Missouri Department of Social Services, DAB No. 1515 (1995)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT: Missouri Department of Social Services

DATE: May 1, 1995
Docket No. A-95-39
Decision No. 1515

DECISION

The Missouri Department of Social Services (Missouri) appealed a
determination by the Health Care Financing Administration (HCFA)
disallowing $3,526,227 in federal financial participation (FFP) claimed
by Missouri under title XIX (Medicaid) of the Social Security Act (Act).
Missouri had claimed the disallowed FFP for a payment to Cardinal
Glennon Children's Hospital (Cardinal Glennon) for hospital services in
fiscal years (FYs) 1984, 1985, and 1986. The payment resulted from a
settlement agreement entered into by Missouri and Cardinal Glennon on
October 27, 1992. HCFA disallowed Missouri's claim on the basis that
the payment was not eligible for FFP because it was not made within the
two-year filing period specified by section 1132(a) of the Act and not
made in accordance with Missouri's approved Medicaid State plan.

For the reasons discussed below, we find that Missouri's claim to HCFA
for FFP for the settlement payment to Cardinal Glennon was filed timely
and in accordance with the Missouri State Medicaid plan. Accordingly,
we reverse the disallowance.


Statutory and Regulatory Background

Federal funding for Medicaid is made available to states which have an
approved State plan. Section 1901 of the Act. A Medicaid State plan
details the manner in which a state intends to provide Medicaid-funded
services to eligible individuals. See section 1902 of the Act. In
order to qualify for FFP, a state's claim for the costs of medical
services must be in accordance with an approved Medicaid State plan.
Section 1903(a) of the Act. The regulations describe the State plan as
--

a comprehensive written statement submitted by the agency
describing the nature and scope of its Medicaid program and giving
assurance that it will be administered in conformity with the
specific requirements of title XIX, the regulations in this Chapter
IV, and other applicable official issuances of the Department. The
State plan contains all information necessary for HCFA to determine
whether the plan can be approved as a basis for . . . FFP in the
State program.

42 C.F.R.  430.10.

In order for a state to receive reimbursement under the Medicaid
program, a state's claim for FFP must be filed in a timely manner.
Section 1132(a) of the Act requires that --

. . . any claim by a State for payment with respect to an
expenditure made during any calendar quarter by the State --

(1) in carrying out a State plan approved under title . . . XIX
. . . of this Act . . .

* * *

shall be filed (in such form and manner as the Secretary shall
by regulations prescribe) within the two-year period which
begins on the first day of the calendar quarter immediately
following such calendar quarter; and payment shall not be made
under this Act on account of any such expenditure if claim
therefor is not made within such two-year period; except that
this subsection shall not be applied so as to deny payment with
respect to any expenditure involving court- ordered retroactive
payments or audit exceptions, or adjustments to prior year
costs.

The implementing regulation at 45 C.F.R.  95.13(b) declares that a
State agency's expenditure under the Medicaid program is considered to
have been made "in the quarter in which any State agency made a payment
to the service provider." HCFA's State Medicaid Manual reiterates that
an expenditure occurs when cash or its equivalent "is actually paid" by
an agency of the state. Section 2560.4(G)(1).


Factual Background

Cardinal Glennon, operated by the Franciscan Sisters of Mary and located
in the inner city of St. Louis, is dedicated to serving the health care
needs of poor and underprivileged children. In the years at issue, 1984
to 1986, Cardinal Glennon was a tertiary care hospital, an institution
of last resort treating the most difficult and complex of cases.
Cardinal Glennon served a high percentage of Medicaid patients; during
1984 through 1986 42.33% of its patient days were Medicaid patient days.
Missouri Exhibit (Ex.) 1, at 2-9.

During this period Missouri made payments to Cardinal Glennon for its
eligible Medicaid costs. Missouri filed timely claims with HCFA for FFP
based upon the reimbursements to Cardinal Glennon for the services the
hospital provided during 1984 to 1986.

In June 1986 Cardinal Glennon initiated a rate adjustment appeal based
on its contention that it was eligible for increased rates due to its
status as a disproportionate share hospital (DSH) from 1984 to 1986. 1/
Cardinal Glennon alleged that, due to shortfalls in reimbursement, it
was in financial difficulty that threatened personnel layoffs and
reduction in care. Missouri, pursuant to its approved State plan,
granted a prospective rate increase to Cardinal Glennon effective August
1, 1986, but determined that under its State plan it was not permitted
to grant a retrospective rate adjustment to increase rates. 2/

Cardinal Glennon appealed Missouri's decision to the Administrative
Hearing Commission of the state of Missouri (AHC). On July 11, 1990,
the AHC found that Cardinal Glennon was a DSH for the years in question
and that Missouri's State plan permitted retroactive rate adjustments.
Missouri Ex. 1. The AHC declared:

The purpose of the rate adjustment for disproportionate share
hospitals, by its own terms, is to alleviate financial distress
experienced by those providers who serve an unusually large number
of Medicaid recipients. This purpose is squarely within Medicaid's
goal to provide health care to the poor. Adjustment for
disproportionate share status is a remedial measure, and its only
purpose is to provide a safety net for providers in danger of
financial collapse.

Id. at 16. The AHC also overturned Missouri's 10% limitation on the
rate increase because it was based on an informal, internal policy that
was never promulgated as a regulation. Id. at 15. The AHC accordingly
determined that Cardinal Glennon was entitled under Missouri's approved
State plan "to a per diem reimbursement rate adjustment for its fiscal
years 1984, 1985, and 1986, for disproportionate share provider status
equal to all of its unreimbursed actual costs per paid day subject to
any applicable limitations." Id. at 17. 3/

Missouri appealed AHC's decision to the Circuit Court of Cole County.
On February 6, 1992, the court affirmed AHC's decision in all respects.
Missouri Ex. 7. Missouri then appealed to the Missouri Court of Appeals,
but also entered into settlement negotiations with Cardinal Glennon.
Cardinal Glennon asserted its claim was worth $9,001,930, representing
the disproportionate share adjustment plus interest, but offered to
settle for $6,579,513. Missouri Ex. 8, Declaration of Donna Checkett, 
6.

On October 26, 1992, Missouri entered into a settlement agreement with
Cardinal Glennon, paying the hospital $5,795,903, which represented
Cardinal Glennon's unreimbursed Medicaid costs but did not include any
interest payments. Missouri Ex. 10. Missouri paid this amount on
November 20, 1992. On February 3, 1993, Missouri submitted a claim for
FFP in the amount of $3,526,227, the federal share of the settlement
agreement, on its Medicaid Quarterly Expenditure Report for the quarter
that ended December 31, 1992.


Discussion

I. Missouri's claim for FFP for the settlement agreement with Cardinal
Glennon was filed within the timely claims deadline.

Missouri took the position that the two-year claiming period for the
Cardinal Glennon settlement began on January 1, 1993, the first day of
the calendar quarter following the November 20, 1992 settlement payment.
According to HCFA, however, the two-year claiming period in this case
was triggered when Missouri first paid Cardinal Glennon for the services
provided during FYs 1984-1986. HCFA argued that since Missouri had
previously claimed FFP for those services, Missouri's claim in 1993 for
additional FFP for Cardinal Glennon's services in FYs 1984-1986 was not
timely. HCFA contended that if any additional payment to a provider
could start a new two-year period for submitting a claim, there would no
reason for the three exceptions to the two-year filing period listed in
section 1132(a) -- for an expenditure involving a court-ordered
retroactive payment, an audit exception or an adjustment to a prior
year's costs. In support of its position, HCFA referred to several
Board decisions. See, e.g., Alabama Dept. of Human Resources, DAB No.
1220 (1991); South Carolina State Health and Human Services Finance
Commission, DAB No. 943 (1988); and New York State Dept. of Social
Services, DAB No. 521 (1984).

The questions of timely claims presented by this appeal closely parallel
those recently examined by the Board in another appeal also involving
Missouri, Missouri Dept. of Social Services, DAB No. 1511 (April 5,
1995). In that appeal Missouri argued that a disallowance relating to
overpayments to two facilities should be reversed because HCFA had
already been the beneficiary of the full amount of the federal share of
the overpayments through a settlement of other claims with the corporate
owner of the facilities. HCFA contended that even if Missouri were to
pay the providers and then submit claims to HCFA for these expenditures,
HCFA would nevertheless reject the claims on the basis of timeliness,
because Missouri's initial payments to the providers triggered the
two-year timely claims provisions and that any claims now submitted by
Missouri would accordingly be too late.

In a preliminary analysis intended to assist the parties in the ultimate
resolution of Missouri's claims, the Board reviewed the timely claims
rules and concluded --

the timely claims deadline begins to run once the state makes an
actual payment to the certified provider of services. Missouri has
not yet made an actual payment to the . . . providers for the
additional increment of the higher rate claimed. Once an actual
payment is made for this previously disputed increment of the rate,
Missouri would appear to have the full two-year time period
specified by the timely claims rule in which to file a claim for
the adjustment amount.

At 8.

The Board examined HCFA's arguments concerning timeliness and made
several conclusions about HCFA's arguments. Many of these conclusions
are applicable to the circumstances of this appeal:

o The basic timely claims rule relies entirely on the date a state
makes an "expenditure" or "payment" for the service to the
provider as the beginning point of the two-year timely claims
period. The plain meaning of the term "expenditure" or
"payment" is the state's actual reimbursement to the facility
for the service it provided.

o HCFA's policy would have the effect of requiring a state to make
full payment on a claim and file a claim for FFP even though the
state questioned the legality of the claim and even though HCFA
would not ultimately provide funding for any claim which a state
had determined was unallowable. 4/

o HCFA's interpretation could have serious program implications
since it might encourage states not to question dubious claims
from a private provider or, in the alternative, to forego
settlement and continue litigation, even where a state had
reevaluated its position on a provider's claim, until a court
ordered the payment of the claim (thus invoking the court-
ordered payment exception to the timely claims rule).

At 8 - 10 (emphasis and footnote added).

Here, for services rendered in FYs 1984-1986, Missouri first paid
Cardinal Glennon in those same years. Later, in 1992, it paid Cardinal
Glennon additional money for those services. Just because a state has
paid a private provider some amount for the services the provider
rendered does not mean that the state cannot pay that provider
additional money at a later date for those services when it determines
that its State plan requires such a payment. Under the plain language
of section 1132(a) of the Act, the later payment in question here is an
"expenditure" and qualifies for FFP since it was claimed within the
requisite two-year period.

HCFA's argument that the exceptions listed in section 1132(a) to the
timely claims rules would be rendered meaningless by the validation of
any additional payment to a provider does not apply to the expenditure
at issue here because the payment to Cardinal Glennon was a current
expenditure; the exceptions concern expenditures that occurred in the
past. The exceptions have relevance when a state makes an initial
payment or adjustment to a provider which qualifies under an exception
but is still unable to file a claim for federal funding for that payment
within the two-year period provided by the basic rule. Missouri at 10.
That was not the case here. Moreover, HCFA did not respond to Missouri's
contention that State Medicaid Manual  2560.4 (Missouri Ex. 13)
interpreted two of these exceptions -- for adjustments to prior year
costs and audit exceptions -- as applicable only to public providers
because it is only in the public provider situation that the time a
"payment" is made can be difficult to determine precisely.

The difference between payments to public and private providers also
leads us to reject HCFA's contention that previous Board decisions
support its interpretation. In such cases as South Carolina State
Health and Human Services Finance Commission, DAB No. 943 (1988), aff'd,
No. 88-1313-16 (D.S.C. July 17, 1989), aff'd, 915 F.2d 129 (4th Cir.
1990); Massachusetts Dept. of Public Welfare, DAB No. 796 (1986); Texas
Dept. of Human Services, DAB No. 981 (1988); and Alabama Dept. of Human
Services, DAB No. 1220 (1991), the states involved were making
adjustments to payments made to public providers. 5/ For example, in
South Carolina, the facility involved was a state-owned provider, and
the disputed "payment" was an interdepartmental transfer of funds from
the Medicaid agency to the state's department of mental health.
Moreover, the payment was for cost items that could have been identified
and included in the per diem calculation at the time the state first
calculated and paid it; the state admitted that the failure to do so was
a conscious choice that it later reconsidered. In contrast, the DSH
payments involved in the present case were made by writing a check to a
private provider and, as we discuss below, are additions to the per diem
rate that are necessarily retrospective in nature, since they relate to
an analysis of Medicaid case load and the resultant financial impact on
the provider. Missouri's failure to include them in the per diem rate
when Cardinal Glennon initially claimed them was based on an
interpretation of its state plan that was later found to be erroneous,
not on a conscious decision to exclude permissible costs from the
initial per diem calculation.

HCFA also cited New York State Dept. of Social Services, DAB No. 521
(1984), as instructive in this case. However, in that case, no
additional payment took place; instead, the state reclassified previous
expenditures from non-federal participating to federal participating. As
the Board noted there, this "does not change the time when the money is
paid to the provider; that is when the expenditure occurs." Id. at 11.

We therefore find that Missouri's payment of the settlement amount to
Cardinal Glennon was not an adjustment or re-classification of a prior
expenditure from the years 1984 to 1986, but an entirely new
expenditure. Accordingly, we conclude that Missouri's payment of the
settlement amount to Cardinal Glennon on November 20, 1992 was an
"expenditure" within the meaning of the plain language of section
1132(a) of the Act and, as such, was the event which triggered the
beginning of the two-year claiming period in the next calendar quarter.

Having determined that Missouri's claim for FFP relating to the Cardinal
Glennon settlement was timely, we now turn to the question whether the
claim itself was allowable under Missouri's State plan.


II. The settlement payment to Cardinal Glennon, based on a retroactive
rate adjustment for a DSH, was in accord with Missouri's approved
Medicaid State plan.

HCFA contended that even if Missouri's claim had been timely filed, the
claim was still ineligible for FFP because the payment was not made in
accordance with Missouri's approved State Medicaid plan.

HCFA argued that Missouri's position, prior to its settlement agreement
with Cardinal Glennon in 1992, was that a retroactive rate adjustment
was not permitted under its State plan, Rate Appeals Procedure Manual,
and long-standing practice. HCFA declared that Missouri had maintained
this position from 1986 to 1992. HCFA labeled Missouri's current
position that its State plan permitted retroactive rate adjustments as
"an after-the-fact attempt to justify acting inconsistently with its
approved plan," asserting that Missouri adopted the AHC's decision as
Missouri's official interpretation only for the purposes of obtaining
FFP for the settlement. HCFA Brief (Br.) at 16. HCFA noted that
Missouri had resisted Cardinal Glennon's claim for over six years before
the AHC and in court appeals, thereby belying its current embrace of the
AHC decision. HCFA further disputed Missouri's assertion that its
interpretation of its State plan is entitled to deference by HCFA.
Although it did not specifically dispute Missouri's assertion that under
Missouri state law the AHC is the final administrative arbiter of what
was authorized under the Missouri Medicaid State plan, HCFA declared
that it was not a party in any action before the AHC or state court, and
that therefore no legal or factual conclusion reached by the AHC or
state court is binding on HCFA.

HCFA argued that the approved State plan, the Rate Appeals Procedure
Manual, and state practice in place at the time the services were
rendered and the costs incurred support its disallowance.

The Board has previously held that a state's interpretation of its own
State plan is entitled to deference "so long as that interpretation is
an official interpretation and is reasonable in light of the language of
the plan as a whole and the applicable federal requirements."
California Dept. of Health Services, DAB No. 1474, at 3 (1994). A
state's interpretation of its State plan, however, is not entitled to
deference where the state's proposed interpretation does not give
reasonable effect to the language of the plan as a whole, where the
interpretation appears to have been adopted for the purposes of
litigation, or where the administrative practice of the state was not
consistent with the proposed interpretation. See North Dakota Dept. of
Social Services, DAB No. 934, at 4 (1988).

The question we are presented with here is which of two distinct
interpretations of Missouri's Medicaid State plan regarding retroactive
rate adjustments is controlling: Missouri's interpretation in 1986
rejecting Cardinal Glennon's request for a retroactive adjustment or the
AHC interpretation, affirmed by the state court, that later was the
basis for the settlement agreement with Cardinal Glennon.

We agree with HCFA that the AHC and state court opinions concerning the
availability of DSH payments to Cardinal Glennon were not necessarily
controlling on HCFA on the issue of whether FFP was allowable. However,
that does not mean that those opinions cannot be considered the State's
official interpretation of its own Medicaid plan which, if reasonable in
light of the language of the plan as a whole and applicable federal
regulations, does affect FFP availability.

We conclude that the AHC interpretation of the State plan is controlling
here. HCFA did not dispute Missouri's assertion (Missouri Br. at 18)
that "[a]s the final arbiter of the State Plan, the AHC's decisions
receive broad deference in the State courts." (Emphasis added; citation
omitted.) See also AHC Decision, Missouri Ex. 1, at 13 ("The [AHC] . .
. `stands in the shoes' of the department for the purposes of
determining the contested case. Geriatric Nursing [Facility v. Dept. of
Social Services, 693 S.W.2d 206, 209 (Mo. App. 1985)]; Missouri Health
Facilities Review Committee v. Administrative Hearing Commission of
Missouri, 700 S.W.2d 445 (Mo. banc 1985).") Furthermore, we find that
the AHC interpretation was reasonable in light of the language of the
State plan as a whole and the federal regulations. Missouri asserted,
and HCFA did not deny, that its State plan does not specifically address
whether rate adjustments may be retrospective as well as prospective.
Thus, Missouri's present interpretation is not inconsistent with the
language of the State plan. Moreover, this interpretation is reasonable
in light of the federal and state provisions governing DSH services, for
which the claims were made. DSH claims are by nature "retroactive" in
that they require a state to go back each year to determine if a
hospital met the criteria for a DSH and, if the hospital qualifies, to
make adjustments in the rates the hospital received for its services.
The AHC recognized this point when it focused on the remedial purpose of
the DSH regulations to reimburse qualifying providers. Thus, the AHC
properly concluded that Missouri's State plan could not reasonably be
interpreted to preclude retroactive rate adjustments for DSH payments.

While the AHC interpretation was certainly the result of litigation, it
cannot be reasonably considered to have been adopted as a litigation
maneuver that would render it inappropriate for the Board to defer to
this interpretation. Nor was the interpretation inconsistent with prior
administrative practice by Missouri, as evidenced by other instances
where Missouri, under the "exceptional circumstances" provision of the
Rate Appeals Procedure Manual, granted retroactive rate adjustments to
providers of Medicaid services during the years in question for reasons
such as Medicare intermediary errors and facility mergers. Missouri
Exs. 14-18.

We therefore conclude that the AHC's interpretation of the State plan is
a reasonable interpretation which is entitled to deference and that the
settlement payment to Cardinal Glennon was therefore
allowable. Conclusion

For the reasons discussed above, we reverse the disallowance.

____________________________ Donald F.
Garrett

____________________________ Norval D.
(John) Settle

____________________________ M. Terry
Johnson Presiding Board Member


1. A "disproportionate share hospital" is a hospital that serves a
disproportionate number of low income patients. During the period at
issue a DSH was entitled to additional Medicaid payments. See section
1923 of the Act. Section 1902(a)(13) of the Act requires that a State
plan provide for the payment of hospital services provided under the
plan through the use of rates which take into account the situation of
hospitals serving a disproportionate number of low income patients, and
which are reasonable and adequate to meet the costs incurred by an
efficient and economically operated facility in providing care and
services. Regulations implementing section 1902(a)(13) are set forth at
subpart C of 42 C.F.R. Part 447.

2. Missouri also limited this prospective rate adjustment to
Cardinal Glennon to a 10% increase based on the provisions of Missouri's
Rate Appeals Procedure Manual. See Missouri Ex. 6, at 16-17.

3. Missouri's regulation authorizing DSH adjustments was effective
April 2, 1984; the AHC decision applied to the period after that date.
Missouri Ex. 1, at 17.

4. This policy appears particularly unreasonable here, since the
financial distress that Missouri found in its initial determination was
present at Cardinal Glennon could possibly have led the hospital to
declare bankruptcy before a final adjudication of allowability. Prior to
October 1, 1985, HCFA could require a state to adjust its claims for the
federal share of overpayments even where the state was unable to recover
them due to provider bankruptcy. See Utah Dept. of Health, DAB No.
1307, at 3-4 (1992). Thus, Missouri would have borne 100% of the risk
for payments for 18 months (April 2, 1984 through September 30, 1985).

5. HCFA also cited California Dept. of Health Services, DAB No. 1472
(1994). However, the state in that case admitted that its claims for
additional administrative costs were untimely and sought application of
the "adjustments to prior year costs" exception; its argument that the
new claims were "part and parcel" of earlier claims was made to bolster
its claim that the exception should be applied rather than to support an
assertion that the new claims were