Supreme Court held that,
before conditions may be imposed on federal funds granted to a state,
the state must be aware of those conditions and must knowingly and
voluntarily accept them.

The situation in Pennhurst is distinguishable from the situation
presented here, however. Pennhurst involved the issue whether Congress
intended, in unclear provisions, to impose an affirmative obligation on
states to expend their own funds to provide "appropriate treatment" in
the "least restrictive environment" to all developmentally disabled
individuals. In Bennett v. Kentucky, 470 U.S. 656 (1985), the Supreme
Court clarified that Pennhurst "does not suggest that the Federal
Government may recover misused federal funds only if every improper
expenditure has been specifically identified and proscribed in advance."
470 U.S. at 666 (emphasis in original). The Supreme Court concluded in
Bennett that Kentucky had clearly agreed to abide by the requirements of
the relevant statute there as a condition for receiving federal funds,
and that those provisions were not ambiguous as applied to the facts.
Thus, the disallowance was upheld.

The statute and regulations at issue here do clearly proscribe FFP in
services to individuals aged 22 through 64 in IMDs. California did not
point to any language in the statute or regulations or HCFA policy which
specifically states that a distinct part facility will not be examined
separately for IMD purposes. Thus, the fact that EVP may be a distinct
part does not end our lnquiry .

As discussed below, we determine that the statute supports HCFA's view
that the IMD exclusion applies to the entity participating in Medicaid,
even if participating as a distinct part; California's interpretation is
unreasonable, particularly in light of statutory amendments made in 1987
and 1988. We further determine that EVP was an "institution" and that
EVP's patients were "in an institution" under the applicable
regulations. Finally, we determine that California's evidence does not
show that California did in fact and could reasonably rely on EVP's
relationship with SCVMC as meaning that SCVMC was the appropriate
institution for purposes of determining whether the IMD exclusion
applied. B. The statutory provisions support HCFA, not California.

The purpose of the IMD exclusion is discussed in the legislative history
of the Act:

Since the enactment of the Social Security Act, patients in public
mental . . . hospitals have not been eligible under the public
assistance titles of the Social Security Act, and only prior to
1951 were individuals eligible who were patients in private mental
. . . hospitals. The reason for this exclusion was that long-term
care in such hospitals had traditionally been accepted as a
responsibility of the States.

S. Rep. 404, 89th Cong., 1st Sess., pt. 1 at 144 (1965) reprinted in
1965 U.S.C.C.A.N. 1942, 2084-87.

The history of the IMD exclusion is discussed in Connecticut Dept. of
Income Maintenance v. Heckler, 471 U.S. 524, 530-536 (1985). In that
case, the Supreme Court upheld this Board's conclusion in Joint
Consideration: "Institutions for Mental Diseases", DAB No. 231 (1981),
that the IMD exclusion did not apply exclusively to state mental
hospitals or their functional equivalent, as California and other states
had argued, but could be applied to nursing facilities that were
independent of such hospitals.

Section 1905(a) of the Act defines "medical assistance," including a
list of services states either are mandated to cover or have the option
of covering. Originally, this list included "inpatient hospital
services (other than in an institution for mental diseases)," "skilled
nursing home services (other than in an institution for mental
diseases)," and "inpatient hospital services and skilled nursing home
services for individuals 65 years of age or over in an institution for .
. . mental diseases." The section also contained at the end of the list
of services a general exclusion of services to individuals under age 65
in an IMD (later modified to allow inpatient psychiatric services to
individuals under age 21 or in some cases age 22). The legislative
history explained that the parenthetical "(other than in an institution
for mental diseases)" was necessary to make it clear that states were
not mandated to provide inpatient hospital services or skilled nursing
home services to the aged in IMDs. S.Rep. No. 404, 89th Cong., 1st
Sess., 1965 U.S.C.C.A.N at 2021.

Regulations defining "skilled nursing home services (other than in an
institution for mental diseases)" provided that a skilled nursing home
is "a facility, or a distinct part of a facility" meeting certain
conditions, but also provided that such services must be "furnished by a
skilled nursing home maintained primarily for the care and treatment of
persons with disorders other than . . . mental diseases." Under this
definition, FFP clearly was not available even for a distinct part of a
facility if it was primarily for the care and treatment of persons with
mental diseases.

In the Social Security Amendments of 1972, Public Law 92- 603, Congress
substituted the term "skilled nursing facility services" for "skilled
nursing home services." The term "skilled nursing facility services" was
defined for Medicare purposes in section 1861(j) of the Act, as follows:

The term "skilled nursing facility" means . . . an institution (or
a distinct part of an institution) . . . which-- (1) is primarily
engaged in providing to inpatients (A) skilled nursing care
and related services . , or (B) rehabilitation services . . .
; * * * except that such term shall not . . . include
any institution which is primarily for the care and treatment of
mental diseases.

Congress adopted this definition for Medicaid purposes by requiring that
a state plan provide that "any skilled nursing facility receiving
payments under the plan must satisfy all of the requirements contained
in section 1861(j), except that the exclusion contained therein with
respect to institutions which are primarily for the care and treatment
of mental diseases shall not apply for purposes of this title." Section
1902(a)(28) of the Act.

Arguably, these provisions did not as clearly exclude from coverage (for
other than the aged) services in a distinct part facility primarily for
the care and treatment of persons with mental diseases. However, we
think California could not reasonably interpret these provisions as
permitting a distinct part facility which was primarily for persons with
mental diseases to qualify to provide SNF services (other than to the
aged). First, the legislative history does not indicate that any change
was intended with respect to coverage for such services. Second,
consideration of the Act as a whole leads to a conclusion that the only
reason section 1902(a)(28) read out the exception in section 1861(j) for
IMDs was that, under Medicaid, SNF services in an IMD could be covered
for the aged.

In 1972, Congress also added to the list of services "intermediate care
facility services (other than in an institution for mental diseases)."
Since "intermediate care facility services" (ICF services) are not
coverable under title XVIII, section 1905(c) of the Act defined an ICF
as an institution meeting certain requirements, but stated that the term
did not include with respect to individuals under age 65, "any public
institution or distinct part thereof for mental diseases or mental
defects" except services for the mentally retarded or persons with
related conditions meeting requirements of section 1905(d) (called
ICF/MR services).

In the Omnibus Budget Reconciliation Act of 1987 (OBRA 1987), Public Law
100-203, Congress substituted the term "nursing facility" for SNFs and
ICFs (other than ICFs/MR). A new section 1919(a) of the Act defines
"nursing facility" for Medicaid purposes as--

an institution (or distinct part of an institution) which-- (1) is
primarily engaged in providing to residents [certain specified
nursing, rehabilitation or health-related services] and is not
primarily for the care and treatment of mental diseases; . . .

In 1988, Congress added the following definition of an IMD as section
1905(i) of the Act:

The term "institution for mental diseases" means a hospital,
nursing facility, or other institution of more than 16 beds, that
is primarily engaged in providing diagnosis, treatment, or care of
persons with mental diseases, including medical attention, nursing
care, and related services.

Medicare Catastrophic Coverage Act, P.L. 100-360,  411(k)(14)(A). HCFA
argued that the reference to "nursing facility, or other institution" in
this definition meant that EVP, as a nursing facility, was an
institution for purposes of the IMD exclusion. California argued that
the lack of specific reference to a "distinct part nursing facility" in
this definition meant that Congress did not intend the definition to
apply to distinct parts. In support, California pointed to the language
in the definition of ICF services in section 1905(c), which specifically
excluded both an institution and a distinct part thereof for mental
diseases, arguing that where Congress meant to exclude a distinct part
Congress explicitly said so.

California's argument ignores the definition of "nursing facility" in
section l919(a) which encompassed distinct parts of larger institutions.
If an IMD can be a nursing facility and a nursing facility can be either
an institution or a distinct part of an institution, then clearly an IMD
can be a nursing facility which is a distinct part of a larger
institution. Moreover, even if the term "nursing facility" was not used
in the IMD definition in its technical sense, it would apply to EVP. The
record clearly indicates that EVP was a facility under the plain meaning
of that term, that EVP viewed itself as a facility, and that EVP
provided nursing services .

California's reliance here on the specific reference to "distinct part"
in the ICF definition is misplaced. 4/ First, the SNF definition in
title XVIII is best read as meaning that neither an institution nor a
distinct part may be primarily for persons with mental diseases for
Medicare purposes, and the deletion of this exception for Medicaid in
section 1902(a)(28) appears attributable to the option for states to
cover SNF services for the aged in an IMD. Section 1905(a) made it
clear that neither SNF services nor ICF services (other than for the
aged) could be "in an IMD," and California gave no logical reason why
Congress would treat distinct part SNFs differently from distinct part
ICFs for purposes of the exclusion. The differences in how the
exclusion is structured for each appear attributable to the timing of
when the provisions were added and the relationship of the SNF
provisions to title XVIII, which does not cover ICF services.

In any event, any confusion caused by the earlier statutory provisions
was, in our view, removed by the definition of "nursing facility" in
section l919(a), enacted in 1987. That definition is structured so that
it clearly means that neither a distinct part nor other nursing facility
which is "primarily for persons with mental diseases" qualifies to
provide services under Medicaid. 5/ If the language in section l919(a)
on what institutions may not qualify under Medicaid does not also apply
to distinct part facilities, then the language on what requirements an
institution must meet to qualify under Medicaid also would not apply to
distinct part facilities. This would not make sense.

While the definition of "nursing facility" was not effective until
October 1, 1990, after this disallowance period had begun, the
definition was enacted in 1987 and the term was used in the 1988
definition of IMD. We do not see how, after that point, California
could reasonably determine that Congress intended to fund services to
individuals aged 22 through 64 in distinct part facilities that were
primarily for the care and treatment of persons with mental diseases.

C. From the text of the regulatory definitions of "institution" and
"in an institution." California was on notice that EVP was an IMD.

Even if EVP was not a "nursing facility" as that term is used in section
1905(i), it would fit within the language "or other institution" in that
section. "Institution" is defined in the applicable regulations as "an
establishment that furnishes (in single or multiple facilities) food,
shelter, and some treatment or services to four or more persons
unrelated to the proprietor." As discussed below, EVP, in its
individual capacity as a County-operated facility, provides food,
shelter, and psychiatric services to patients needing nursing level
care. Moreover, EVP provides these services in a 99-bed facility which,
according to two censuses submitted with the record, treated at least 57
and 97 patients on November 28, 1989 and November 22, 1990,
respectively. Thus, EVP qualifies as an institution in its own capacity.

California focused on the language "in . . . multiple facilities" in the
regulatory definition of "institution," arguing that EVP could not
itself be an institution within this definition because it was one part
of a multiple facility institution known as SCVMC. Implicit in
California's argument is the assumption that an institution cannot exist
within another institution. Also implicit in California's argument is
the assumption that a facility, such as a skilled nursing facility,
cannot itself be an institution if it maintains an administrative
relationship with a larger institution.

California's assumptions are not supported by the language of the
regulation. There is no basis for concluding that a facility which
itself meets the regulatory definition of an institution cannot consist
solely of an SNF or other facility, even if that facility is also part
of a larger entity which is an institution.

California argued that interpreting the term "institu- tion" to apply to
a single facility which is also part of a larger institution would
effectively render the "multiple facilities" language in the definition
meaningless. California's argument ignores the fact that there may be
times when an establishment has multiple facilities, none of which
furnish food, shelter, and services, but which together furnish these
three items and thus constitute an institution within the definition.
This is not the situation here, where EVP in a single facility provides
all three.

Moreover, patients in EVP were "in an institution." Under the
regulations at 42 C.F.R.  435.1009, that phrase "refers to an
individual who is admitted to live there and receive treatment or
services provided there that are appropriate to his requirements." The
individuals in question here were admitted to live at EVP and receive
services provided there, under EVP's separate admission policies.

Thus, the applicable regulations support a conclusion that the
individuals in question here were in an institution, called EVP, which,
as discussed above, had the overall character of an IMD. D.
California's evidence does not fully support its assertions about the
relationship between EVP and SCVMC.

In determining whether California could reasonably view SCVMC as the
appropriate (and only) institution to be examined for purposes of
determining whether patients in EVP are in an IMD, we have considered
the arguments presented by California on the relationship between EVP
and SCVMC. California's main arguments were that--

o SCVMC "operates EVP under a consolidated license issued by the
State of California Department of Health Services";

o The State issues "a consolidated license to a general acute
hospital where there is (1) a single governing body, (2) a single
administration, and (3) a single medical staff, with a single set
of bylaws, rules and regulations which prescribe a committee
structure for all facilities maintained by the licensee";

o SCVMC and EVP are "financially integrated," as evidenced by the
cost report filed by SCVMC;

o Under the terms of an Interdepartmental Agreement "between SCVMC
and the County of Santa Clara, the Executive Director of SCVMC had
final authority over EVP's Director of Acute Services, and the
Director of Acute Services was subject to the decisions of SCVMC's
Governing Board."

CA I at 10-12. 6/

The evidence California submitted does not support these assertions.
First, the consolidated license was not granted to SCVMC as a general
acute hospital, but was granted to the County of Santa Clara, which
owned both the hospital and EVP. See CA Ex. 10; Ex. 1, at 1.

Second, the record does not indicate that the hospital "operated" EVP.
EVP is referred to as a county owned and operated facility and the
County Board of Supervisors has full legal authority and responsibility
for the operation of the facility. E.g., HCFA Ex. 4. Day-to-day
operations were by the County Health Department, Bureau of Mental
Health.

The Interdepartmental Agreement California submitted is between the
County Health Department (Department) and "Santa Clara Valley Medical
Center (SCVMC) whose Executive Director is the director of the County
Department of Hospitals and Clinics." CA Ex. 1, at 1. The
Interdepartmental Agreement states that--

the Department wishes to operate the APU [acute psychiatric unit]
and EVP in order to assure the integration of acute psychiatric
care with other mental health services offered by the County, and,
in operating such units desires to purchase specific services from
SCVMC when necessary.

Id. The Department was responsible for providing all care required by
the patients in EVP, for hiring and supervising the nursing staff,
therapists, and other non- physician personnel necessary to provide the
services for which the Department was responsible. SCVMC agreed to
provide certain listed ancillary and support services. CA Ex. 1.
However, an examination of the budget accompanying the Interdepartmental
Agreement indicates that SCVMC was not providing all of these services
to EVP; some were provided only to the APUs (which were units of SCVMC
as a general acute care hospital and included within its certification
as such). Among the listed services not in fact provided to EVP were
food services. See CA Ex. 1 (Attachment); CA 3, at 11. Thus, SCVMC did
not furnish food to EVP patients.

Moreover, the fact that the Department purchased these services from
SCVMC undercuts the suggestion in one of California's affidavits that we
should view the arrangement between SCVMC and the Department as similar
to a management agreement under which a hospital purchases management
services from another entity. CA Ex. 4, at 2. If SCVMC were purchasing
management services from the Department, one would expect SCVMC to be
paying the Department, rather than vice versa. Also, services purchased
from SCVMC were limited support and ancillary services. The core
services provided at EVP were provided by EVP staff.

Furthermore, SCVMC would be required to "step down" costs to EVP on
SCVMC's costs reports, given the purchase of services from SCVMC for EVP
by the Department, irrespective of whether EVP and SCVMC were one
institution or separate institutions. See CA Ex. 9, at 2. SCVMC did
not bill for services provided by EVP; the Department did. CA Ex. 1, at
2. Thus, while the record shows a certain degree of financial
integration between SCVMC and EVP, we do not see this as establishing
that the appropriate institution for purposes of the IMD exclusion is
SCVMC, not EVP.

While the Interdepartmental Agreement does state that "ultimate
responsibility" for the administration of EVP lies with SCVMC, this
recognition is tied to viewing EVP's beds as being included in SCVMC's
license. See CA Ex. 1. Other documents in the record indicate that in
fact the consolidated license was granted to the County and that
ultimate responsibility lay with the County Board of Supervisors. HCFA
Ex. 4; HCFA Ex. 10. Moreover, the Interdepartmental Agreement uses the
acronym SCVMC to refer both to SCVMC as a general acute care hospital
and to the hospital's Executive Director in his capacity as director of
the County Department of Hospitals and Clinics.

Much of the relationship between SCVMC and EVP flows from the
requirements of the State law on consolidated licenses. Under that law,
a facility certified to provide skilled nursing care may be under a
consolidated license with a hospital only if the owner is a public
agency and then only if certain conditions are met. CA Exs. 11 and 23.
Those conditions--a single governing body, single administration, and
single medical staff-- must be maintained by the licensee. Here, the
licensee is the County. The County organizational scheme meeting these
conditions is referred to in the record as SCVMC, but this organization
is not equivalent to the general acute care hospital which is also
referred to as SCVMC. Nor is this organization equivalent to EVP, which
was a facility which furnished food, shelter, and some services directly
to patients.

In sum, the relationship between SCVMC and EVP was largely because they
were both County owned and operated facilities under a consolidated
license. To view such an arrangement as sufficient to remove a facility
like EVP, which is otherwise clearly an IMD, from the scope of the IMD
exclusion, would contravene congressional intent by inadvertently
encouraging states to evade the FFP exclusion for IMDs by
administratively linking their IMDs to larger institutions.

E. Other sections of the regulations to which the parties cited are
not instructive.

Throughout the record, one or both parties cited to various sections of
the regulations and other statements of policy in support of their
arguments as to which entity the IMD guidelines should be applied.
These sections include the definition of "nursing facility services"
found at 42 C.F.R.  440.40(a)(ii); the definition of "distinct part"
found at section 2110 of the State Medicaid Manual; the policy regarding
what constitutes a hospital-based facility for Medicare purposes,
published at 45 Fed. Reg. 58,699; and the definition of "health
facility" in the California Health and Safety Code and regulations.
However, these sections are either irrelevant or do not support
California's position.

The definition of nursing facility services is not relevant where we
have definitions of "nursing facility" and "institution," terms that are
used in the IMD definition itself. Moreover, criteria for determining
what is a distinct-part or hospital-based facility are not relevant here
because we have determined that the type of nursing facility involved is
not determinative of the issues. For the same reason, it is irrelevant
that California's regulations define "health facility" to include a
distinct part of a hospital.

CONCLUSION

For the above reasons, we find that HCFA correctly found that EVP was an
IMD within the meaning of the Act, and we uphold the disallowance in
full on that basis.

___________________________ Donald F.
Garrett


___________________________ M. Terry
Johnson


___________________________ Judith A.
Ballard Presiding Board Member


1. Changes made to section 4390 in March 1994 (effective April 6, 1994)
added the following language:

[C]omponents that are certified as different types of providers,
such as nursing facilities and hospitals, are considered
independent from each other [for purposes of applying these
guidelines].

Transmittal No. 65. The changes also added a list of questions to
assist a regional office in determining whether a component is
independent. California argued that, using these questions, one would
determine that EVP is not independent of SCVMC. California's argument
ignores the language quoted above, however, which would directly apply
here since EVP was certified as a nursing facility and SCVMC as a
hospital. In context, the list of questions is clearly intended to be
used only when components of a larger institution are not certified as
different types of providers.

2. For purposes of this decision we use the following abbreviated
citations: California's Appeal File (CA I); HCFA's Response (HCFA I);
California's Reply (CA II); HCFA's Reply (HCFA II); California's
Response to the Board's Order to Develop the Record (CA III); and HCFA's
Response to the Board's Order to Develop the Record (HCFA III).

3. California did not provide any evidence that, prior to this
disallowance, it had made any determination that EVP was a "distinct
part" of SCVMC, nor that EVP's certification was as a "distinct part" of
SCVMC, rather than as an institution itself. We note that the
Medicare/Medicaid Certification and Transmittal Forms completed by the
State survey agency list EVP as in provider/supplier category "04,"
which is the category for "SNF." There is a separate category "03" for
"SNF/ICF (Distinct Part)," which the State survey agency did not use to
classify EVP. The classification of EVP was the same when EVP was Santa
Clara Valley Skilled Nursing Facility, privately owned, and
subsequently, after it was purchased by the County. Since HCFA referred
to EVP as a distinct part facility, however, we assume for purposes of
this decision that EVP was a distinct part of SCVMC.


4. We note that California did not argue, or present any evidence, that
it somehow relied on this language in interpreting the exclusion not to
apply to EVP because EVP was a distinct part of SCVMC. In an Order to
Develop the Record, we specifically asked California if, prior to the
review period at issue in this disallowance, it had ever made a specific
examination of EVP to determine whether it was an IMD. California did
not answer this question. From that failure to answer, the Board can
infer either that California never made such an examination or made such
examination and determined that EVP was an IMD.

5. Of course, this definition of a "nursing facility" must be read
together with section 1905(a)(14), as amended by OBRA 1987, which
permits states to cover nursing facility services in an IMD to
individuals aged 65 or over. HCFA stated that it has been working with
congressional staff since 1989 to draft a technical amendment to section
1919(a) to clarify that a facility could be certified to provide such
services even if it is an IMD. See HCFA III at 18.

6. California also argued that the phrase "overall character" in the
regulations indicated that SCVMC was the appropriate institution to
examine. This argument ignores the fact that the full phrase in the
regulation is "overall character of the facility." While this might be
confusing if a distinct part consisted merely of a wing or floor of a
building and might not itself be considered a facility, we do not think
it is confusing as applied to EVP, which was itself a facility.