SUBJECT: New York State Department of Health

DECISION

The New York State Department of Health (New York) appealed two determinations of the Centers for Medicare & Medicaid Services (CMS) disallowing federal financial participation totaling $302,400,000 claimed by New York under title XIX (Medicaid) of the Social Security Act (Act). ⁽¹⁾ The claim was for disproportionate share hospital (DSH) payment adjustments for services provided in federal fiscal years 1994 and 1995 by psychiatric hospitals operated by the New York State Office of Mental Health (OMH). The claims were filed on September 29, 2000.

CMS identified two separate grounds for disallowing the full amount claimed: that the claim was based on the erroneous premise that patients ages 22 through 64 in these hospitals were Medicaid-eligible, and that New York did not meet the two-year claiming deadline in section 1132 of the Act. CMS identified as an additional ground for disallowing all but $714,013 of the total claim that the amount was in excess of New York's DSH allotments for the years in question. ⁽²⁾

As discussed in detail below, we conclude that CMS properly disallowed New York's claim. In determining what psychiatric hospitals qualified for the DSH payment adjustments, New York improperly treated inpatient days attributable to patients ages 22 through 64 as inpatient days attributable to Medicaid eligibles. This treatment was contrary to express instructions by CMS, of which New York had notice. These instructions were based on statutory and regulatory provisions that treat individuals in this age group as ineligible for any Medicaid services, by reason of their institutional status, if they are patients in an institution for mental diseases, such as a psychiatric hospital. Since New York did not show that the psychiatric hospitals otherwise qualified to receive the DSH payment adjustments, the claim was not allowable.

Furthermore, there is no basis for finding that New York met the two-year deadline for filing the claim, or that the claim fell within an exception to the claiming deadline for an "adjustment to prior year costs," or that a waiver of the claiming deadline was warranted. Under the timely claims provisions, an expenditure is considered to have been made for the services provided by the hospitals the first time OMH either recorded or paid an amount for those hospital services. New York failed to show that it submitted the claim at issue here within the two-year period triggered by the expenditure. New York also failed to establish that the exception to the claiming deadline applied. That exception is limited to an adjustment to a particular cost item previously paid using an interim rate. While the state Medicaid plan permitted New York to make some retrospective adjustments to the payment rates for these hospitals, New York did not establish that its plan permits it to retrospectively redetermine whether a hospital qualifies for DSH payment adjustments, as it did here. In addition, New York's request for a waiver of the claiming deadline relied on New York's erroneous premise that it could treat patients ages 22 through 64 as Medicaid-eligible in determining whether the hospitals qualified for the DSH payment adjustments. CMS clearly was not arbitrary or capricious in denying a waiver since this did not constitute a circumstance beyond New York's control.

Finally, New York admitted that most of its claim was for amounts that exceeded New York's DSH allotments for the fiscal years in question. This alone justifies a disallowance of the excess amount. New York's argument that it could make room under its allotments by reclassifying some DSH payments as regular Medicaid payments is purely speculative. New York has not yet withdrawn any of its previous claims for DSH payment adjustments to make room under the allotments.

Accordingly, we uphold the disallowances in full.

Legal Background

The issues raised in this case involve three different parts of the Act, identified below.

1. Disproportionate share

In accordance with section 1903(a) of the Act, a state with an approved Medicaid state plan may receive federal financial participation (FFP) for expenditures for "medical assistance." Various types of medical care and services that qualify as "medical assistance" are listed in section 1905(a), including inpatient hospital services (section 1905(a)(1)).

In setting Medicaid payment rates for hospital services, states must "take into account the situation of hospitals which serve a disproportionate number of low income patients with special needs," referred to here as disproportionate share hospitals (DSHs). Section 1902(a)(13)(A)(iv) of the Act. ⁽³⁾ Detailed requirements pertaining to DSHs are found in section 1923 of the Act, captioned "Adjustment in Payment for Inpatient Hospital Services Furnished by Disproportionate Share Hospitals." The state plan must provide for "an appropriate increase in the rate or amount of payment" for inpatient hospital services provided by such hospitals. Section 1923(a)(1)(B). This increase is referred to as a "payment adjustment." Section 1923(c).

The Act limits total DSH payment adjustments by each state to the amount of a state allotment. Section 1923(f). CMS publishes the state DSH allotments in preliminary and final form in the Federal Register each year. 42 C.F.R. � 447.297. Section 447.297(d)(2) provides that if "HCFA determines that at any time a State has exceeded its final DSH allotment for a Federal fiscal year, FFP attributable to the excess DSH expenditures will be disallowed."

The Act also imposes a hospital-specific limit. Section 1923(g)(1) of the Act restricts DSH payment adjustments to any DSH to the cost of uncompensated care incurred by that DSH, providing that a payment adjustment may not exceed "the costs incurred during the year of furnishing hospital services . . . by the hospital to individuals who either are eligible for medical assistance under the State plan or have no health insurance (or other source of third party coverage) for services provided during the year." The hospital-specific limit applied only to public hospitals ("hospitals owned or operated by a State (or by an instrumentality or a unit of government within a State)") during a transition year identified as a state fiscal year that began before January 1, 1995. Section 1923(g)(1)(B). Public hospitals that qualified as "high disproportionate share" hospitals could, however, receive an enhanced payment of up to 200% of uncompensated costs (instead of 100% of such costs) during the transition year. Section 1923(g)(2)(A). Section 1923(g)(2)(B) provides that--

a hospital is a "hospital with high disproportionate share" if-

(i) the hospital is owned or operated by a State (or by an instrumentality or a unit of government within a State); and

(ii) the hospital-

(I) meets the requirement described in subsection (b)(1)(A), or

(II) has the largest number of inpatient days attributable to individuals entitled to benefits under the State plan of any hospital in such State for the previous fiscal year.

Subsection (b)(1) of section 1923 sets out two independent criteria for a hospital to be deemed a DSH:

(A) the hospital's medicaid inpatient utilization rate (as defined in paragraph (2)) is at least one standard deviation above the mean medicaid inpatient utilization rate for hospitals receiving medicaid payments in the State; or

(B) the hospital's low-income utilization rate . . . exceeds 25 percent.

Thus, if a hospital qualifies as a DSH based on a Medicaid utilization rate that is at least one standard deviation above the statewide mean, it also qualifies as a high DSH.

"Paragraph (2)" of section 1923(b) states:

For purposes of paragraph (1)(A), the term "medicaid inpatient utilization rate" means, for a hospital, a fraction (expressed as a percentage), the numerator of which is the hospital's number of inpatient days attributable to patients who (for such days) were eligible for medical assistance under a State plan approved under this title in a period . . . , and the denominator of which is the total number of the hospital's inpatient days in that period. . . .

2. General IMD Exclusion

Section 1905(a) of the Act enumerates various services for which payment qualifies as "medical assistance." That section also provides that "medical assistance" does not include "payments with respect to care or services for any individual who has not attained 65 years of age and who is a patient in an institution for mental diseases." Section 1905(a). ⁽⁴⁾ This provision, known as the general IMD exclusion, was modified as of January 1, 1973 to allow for coverage of persons in institutions for mental diseases (IMDs) who had not yet reached the age of 21, or in some cases, age 22. Section 1905(a)(16). The IMD exclusion is also incorporated specifically into the definition of various levels of institutional service which qualify as "medical assistance." For example, "medical assistance" is defined to include "inpatient hospital services (other than services in an institution for mental diseases)." Section 1905(a)(1). ⁽⁵⁾ Thus, throughout the disallowance period, the Act proscribed payments for persons ages 22 through 64 in an IMD. ⁽⁶⁾

Regulations governing recipient eligibility for medical assistance provide in pertinent part at 42 C.F.R. � 435.1008 (titled "Institutionalized individuals"):

(a) FFP is not available in expenditures for services provided to -

* * * * *

(2) individuals under age 65 who are patients in an institution for mental diseases unless they are under age 22 and are receiving inpatient psychiatric services under � 440.160 . . . .

See also 42 C.F.R. � 441.13(a)(2).

An IMD is defined in the Act as "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." Section 1905(i).

3. Claiming Deadline

Section 1132(a) of the Act prohibits the payment of FFP for any expenditure for which no claim has been filed within two years of the end of the calendar quarter in which the expenditure was incurred. The statute reads in relevant part:

[A]ny 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 the claim therefor is not made within such two-year period. . . .

Similarly, 45 C.F.R. � 95.7 provides that "we will pay a State for a State agency expenditure . . . only if the State files a claim with us for that expenditure within 2 years after the calendar quarter in which the State agency made the expenditure."

The purpose of the claiming deadline is to ensure that states submit reimbursement requests in a timely fashion. Claiming delays had in the past made it difficult for the Department of Health and Human Services (HHS) to plan its budget since claims for millions of dollars for expenditures in years long past could turn up at any time. See Connecticut v. Schweiker, 684 F.2d 979, 982 (D.C. Cir. 1982), cert. denied, 459 U.S. 1207 (1983).

The provision at 45 C.F.R. � 95.13(b) addresses the issue of when an expenditure for Medicaid services is considered to have been made, as follows:

We consider a State agency's expenditure for services under title . . . XIX to have been made in the quarter in which any State agency made a payment to the service provider.

"State agency" is defined to mean for purposes of title XIX "any agency of the State, including the State Medicaid agency . . . , its fiscal agents, a State health agency, or any other State or local organization which incurs matchable expenses; . . ." 45 C.F.R. � 95.4.

Section 2560.4G.1. of the State Medicaid Manual issued by CMS defines expenditure for purposes of timely claims under Medicaid. In general, an expenditure "occurs when cash or its equivalent is actually paid in the current quarter by an agency of the state" but in the case of non-cash items "occurs at the time of the appropriate accounting transaction by any agency of the State." With respect to expenditures for services, the section refers to 45 C.F.R. � 95.13(b) and then makes a distinction between services provided by a public facility or provider and a non-public facility or provider. For a public facility or provider (owned or operated by a State, county, city or other local government agency or instrumentality), the section states that "the expenditure is made when it is paid or recorded, whichever is earlier, by any state agency."

Section 1132 of the Act and 45 C.F.R. � 95.19 provide several exceptions to the two-year limit for filing claims. The exceptions include claims for adjustments to prior year costs; claims resulting from audit exceptions or from court-ordered retroactive payments; and any claim for which the Secretary of HHS decides there was "good cause" for the late filing. Section 95.22(a) of 45 C.F.R. states that "[g]ood cause for the late filing of a claim is lateness due to circumstances beyond the State's control." Section 95.22(b) gives as examples of such circumstances "(1) Acts of God; (2) Documented action or inaction of the Federal government."

An "adjustment to prior year costs" is defined 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 State Medicaid Manual provision at section 2560.4 A.2. interprets this for purposes of Medicaid to mean "adjustments to expenditures claimed under an interim rate concept and for which it is later determined that the cost is greater than that originally claimed."

Factual Background

On June 30, 1994, New York submitted a state plan amendment providing for payment of 200% DSH transition year funding to "high DSH" facilities. New York Ex. 23 (SPA #94-26). The SPA provided in pertinent part:

[e]ffective for the state fiscal year beginning April 1, 1994, disproportionate share payments to OMH facilities with inpatient Medicaid eligible patient days, as a percentage of total inpatient patient days, of at least one standard deviation above the statewide mean Medicaid patient day percentage shall be increased to 200 percent of the disproportionate share limit determined in accordance with this section.

Id. at 18 (unnumbered). CMS approved the SPA on June 6, 2001, with an effective date of April 1, 1994. Id. at 1 (letter from Kelly to Novello dated 6/6/01). ⁽⁷⁾

By letter dated September 27, 2000, OMH submitted a claim to New York for FFP of $302,400,000 in DSH payment adjustments for the period April 1, 1994 through March 31, 1995 made to psychiatric hospitals operated by OMH. New York Ex. 2, Att. C, at 1, 3-6 (unnumbered). New York claimed this amount as adjustments to prior period medical assistance payments on its revised Quarterly Statement of Expenditures for the quarter ended June 30, 2000, dated September 29, 2000. New York Ex. 1, at 1 (11/27/00 disallowance letter for Docket No. A-01-27). According to OMH, it made the adjustments as a result of CMS's "reinterpretation of countable Medicaid days for the purpose of determining disproportionate share formulas as outlined in the December 1999 Intermediaries Program Memorandum A-99-62." New York Ex. 2, OMH memorandum dated 11/6/00, at 1. In OMH's view, "the reinterpretation of Medicaid countable days . . . makes it clear that if the patient is otherwise eligible for Medicaid, those days are countable regardless of the IMD exclusion." Id. OMH reviewed the cases of all patients ages 22 through 64 (the age group subject to the IMD exclusion) who had any inpatient stays in OMH hospitals in the period in question to determine if they were Medicaid-eligible. Id. at 2. OMH then calculated the hospitals' Medicaid utilization rates, including inpatient days attributable to such patients whom it determined were Medicaid-eligible. OMH determined that the Medicaid utilization rates of all but one of the hospitals increased to a percentage at least one standard deviation above the statewide mean Medicaid utilization rate and therefore they qualified as high DSHs eligible for the 200% transition year payment. New York Ex. 4, at 3; see also New York Ex. 2. ⁽⁸⁾

By letter dated November 27, 2000, CMS advised New York of its determination that $301,685,987 of the total amount claimed exceeded the state-specific DSH payment adjustment limits, computed in accordance with 42 C.F.R. � 447.298(c), for federal fiscal years 1994 and 1995. Specifically, CMS determined that the payments exceeded New York's 1994 DSH allotment by $151,156,261 FFP and exceeded New York's 1995 DSH allotment by $150,529,726 FFP. CMS stated that it was disallowing the excess amounts based on 42 C.F.R. � 447.297(d)(2). By letter dated December 8, 2000, CMS advised New York that it was deferring the remaining $714,013 of the total amount claimed. New York Ex. 24. By letter dated August 8, 2001, CMS advised New York that it was disallowing the $714,013 on the ground that the claims were not filed in accordance with the two-year claiming deadline and did not fall into any of the exceptions provided in 45 C.F.R. � 95.19. CMS found specifically that $43,739 of the expenditures were made in federal fiscal year 1994 and $670,274 of the expenditures were made in federal fiscal year 1995, while the claim was not made until September 29, 2000.

On April 19, 2001, while New York's appeal of the $301,685,987 disallowance was pending and after the $714,013 had been deferred, New York filed a request for a waiver of the two-year claiming deadline for both amounts. New York Ex. 4. (Although the $301,685,987 was not initially disallowed as an untimely claim, New York apparently recognized that CMS would have disallowed the claim on this basis if the DSH allotments had not been exceeded.) New York asserted that there was good cause for a waiver on the ground that it was not clear until CMS issued Medicare Intermediaries Program Memorandum A-99-62 in 1999 that New York could include days of service to Medicaid-eligible patients subject to the IMD exclusion in calculating the Medicaid utilization rate for purposes of determining if a hospital qualified for 200% DSH transition year funding. New York stated that it realized that if all qualified hospitals claimed the transition payment, "the statewide DSH cap would be exceeded." Id. at 3. New York stated that, accordingly, if the waiver were granted, it would redetermine--

the MA eligibility of the Home Relief ("HR") population previously claimed in the State's DSH claim for FFY 1994-95. Cost of HR recipients found to be MA eligible can then be shifted from DSH to regular MA claims, . . . thereby opening up room under the DSH cap for OMH's transition year DSH claim.

Id. New York also requested a good cause waiver of the deadline to file a Medicaid claim for the Home Relief recipients. ⁽⁹⁾

By letter dated February 4, 2002, CMS notified New York that its request for a good cause waiver of the two-year claiming deadline was denied. CMS stated that there was no federal action or inaction that prevented New York from timely filing the claims. CMS noted that a state has an opportunity to raise any disputed issue of law if a claim is disallowed. Thus, CMS stated, "[i]f the State fails to timely file claims and argue their legal merits, it loses the right to later do so." CMS Ex. 6, at 1. CMS further stated:

[W]e do not agree with the State's underlying argument that the Medicare policy clarification is directly applicable to Medicaid. Unlike in Medicare, in Medicaid there is an express prohibition at section 1905(a)(B) of the Social Security Act on medical assistance payments for care and services for patients between 21 and 65 years of age in institutions for mental diseases. As we noted in a letter to State Medicaid Directors issued August 17, 1994, this prohibition extends to increased DSH payments based on care and services for these patients. This key difference in the two programs means that the interpretation set forth in Transmittal A-99-62 would directly conflict with an express Medicaid provision, and thus does not apply to Medicaid.

Id. at 2.

Summary of Arguments on Appeal

New York did not dispute CMS's determination that New York's DSH allotments for federal fiscal years 1994 and 1995 were exceeded by a total of $301,685,987. New York nevertheless took the position that this amount is allowable because New York could reduce its DSH payment adjustments below the allotments by reclassifying some DSH payment adjustments related to Home Relief recipients as regular Medicaid payments. New York also argued that both the $301,685,987 and the $714,013 disallowed by CMS were claimed within the two-year deadline or fell within the exception for an adjustment to prior year costs. New York argued further that in any event it was entitled to a waiver of the two-year claiming deadline because CMS policy changed in 1999 to permit it to count days of service to IMD patients ages 22 through 64 in calculating the Medicaid utilization rate which determined whether a hospital qualified for 200% transition year DSH payment adjustments. In addition, New York maintained that, since its State plan amendment providing a methodology for making 200% transition year DSH payment adjustments was approved on June 6, 2001 with an effective date of April 1, 1994, New York was entitled to claim such payments retroactive to this effective date.

For the reasons explained below, we conclude that the costs were unallowable. OMH incorrectly determined that the hospitals qualified as high DSHs eligible for enhanced DSH payment adjustments by treating some IMD patients ages 22 through 64 as eligible for Medicaid. We first discuss that basis for the disallowance. ⁽¹⁰⁾ We then proceed to address each of the other two grounds on which CMS relied since they provide independent bases for nearly the entire amount disallowed.

The costs were unallowable because the OMH hospitals did not qualify as disproportionate share hospitals.

OMH determined that each of the hospitals in question qualified as a high DSH eligible for 200% DSH transition year funding because it had a Medicaid utilization rate at least one standard deviation above the statewide mean Medicaid utilization rate. A hospital's Medicaid utilization rate is a fraction, "the numerator of which is the hospital's number of inpatient days attributable to patients who (for such days) were eligible for medical assistance under [an approved State plan] in a period . . ., and the denominator of which is the total number of the hospital's inpatient days in that period." Section 1923(b)(2) of the Act. OMH included in the numerator days attributable to some patients ages 22 through 64 in OMH hospitals. New York acknowledged that the hospitals were institutions for mental diseases (IMDs) and that, under section 1905(a) of the Act, IMDs may not receive regular Medicaid funds for inpatient hospital services provided to patients ages 22 through 64. However, New York took the position that section 1905(a) does not address how inpatient days attributable to such patients should be treated in connection with DSH payment adjustments. New York argued that such patients could be eligible for medical assistance under its approved Medicaid state plan within the meaning of section 1923(b)(2) of the Act and that its calculation of the Medicaid utilization rate properly included inpatient days for those patients whom it identified through a review of case records to be Medicaid-eligible.

New York's position is contrary to HHS's longstanding interpretation of the IMD exclusion. New York was advised of how CMS applied that interpretation in the DSH context by an August 17, 1994 letter from CMS to state Medicaid directors regarding "HCFA's interpretation of the new DSH requirements" in the Omnibus Budget Reconciliation Act (OBRA) of 1993. New York Ex. 13, at 1 (unnumbered). The letter states in pertinent part:

It is important to note that the numerator of the MUR [Medicaid utilization rate] formula does not include days attributable to medicaid patients between 21 and 65 years of age in Institutions for Mental Disease (IMDs). These patients are not eligible for Medical Assistance under the State plan for the days in which they are inpatients of IMD's and may not be counted as Medicaid days in computing the Medicaid utilization rate.

Id. at page 2 of enclosure. New York never argued that it lacked notice of this letter, which New York acknowledged directly addresses the issue presented here. See New York Reply Br. at 6. ⁽¹¹⁾

Moreover, the letter's instruction to exclude IMD patients ages 22 through 64 in calculating the Medicaid utilization rate is fully consistent with how the general IMD exclusion has been applied in other contexts. Both Board and court decisions have held that the Act and regulations treat the IMD exclusion as a general limit on Medicaid eligibility of individuals, by virtue of their institutional status, as well as a limit on particular covered services. ⁽¹²⁾ See, e.g., New York State Dept. of Health, DAB No. 1809 (2002); New York State Dept. of Social Services, DAB No. 1577 (1996); New Jersey Dept. of Human Services, DAB No. 1549 (1995), aff'd, New Jersey Dep't of Human Servs. v. United States, No. 96-441 (AET) (D. N.J. Feb. 11, 1997); California Dept. of Health Services, DAB No. 1338 (1992); Joint Consideration: Admission/Discharge Issue, DAB No. 436 (1983); Petition for Clarification of Decision No. 436, DAB No. 535 (1984). Thus, the Board has held that IMD patients ages 22 through 64 are ineligible for Medicaid care or services including ancillary and physician services provided in the IMD by outside providers as well as medical services received away from the IMD (for example, in an acute care hospital to which they were temporarily transferred).

The interpretation in CMS's letter, of which New York had notice, was clearly reasonable since it is consistent with the application of the general IMD exclusion described above. The Board has held that "the federal agency's interpretation is entitled to deference as long as the interpretation is reasonable and the grantee had adequate notice of that interpretation." New Jersey Dept. of Human Services, DAB No. 1773, at 6 (2001), citing DAB No. 1667, at 26. Accordingly, deferring to CMS's interpretation, we conclude that New York improperly included in the numerator of its Medicaid utilization rate inpatient days attributable to IMD patients ages 22 through 64 since these patients could not be eligible for Medicaid as long as their status remained that of patients in an IMD.

New York argued, however, that HHS changed its policy regarding the treatment of such IMD patients in issuing HCFA Ruling 97-2 on February 27, 1997. New York quoted the following preface to the ruling:

Acquiescing to the holdings of federal courts of appeals in four circuits, HCFA has issued the following Ruling changing its interpretation of statutory and regulatory provisions concerning the treatment of medicaid days in calculating the Medicare disproportionate share adjustment under the prospective payment system. Effective February 27, 1997, the ruling states that the DSH adjustment should be determined by including as part of the calculation all inpatient hospital days of service for which a patient was eligible for assistance under a state Medicaid plan, whether or not the hospital actually received payment for those days.

New York Br. at 8, quoting New York Ex. 7, at 1 (emphasis added by New York). In addition, New York noted the statement in a December 1999 policy guidance, Intermediaries Program Memorandum Transmittal No. A-99-62, that, in making the Medicare disproportionate share adjustment calculation, "the focus is on the patient's eligibility for Medicaid benefits as determined by the State, not the hospital's 'eligibility' for some form of Medicaid payment." Id., quoting New York Ex. 8, at 2.

New York's reliance on these policy issuances is misplaced (even disregarding the fact that, by their own terms, these issuances are applicable only on a prospective basis). Contrary to what New York argued, these issuances are not inconsistent with the advice in CMS's August 17, 1994 letter to State Medicaid directors. As just discussed, not only are IMDs ineligible to be reimbursed for the cost of inpatient hospital services to patients ages 22 through 64, but such patients are themselves ineligible for Medicaid by virtue of their institutional status. The instruction to "focus . . . on the patient's eligibility" in no way supports New York's position, since the patients here were not Medicaid-eligible. Moreover, the issuances apply specifically to the calculation of Medicare DSH payment adjustments, while the disallowances at issue here involve claims under title XIX of the Act for Medicaid DSH payment adjustments.

New York also relied on the legislative history of DSH amendments in the Balanced Budget Act of 1997, quoting a conference report which describes current law as follows:

The law sets minimum standards by which a hospital may qualify as a disproportionate share (DSH) hospital, and minimum payments to be made to those hospitals. States are generally free to exceed federal minimums in both designation and payments up to certain ceilings.

New York Reply Br. at 4, quoting H.R. Conf. Rep. 105-217 (July 30, 1997) (emphasis added by New York). According to New York, this demonstrates that "Congress has allowed the states great latitude in determining the standards that they use in determining their Medicaid DSH methodology." Id. Any such latitude is irrelevant here, however. As indicated above, section 1923(g)(2)(B)(ii) of the Act specifies two independent criteria based on which a hospital may qualify as a high DSH. There is no indication in the record that OMH determined that any hospital qualified as a high DSH based on any criterion other than its Medicaid utilization rate. Indeed, this is the only criterion to qualify as a high DSH specified in the approved SPA. (Moreover, New York provided no evidence that the OMH hospitals qualified as DSHs eligible for payment adjustments of 100% of uncompensated costs based on any other criterion specified in the approved SPA.) While the Board has recognized that a state's interpretation of its own state plan is entitled to some deference, such deference is appropriate only where the state's interpretation "is reasonable and does not conflict with federal requirements." Virginia Dept. of Medical Assistance Services, DAB No. 1838, at 13-14 (2002), quoting Louisiana Dept. of Health and Hospitals, DAB No. 1542, at 2 (1995). New York's view that the Medicaid utilization rate may be calculated by treating IMD patients ages 22 through 64 as Medicaid-eligible is unreasonable since it is inconsistent with the general IMD exclusion. ⁽¹³⁾

New York did not establish that the claims were not barred by the timely claims provisions, or that a waiver should have been granted.

CMS disallowed $714,013 on the ground that New York did not meet the two-year claiming deadline in section 1132 of the Act, which requires that an expenditure "made" during any calendar quarter be filed within the two-year period beginning on the first day of the immediately following calendar quarter. CMS found that the expenditures were made nearly five years before the claim was filed on September 29, 2000. On appeal, New York argued that the entire $302,400,000 disallowed, including the $714,013, was timely claimed. New York referred to the State Medicaid Manual provision that an expenditure to a public facility is made when it is paid or recorded, whichever is earlier, by any state agency. New York contended that the expenditure in question here "occurred when it was recorded, on September 27, 2000, the date that OMH submitted the claim to the New York State Department of Health . . . ." New York Reply Br. at 14. According to New York, this was the appropriate date to use under the circumstances here, where "the 'expenditure' at issue is not for costs, but an additional reimbursement by the federal government . . . ." Id.

Below, we first provide some background to help the reader understand the context for our discussion of the timely claims provisions as applied to expenditures for Medicaid services provided by public providers and of the exception for an "adjustment to prior year costs." We then explain why we conclude that New York did not establish that its claim was timely or that it qualified as an "adjustment to prior year costs." Finally, we discuss New York's waiver argument and why we reject it.

General background and analysis

As discussed in the legal background section above, the rule for Medicaid services is that the expenditure is considered made when "any State agency made a payment to the service provider." 45 C.F.R. � 95.13(b). Evaluating what this means when the service provider is a public hospital or other facility, especially a state-owned one, is complicated. The public entity that operates the facility will on an ongoing basis cover the costs the facility incurs in providing services (such as employee costs, supplies, and drugs).

Yet, the facility does not have a right to Medicaid reimbursement, nor does the state have a right to submit a claim, until the facility provides a service that qualifies as "medical assistance" under section 1905(a) of the Act and the approved Medicaid state plan. See section 1903(a) of the Act. The underlying costs of providing the services do not qualify as "medical assistance." See Ohio Dept. of Public Welfare, DAB No. 622 (1985). They may, however, be used in setting the Medicaid reimbursement rate for the services, determined under the state plan. See section 1902(a)(13) of the Act.

Originally, many state plans adopted the Medicare concept of reimbursement for "reasonable costs" based on an interim per diem rate, subject to adjustment based on actual costs of the cost reporting period in which the services were provided (often referred to as a "retrospective" reimbursement system). To provide incentives to reduce costs, however, many states moved to "prospective" rate-setting systems (where the rate is based on the historical costs of providing similar services and is not subject to retrospective adjustment), or to a hybrid system where only limited retrospective adjustments may be made. Some of these systems are per diem systems (that pay a set rate for each day of service) and some use another reimbursement unit, such as the "per discharge" diagnosis related-group system developed for Medicare where the amount is based on the patient's diagnosis and other factors. If the public entity operating a facility has already provided funds to the facility to cover the underlying costs of providing the services, it will not make another payment to the facility merely because the facility has provided a Medicaid service, but the facility will report on Medicaid days (or other units of service), so that the public entity can submit a claim to the state Medicaid agency, which can then submit a claim for FFP in the services, at the rate set according to the state plan.

The State Medicaid Manual recognizes the realities of how public facilities are operated and reimbursed by providing that, for public facilities, the expenditure for a particular item of service is considered made when it is "paid or recorded, whichever is earlier, by any State agency." Section 2560.4G.1; see also 45 C.F.R. �95.4 (definition of "Federal financial participation"). In South Carolina State Health and Human Services Finance Commission, DAB No. 943 (1988), aff'd, South Carolina Health & Human Services Finance Comm'n v. Sullivan, No. 3:88-1313-16 (D. S.C. July 13, 1989), aff'd, 915 F.2d 129 (4^th Cir. 1990), the Board explained that it was reasonable to treat "recording" by any state agency as sufficient to trigger the two-year claiming requirement in order "to take care of the situation where a state does not actually pay out any funds to a public provider, but merely makes a bookkeeping entry." At 4. At that point, the state can be charged with notice of a potential claim and should act diligently to submit it to the federal government.

The regulatory provision applicable to expenditures for Medicaid services, 45 C.F.R. � 95.13(b), refers to "a payment to the service provider," which could include a payment at an interim rate. The definition of "adjustment to prior year costs" in section 95.4 is "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." Reading these two sections together, along with the relevant State Medicaid Manual provisions, leads to the following conclusions:

• When any state agency records or pays (whichever is earlier) an amount that includes an amount for a particular item of service provided by a public facility (such as a day of inpatient hospital service provided to a specific patient), that is considered an "expenditure" for that service triggering the two-year claiming period.



• An increase in the amount paid or recorded for that particular item of service is not a new expenditure; if the increase is not claimed within the two-year period from when an amount for that item of service was first paid or recorded, the relevant issue is whether the exception for an adjustment to a prior year cost applies.



• To meet the exception, any adjustment must be an adjustment to the amount paid or recorded under an "interim rate concept."



• The adjustment must be consistent with the state plan reimbursement methodology; otherwise, the rationale underlying the timely claims requirements would be undercut because any state with a retrospective system could make whatever adjustments it wanted at whatever time.

See South Carolina; see, also, New York State Dept. of Social Services, DAB. No. 521 (1984), aff'd, New York v. Sullivan, No. 92 Civ. 2832(LMM), 1993 WL 266616 (S.D.N.Y. Apr. 7, 1993); Tennessee Dept. of Health and Environment, DAB No. 921 (1987); New Jersey Dept. of Human Services, DAB No. 1562 (1996).

Application to New York's claim

Here, the DSH payment adjustments were amounts added to the basic Medicaid per unit rates for inpatient hospital services provided by the psychiatric hospitals operated by OMH. The right to submit a claim for federal funding arose when the hospitals provided Medicaid covered services to eligible individuals. Under the regulations and State Medicaid Manual provisions discussed above, the expenditures for these services were made when they were paid or recorded by "any State agency." OMH is a state agency for this purpose, under the definition at 45 C.F.R. � 95.3. Thus, the relevant date triggering the two-year claiming deadline for each service reimbursable at the adjusted rate is determined by when OMH first made a bookkeeping entry of some sort recording an amount that included an amount for that particular item of service, or made a payment to the hospital for that service, whichever was earlier. ⁽¹⁴⁾

The record as a whole shows that New York's claim related to services provided by the OMH hospitals in the period between April 1, 1994 and March 31, 1995. See, e.g., New York Ex. 2. New York itself claimed the DSH payment adjustments as adjustments to its expenditures made in that period, calculated the DSH payment adjustments using inpatient stays in that period, and has not denied that the DSH allotments were those for the federal fiscal years covered by that period. Moreover, it is likely that New York had previously claimed FFP in some amounts for the services provided by the hospitals in that period. Indeed, New York never asserted that the DSH payment adjustments were the first amounts recorded as reimbursement for the particular items of service that are the basis for the Medicaid claim. Accordingly, the disallowed amounts at issue here are properly treated as retrospective adjustments to the amounts of expenditures previously made and claimed for services provided in the period April 1, 1994 through March 30, 1995, rather than as new expenditures triggering a new two-year period.

Contrary to what New York argued, the date OMH submitted to New York its claim for FFP in the DSH payment adjustments is not the relevant date for determining whether the claim was timely. This date does not necessarily (nor even likely) establish when OMH first recorded an amount for the particular items of service provided by the hospitals in the period April 1, 1994 through March 30, 1995, that constitute the "medical assistance" to which its claim relates. There is nothing in the record that establishes when this recording occurred for purposes of determining if the claim was timely.

We also reject New York's argument that the exception to the two-year claiming deadline for adjustments to prior year costs applied here. According to New York, the claim for DSH amounts was only an estimate because the amount of uncompensated costs on which the hospital-specific limits for the DSH payment adjustments are based (referred to as the "Medicaid DSH deficit") has not been finally determined. Specifically, New York stated that OMH uses its Medicare cost reports to determine the Medicaid DSH deficit, and that the cost report for State fiscal year 1994-95 cost period "remains open for adjustment." New York Br. at 21. New York asserted that if OMH is successful in obtaining additional Medicare reimbursement, "[t]his could result in some change to the DSH deficit for FFYs '93-34, 94-95, and may necessitate an adjustment to these claims . . . ." Id. In support of this assertion, New York submitted an affidavit by the Director of the Bureau of Costing and Rate Setting for OMH. New York Ex. 19.

As New York asserted, its state plan methodology for calculating the DSH distribution amounts expressly provides for a reconciliation process, after initial DSH payment adjustments are made, which could result in additional payments. See New York Ex. 23. However, the reconciliation methodology described in the SPA and the affidavit relates to reconciling the "projected limits" (based on the Medicaid DSH deficit determined using prior years' cost reports) to the hospitals' actual costs and revenues, pursuant to the SPA. Id.; see also New York Ex. 19. The record shows that the DSH amounts claimed here were not made as a result of this reconciliation process. Instead, they resulted from OMH's recalculation of the hospitals' Medicaid utilization rates based on treating IMD patients ages 22 through 64 as Medicaid eligibles. This led to OMH's identifying additional hospitals as DSHs that had not previously been so identified. ⁽¹⁵⁾

The state plan provisions submitted by New York distinguish the determination of whether a hospital qualifies (is eligible) for a DSH payment adjustment from the issue of what the amount of the adjustment will be. New York did not point to, and we could not find, any provision specifically permitting any retrospective determination of DSH eligibility status. ⁽¹⁶⁾ Nor did New York's affidavit specifically refer to using cost report data for the rate period to recalculate the Medicaid utilization rate initially used in determining whether a hospital qualified for DSH payment adjustments. Thus, we conclude that New York has not shown that the claims fall within the limited exception for an adjustment to an interim rate subject to final cost settlement.

New York argued in addition that this case is analogous to Virginia Dept. of Medical Assistance Services, where the Board found that Virginia's claim for enhanced DSH payment adjustments was not untimely. New York's reliance on Virginia is misplaced. In that case, the Board found that, contrary to what CMS argued, Virginia's state plan provided for making the enhanced payments. Moreover, in Virginia it was undisputed that the claims were filed within two years of the actual payments to the hospitals, and the issue presented was whether CMS could properly impute that Virginia had made the payments in earlier years.

New York was not entitled to a good cause waiver

We also reject New York's alternative argument that, in the event that the claim was deemed untimely, New York was entitled to a good cause waiver of the two-year claiming deadline. As noted previously, CMS denied New York's waiver request on February 4, 2002, stating that, contrary to New York's assertion, CMS had never changed its policy that inpatient days attributable to IMD patients ages 22 through 64 could not be counted in calculating the Medicaid utilization rate which determined whether a hospital qualified for 200% transition year DSH payment adjustments. We have already found that, as CMS asserted, there was no such change in policy. Accordingly, we conclude that CMS's denial of the waiver request was not arbitrary, capricious or an abuse of discretion. ⁽¹⁷⁾ (New York also argued in its initial brief that the denial of a waiver was arbitrary and capricious because CMS had paid at least one state for a transition year DSH claim using inpatient days for IMD patients ages 22 through 64 as part of the calculation. However, New York did not pursue this argument after CMS provided documentation to show that CMS had notified the only state involved, Kansas, that this payment was an error. See CMS Response Br., attached Declaration of William Lasowski and letter dated 4/19/02.)

Finally, New York argued that since its State plan amendment (SPA 94-26) providing a methodology for making 200% transition year DSH payment adjustments was approved on June 6, 2001 with an effective date of April 1, 1994, New York was entitled to claim such payments retroactive to this effective date. New York relied on the language in section 1132 of the Act imposing a two-year claiming deadline on a claim for an expenditure "made during any calendar quarter by the State . . . in carrying out a State plan approved under title . . . XIX." New York Br. at 25 (emphasis added by New York). In some circumstances, a delay by CMS in approving a state plan might constitute a circumstance beyond the state's control that would justify a waiver. Here, however, the claim resulted primarily from New York determining that it could treat certain inpatients in the OMH hospitals as Medicaid-eligible whom it had not previously treated as Medicaid-eligible, for purposes of determining the hospitals' Medicaid utilization rates. This determination was not dependent on approval of the SPA, which did not address this matter. New York's position that its late filing of the claim was attributable to the delay in approval of the SPA is also undercut by the fact that New York filed its claim more than eight months before CMS approved the SPA.

New York did not provide any basis for finding that the $301,685,987 should not be disallowed as in excess of New York's allotments for the fiscal years in question.

Section 447.297(d)(2) of 42 C.F.R. requires CMS to disallow FFP claimed for DSH payment adjustments that are in excess of a state's allotment. New York did not dispute that its claim exceeded its DSH allotments for 1994 and 1995 by a total of $301,685,987. New York nevertheless asserted that the claim should not be disallowed on this basis because New York could "make room" for the excess payments under New York's allotment by reclassifying other DSH payment adjustments as regular Medicaid payments. New York Br. at 16-17. As discussed below, however, this argument is purely speculative since New York has not withdrawn any claim for amounts subject to either of the allotments and any claim for reclassified expenditures would likely be untimely.

In New Jersey Dept. of Human Services, DAB No. 1652 (1998), New Jersey argued that DSH payment adjustments in excess of an allotment should be treated as "allowable but not payable" in order to preserve its ability to claim these costs should other claims counted against the allotment later be disallowed on other grounds. The Board rejected that argument, stating that "[d]isallowing expenditures for DSH payments that exceed a state's allotment is a matter of law not discretion, since the Act limits FFP in DSH payments to the allotment amount and the regulations mandate disallowances for excess DSH expenditures." At 6. ⁽¹⁸⁾

Moreover, in New York State Dept. of Health, DAB No. 1827 (2002), where New York took the same action it appears to be proposing here, i.e., withdrawing claims for DSH payment adjustments that exceeded a statutory limit (in that case, the hospital-specific limit) and claiming the same amounts as regular Medicaid costs for individuals who had been reclassified as Medicaid eligibles, the Board found that the Medicaid claims were unallowable on the ground that they were not filed within the two-year claiming deadline. The Board rejected New York's argument that it was merely reclassifying claims for DSH payment adjustments that had already been filed within the two-year period. Instead, the Board found, the regular Medicaid claims were new claims because they "were payments to hospitals for a different type of service" than New York's DSH claims ("Other Care Services" instead of inpatient hospital services), "New York provided no support for its assertion that the regular Medicaid claims and the DSH claims were for the same hospitals, recipients and time periods," and "New York did not even allege that the amount paid to any individual hospital as an 'additional' DSH payment adjustment for a particular recipient served by the hospital corresponded to the payment amount for the 'other care service' provided to that individual which New York included in its regular Medicaid claims." DAB No. 1827, at 2, 8. Accordingly, in the case now before us, it is likely that New York would only incur another disallowance if it were to make room for the excess DSH payment adjustments under its state allotment in the manner it proposes. ^{(19) (20)}

Conclusion

For the reasons stated above, we uphold the disallowances in full.

Cecilia Sparks Ford

Donald F. Garrett

Judith A. Ballard
Presiding Board Member

1. CMS was previously named the Health Care Financing Administration (HCFA). See 66 Fed. Reg. 35,437 (July 5, 2001). We use "CMS" in this decision unless we are quoting documents that refer to HCFA.

2. New York's appeal of CMS's initial disallowance of $301,685,987 was assigned Docket No. A-01-27. New York's appeal of the remaining $714,013 disallowance was assigned Docket No. A-01-115. After these appeals were consolidated, proceedings were stayed pending action by CMS on the deferral of related claims and pending discovery. The stay was extended pending CMS's decision on New York's request for a waiver of the claiming deadline.

3. We quote this provision as it appeared prior to its amendment by Public Law No. 105-33 (Balanced Budget Act of 1997).

4. This provision appears in the current version of the Act after section 1905(a)(27).

5. Other definitions which include the parenthetical exclusion of services "in an institution for mental diseases" are in sections 1905(a)(4)(A) and 1905(a)(15).

6. For ease of reference, we refer to the general IMD exclusion as covering IMD patients ages 22 through 64 even though, in some circumstances, the exclusion also covers individuals between ages 21 and 22.

7. The letter indicates that New York made changes in its original SPA submission as late as March 30, 2001.

8. OMH stated that three hospitals "had no qualifying deficit." New York Ex. 2, OMH memorandum dated 11/6/00, at 1. Thus, these hospitals were not entitled to any DSH payment adjustments even if they qualified as high DSHs.

OMH also found that one hospital (identified as "New York Pl") whose Medicaid utilization rate was not high enough to qualify as a high DSH under section 1923(b)(1)(A) nevertheless qualified as a DSH eligible for a DSH payment adjustment of 100% of uncompensated costs. New York Ex. 2, 11^th page (unnumbered), line 14. It is unclear what the basis for this finding was. New York asserted on appeal that all of the OMH hospitals "meet one of the two tests" in section 1923(b)(1) for qualifying as a DSH. New York Reply Br. at 1, n.1. However, the only supporting documentation with respect to "New York Pl" and the other hospitals involved in this claim relates to the recalculation of the Medicaid utilization rate. New York provided no evidence based on which we could find that any of these hospitals qualified as a DSH under section 1923(b)(1)(B) (on the basis of its low-income utilization rate).

We also note that the record does not show whether New York recalculated the statewide mean Medicaid utilization rate to include inpatient days attributable to patients ages 22 through 64 in OMH hospitals. The mean rate would presumably have increased based on the increases for the OMH hospitals, and some hospitals that previously qualified as DSHs or high DSHs might no longer have qualified. Thus, even if we agreed with New York's legal position, we would not reverse the disallowances unless New York could substantiate its calculations and show that all its state plan requirements were met.

9. Home Relief is New York's state-funded cash public assistance program.

10. CMS's disallowance letters did not identify this as a basis for the disallowance; however, as early as its response to New York's waiver request, CMS took issue with New York's position that it could properly treat inpatient days attributable to patients ages 22 through 64 as inpatient days attributable to Medicaid eligibles in determining the Medicaid utilization rate for purposes of whether the hospitals qualified as DSHs. Moreover, CMS identified this as an independent ground for the disallowance in its response to the appeal. See CMS Br. at 22. The Board has held that the federal agency may raise new grounds for a disallowance after a disallowance letter is issued as long as the appellant is afforded an opportunity to respond. See, e.g., New York State Dept. of Social Services, DAB No. 1666, at 20 (1998). New York had ample opportunity to address the issue and did not request any additional Board proceedings.

11. New York did argue that CMS's August 17, 1994 letter was not binding on it since it was not published in accordance with the Administrative Procedure Act (APA), 5 U.S.C. � 553. The APA requires that when a federal agency adopts, amends or repeals a rule, the agency must publish notice of the proposed change in the Federal Register and give interested persons an opportunity to comment. Courts have consistently held that agency rules are invalid if an agency fails to comply with the APA's notice and comment rulemaking requirement. See New York State Dept. of Social Services, DAB No. 1701, at 22 (1999), and court decisions cited therein. Section 553(b) provides an exception to the notice and comment rulemaking requirement for "interpretative rules, general statements of policy, and rules of agency organization, procedure, or practice," however. Since CMS's August 17, 1994 letter interprets or clarifies the meaning of a statute, it is an interpretative rule which is exempt from notice and comment rulemaking. New York asserted that CMS changed its interpretation as a result of OBRA of 1993, apparently alluding to some caselaw holding that notice and comment rulemaking is required where an agency changes its interpretation. (See court case cited in Maryland Dept. of Human Resources, DAB No. 1667, at 20 (1998).) New York did not point to any prior issuance interpreting "Medicaid utilization rate," however.

12. There is no question that these regulations were promulgated in accordance with the APA.

13. The remainder of New York's arguments address what it characterized as CMS's new argument ("raised for the very first time in . . . Respondent's Brief, pps. 16-17") that the costs of providing services to IMD patients ages 22 through 64 may not be "included in a DSH claim," i.e., that IMDs may not receive DSH payment adjustments for the cost of providing services to such patients. New York Reply Br. at 1. As New York recognized, this differs from the argument that inpatient days attributable to such patients may not be included in the calculation of the Medicaid utilization rate for DSH purposes. However, we see nothing in CMS's brief to substantiate New York's belief that CMS was making the former argument. Accordingly, we do not consider New York's arguments relating to that purported argument.

14. The CMS statement (at CMS Br. at 22, n.6.) that "the Medicaid expenditure occurs when the State records making a payment to OMH" is not consistent with the regulatory definition of state agency, nor does it recognize that what is recorded does not necessarily have to be a "payment."

15. While New York described its claim as though it related only to high DSH eligibility, the record indicates otherwise. The detailed chart in New York Exhibit 2 shows the OMH DSH claim as including 200% of the maximum DSH deficit for OMH hospitals that had a deficit, except for one hospital, for which the amount was only 100% of its maximum DSH deficit. (The recalculated Medicaid utilization rate for that hospital was less than the threshold Medicaid utilization rate used to determine eligibility for the 200%.) If these hospitals had previously been identified as DSHs, the amount of the claim would have been less than 200% to account for the amount of DSH payment adjustments previously made.

16. For general hospitals, SPA 94-26 specifically links eligibility to prior period data. New York Ex. 23, at section 86-1.87(a). The SPA 94-26 provisions for qualifying OMH hospitals are less clear, but earlier provisions on calculating utilization rates for OMH hospitals refer to prior period data for at least parts of the DSH eligibility determination. Id.

17. The Board has stated that, in reviewing disallowances, it will apply this standard to waiver or prior approval decisions that are committed to the agency's discretion. See, e.g., Wisconsin Dept. of Administration, DAB No. 1766 (2001).

18. The Board also stated that "treating New Jersey's claims as 'allowable but not payable' would suggest an affirmative determination that all federal requirements were met," when CMS had made no determination about whether certain payments met all federal requirements. DAB No. 1652, at 7. Similarly, CMS made no determination about whether the payments claimed by New York here met all federal requirements.

19. The reclassification of Home Relief recipients as Medicaid-eligible, even if permissible, could result in lowering the amount of DSH payment adjustments to which the hospitals were entitled. This is so because, if the cost of services to these individuals were reimbursed by Medicaid, this would increase Medicaid revenues and reduce the hospitals' uncompensated costs, which were the basis for the DSH payment adjustments.

20. Since we sustain the disallowance of $714,013 that was within New York's DSH allotments, there may now be room under the allotments. Thus, if its state plan permits, New York may make and claim additional, otherwise allowable DSH payment adjustments to the extent that there is room under its allotment for either fiscal year.