GAB Decision 218
September 30, 1981 Colorado Department of Social Services; Docket No.
79-18-CO-HC Garrett, Donald; Settle, Norval Ford, Cecilia
The Colorado Department of Social Services (State) appealed from a
penalty disallowance in the amount of $10,909,718 made by the Health
Care Financing Administration (Agency). The Agency determined that the
State had violated the utilization control requirements of Section
1903(g) of the Social Security Act (the Act) during the period January
1, 1977 through June 30, 1978 (six quarters), and that the State did not
meet the conditions for a waiver under Section 1903(g)(3)(B) of the Act.
After the waiver provision was amended, the Agency determined that the
State met the amended conditions for the quarters in 1977, and reduced
the disallowance (Agency Memorandum, March 2, 1981). Thus, this appeal
currently concerns a disallowance of $2,881,309 for the period January
1, 1978 through June 30, 1978 (two quarters). The issues center on the
annual review requirement of Section 1903(g)(1)(D) and the effect of the
waiver provision in Section 1903(g)(3)(B) on that requirement. We
conclude, on the basis of the analysis set forth below, that the
modified disallowance should be upheld.
This decision is based on the State's application for review, the
Agency's response, two supplemental memoranda filed by the Agency, the
State's amendment to its appeal, the Board's Order to Show Cause, and
the parties' responses to the Order. We have determined that there are
no material facts in dispute, and that a conference or hearing would not
assist the development of the issues.
Background
Section 1903(g) of the Act requires that the State agency responsible
for the administration of the State's Medicaid plan under Title XIX of
the Act show to the satisfaction of the Secretary that the State has an
"effective program of control over utilization of" long-term inpatient
services in certain facilities, for each quarter that federal medical
assistance is requested for such services, or the Federal medical
assistance percentage (FMAP) must be decreased by an amount determined
pursuant to the formula set out in Section 1903(g)( 5). The State
"must" show that it has "an effective program of medical review
of the
care of patients in... (such) facilities pursuant to section 1902(a)(26)
and (31) whereby the professional management of each case is reviewed
and evaluated at least annually by independent professional review
teams" (Section 1903(g)(1)(D)).
(2) Sections 1902(a)(26) and (31) require that the State plan provide
for a regular program of medical review (MR) in skilled nursing
facilities (SNFs) and mental hospitals (MHs), and a regular program of
independent professional review (IPR) in intermediate care facilities
(ICFs); periodic inspections in all such facilities; and reports
containing the findings and recommendations resulting from such
inspections.
The applicable regulation, 42 CFR 450.23 /1,/, provided in some
detail what a medical review should include: personal contact with and
observation of each SNF patient and review of patient records, and a
full report covering observations, conclusions, and recommendations of
the review team, including specific findings about individual patients.
These reports are to be followed by "appropriate action" on the part
of
the State. Furthermore, the reviews must be made "not less often than
annually."
P.L. 95-59, enacted June 28, 1977, postponed any reductions required
by Section 1903(g) for unsatisfactory showings prior to October 1, 1977.
P.L. 95-142, enacted October 25, 1977, amended Section 1903(g) in
several ways, including the addition of the waiver provision of Section
1903(g)(3)(B). P.L. 96-499, the Omnibus Reconciliation Act of 1980,
December 5, 1980, amended Section 1903(g)(3)(B).
Section 1903(g)(3)(B), as enacted by P.L. 95-142, provided that the
Secretary "shall" waive any reduction in FMAP otherwise required because
of an unsatisfactory or invalid showing for the first three calendar
quarters of 1977, if the Secretary determined that the State's showing
with respect to the quarter ending December 31, 1977, was satisfactory
and valid. Section 964 of P.L. 96-499 amended Section 1903(g)(3)(B) so
that a State qualifies for a waiver of reductions for violations in any
of the four quarters of 1977 if the State made a satisfactory and valid
showing for any calendar quarter ending "on or before December 31,
1978."
The record shows that the Agency notified the State, by mailgram
dated October 18, 1977, and Action Transmittal HCFA-AT-77-106, dated
November 11, 1977, of the enactment of P.L. 95-142, which required
certain changes in the Agency's policies and provided the authority for
certain express waivers of the penalty.
The Agency had developed specific procedures for the States to follow
when making their quarterly showings. These procedures became effective
April 1, 1976. The States were notified of the procedures and
subsequent modifications of the procedures by means of Action (3)
Transmittals (SRS-AT-76-88, June 3, 1976; SRS-AT-76-155, October 1,
1976; HCFA-AT-77-91, September 29, 1977; HCFA-AT-77-106, November 11,
1977).
Each quarter a State must submit certifications signed by the
director of the State Medicaid Agency, stipulating that for each level
of care there were methods and procedures in effect to assure that
utilization control requirements were met. In addition to such
certifications, lists are to be submitted of all MHs, SNFs, and ICFs
participating in Medicaid for that quarter; these lists indicate for
each facility the dates that required reviews were performed. If these
certifications and lists show no violations on their face, then the
Agency considers that a State has made a "facially-satisfactory"
showing. These showings, however, merely state that reviews were
performed on a certain date and that a physician headed each MR team.
Thus, the Agency can determine from the quarterly showings whether a
review was omitted or untimely, and whether a physician was on each MR
team, but not whether other requirements for annual reviews were met.
Action Transmittal SRS-AT-76-88, June 3, 1976, also notified the
States of the approach the Agency would use in evaluating the
information submitted in the quarterly showings. The Action Transmittal
explained, at page 3:
In determining whether State showings with respect to the MR and IPR
requirements are satisfactory, SRS will wait until the attached
quarterly showing format has been in effect for four quarters. At the
end of that period, SRS will evaluate each State's showings for these
four quarters to determine whether each SNF, MH, and ICF which was a
certified provider for the entire four quarters received the required
inspection.
The Action Transmittal also specifically explained how often the
"annual" reviews must be performed.
The Secretary is required to conduct "timely sample onsite surveys"
as part of his validation procedures (Section 1903(g)(2)). The Agency
has implemented this requirement by periodically conducting surveys to
validate the quarterly showings, i.e., to determine whether the reviews
met the Agency's requirements. The onsite surveys involve inspection of
the records kept at the facilities, and generally are only performed at
a selected number of the facilities, rather than all of them. The
Agency alternates onsite surveys with other surveys conducted at the
State agency, where the federal reviewers examine the reports filed by
the MR and IPR teams. If a State cannot provide acceptable evidence of
actual adequate performance of the reviews, the Agency will find the
showing unsatisfactory and invalid.
(4) The Agency found twenty States, including the State of Colorado,
in violation of the annual review requirement, when the Agency reviewed
the quarterly showings for the period ending March 31, 1977. P.L.
95-59, referred to above, postponed any penalties required to be taken
for these violations in quarters prior to October 1, 1977. The Agency
sent a letter to State Agency directors on June 24, 1977 (Exhibit 4,
Agency Response to Order to Show Cause). That letter informed the
States of the postponement but warned the States that they were still
responsible for meeting the annual review requirements. That letter
stated, at page 2:
I would like to reiterate that all facilities whose annual review
falls due during the quarter ending June 30, 1977, must be reviewed by
the close of that quarter. Otherwise your State will be out of
adherence with section 1903(g). Facilities which were to be reviewed by
the quarter ending March 31, 1977, and which were not reviewed, must be
reviewed by the quarter ending March 31, 1978, otherwise your State will
be out of adherence with section 1903(g).
These instructions referred only to late or omitted reviews which had
been identified in quarterly showings because the Agency had not yet
conducted a validation survey (Agency Response to Order to Show Cause,
page 16). The instructions were later revoked by the Agency in its
Action Transmittal explaining the effect of P.L. 95-142. HCFA-AT-77-106
informed the States that, although they had previously been told that
they would not be subject to a reduction until March 31, 1978 for
failure to review those facilities not reviewed during the quarter
ending March 31, 1977, Section 1903(g) as amended produced a change in
that policy (page 3). In order to make a satisfactory showing for the
quarter ending December 31, 1977, "the State must 'make up' each review
omitted in prior quarters of calendar year 1977 AND must complete each
review due in the current quarter...." These instructions referred only
to the reviews cited in the earlier notices of disallowance and the
instructions sent out in the June 24, 1977 letter.
During the calendar year 1977 the State received three separate
notices of disallowance, each regarding a quarter of 1977. Each notice
based the disallowance only on the quarterly showing submitted by the
State. As a consequence, these notices referred only to the types of
errors detectable on quarterly showings, that is, those reviews which
had not been performed or had been performed in an untimely manner. The
Agency informed the State, in a letter dated December 6, 1977, that
because P.L. 95-142 postponed reductions for 1977 until after December
31, 1977, the Agency was withdrawing the previous notifications of
reductions for the first three quarters of (5) 1977. The Agency
informed the State in that letter, however, that it could still be
subject to a disallowance based on the showings for those quarters if
the State did not make a satisfactory and valid showing for the fourth
quarter of 1977.
The notice of disallowance appealed here, dated January 22, 1979,
stated that the State's showing for the quarter ending December 31,
1977, was facially-satisfactory because it listed a 1977 review date for
every facility required to be reviewed. The notice stated, however,
that the Agency was unable to validate the showing with regard to
reviews performed prior to October 1, 1977 (see n. 7). The notice
stated that, as a result, the State's showings were invalid for each
calendar 1977 and 1978 quarter with regard to any facility in which the
last review was conducted prior to October 1, 1977.
The figures provided by the Agency in its notice of disallowance
show, for each level of care, the number of facilities for which the
annual review requirements were not fully met and the total number of
facilities to which the requirements were applicable.
Qtr ending Dec. 31, 1977Qtr ending March 31, 1978Qtr ending June 30,
(MH) 1 of 2 1 of 2 1 of 2
(SNF) 119 of 140 64 of 143 28 of 139
(ICF) 108 of 129 62 of 129 31 of 129
Summary of the Issues
The primary bases on which the State challenged the original
disallowance were the Agency's interpretation of the statutory waiver
provision, Section 1903(g)(3)(B), and the State's assertion that the
Agency gave the State inadequate notice concerning what the State must
do in the fourth quarter of 1977 to qualify for the waiver.
The State alleged that all it had to do in the fourth quarter of 1977
was show that a review was performed in that quarter for each facility
whose review was due that quarter, and that a review was performed for
those facilities which had not been reviewed in the earlier quarters of
1977. The State alleged that the waiver did not require that all of
those reviews performed in 1977 which did not meet the Agency's
requirements be reperformed in the fourth quarter, and that the Agency
misled the State about what it was required to do in the fourth quarter.
Thus, the State appeared to allege that if the reviews actually
performed in the fourth quarter of 1977 under the above premise met the
Agency's requirements, it did not matter whether other reviews performed
in 1977 did, so long as some kind of review had been performed. This
allegation, taken to its logical conclusion, implies that the result of
meeting the waiver provision, as it was interpreted by the State, was
not merely to waive the penalty otherwise required (6) to be taken for
the quarters of 1977, but also to transform the inadequate reviews
performed in 1977 into adequate ones. In other words, reviews performed
in the first three quarters of 1977 which did not meet the Federal
requirements for adequate reviews, should be considered as having
satisfied the requirements, and, thus the State should be relieved of
responsibility for reperforming those reviews in a satisfactory manner
until the next anniversary for the reviews of those facilities. The
State alleged that the States should be allowed to "start anew"
(Response to Order to Show Cause, page 4).
The Agency's supplemental memorandum of March 2, 1981 informed the
Board of the Agency's interpretation of the waiver provision as amended
by P.L. 96-499, and stated that because the State made satisfactory and
valid showings with respect to the quarters ending September 30 and
December 31, 1978, the State qualified for a waiver of the reductions
for all 1977 quarters (page 5). The Agency stated that reductions for
the quarters ending March 31 and June 30, 1978 are still required,
because the State failed to make satisfactory and valid showings for
those two quarters and the waiver provision does not apply to those two
quarters. The State, in its Amendment of Appeal (April 6, 1981, page
4), alleged that by amending Section 1903(g)(3)(B) in December 1980,
Congress intended to remove total liability from the State and that no
reductions should be taken for the quarters ending March 31 and June 30,
1978. Although the disallowance for the four quarters of 1977 is no
longer at issue, the State has retained all of its arguments and
allegations relating to the quarter ending December 31, 1977,
particularly the issue of whether the State must have shown in that
quarter that every review performed in 1977 met the Agency's
requirements. The Agency's response to the Board's Order to Show Cause,
however, outlined more fully the basis for the Agency's disallowance in
the first two quarters of 1978. The Agency stated that the waiver did
not affect the 1978 quarters and that the basis for the disallowance
taken for the 1978 quarters was independent of the December 1977
disallowance. We believe that the issues should be stated in the
following manner. /2:/:
A. The extent of the waiver for reductions, as provided in Section
1903(g)(3)(B), as amended in 1980, and the effect of the waiver on the
annual review requirement.
(7) B. Whether the State's showings for the first two quarters of 1978
were unsatisfactory and invalid.
(1) The basis of the Agency's finding that the showings were
unsatisfactory and invalid.
(a) The meaning of satisfactory and valid under the statute.
(b) Whether a validation survey is a condition precedent to a
disallowance.
(c) The meaning of the annual review requirement.
(2) Applicability of the waiver provision in Section 1903(g)(4)(B).
C. Adequacy of the Agency notice to the State about how the annual
review requirement is met and how a satisfactory and valid showing is
made.
D. Adequacy of Agency notice of the disallowances for the first two
quarters of 1978.
E. Calculation of the penalty.
F. Other issues raised by the State.
Discussion
A. The extent of the waiver under Section 1903(g)(3)(B), as amended
in 1980, and the effect of the waiver on the annual review requirement.
Section 1903(g)(3)(B), as amended by P.L. 96-499, states:
The Secretary shall waive application of any reduction in the Federal
medical assistance percentage of a State otherwise required to be
imposed under paragraph (1) because a showing by the State, made under
such paragraph with respect to a calendar quarter after January 1, 1977,
and before January 1, 1978, is determined to be either unsatisfactory
under such paragraph or invalid under paragraph (2), if the Secretary
determines that the State's showing made under paragraph (1) with
respect to any calendar quarter ending on or before December 31, 1978,
is satisfactory under such paragraph and is valid under paragraph (2).
The plain language of this provision indicates that it does not apply
to reductions for quarters after January 1, 1978; /3/ nonetheless, the
State argued that the legislative history indicates that Congress gave
(8) the Agency discretion to waive the penalty for the 1978 quarters as
well. As support for this allegation, the State cited several portions
of the legislative history; one paragraph the State quoted spoke of the
Secretary's discretion regarding the amount of the penalty to be waived.
However, reading the statement in context, /4/ it seems to refer to
whether the Secretary may waive less than the full reduction. It
certainly makes no reference to a discretion to waive penalties for
quarters other than those specifically referred to in the statutory
provision.
The State also quoted the language, "a standard of reasonableness,"
from a paragraph discussing Section 1903(g)(4)(B) /5/ (H. Rep. No.
95-393, Part II, 1977, page 85), arguing that it was an indication of a
general standard of discretion available to the Secretary. That
paragraph, however, says that the "standard of reasonableness" is
the
standard provided in Section 1903(g)(4)(B) and that it is provided by
Congress for instances where a State failed to review two or three homes
out of hundreds. The paragraph does not refer to a general discretion
on the part of the Secretary to waive penalties.
This Board has previously held that Section 1903(g) does not provide
the Secretary with the discretion to waive penalties, with the exception
of the two specific provisions, Sections 1903(g)(3)(B) and (4)(B).
(Tennessee Department of Social Services and Colorado Department of
Social Services, Decisions No. 167 and 169, April 30, 1981.)
Furthermore, the Comptroller General has previously reached the same
conclusion (Comptroller General's Opinion, #B-164031(3).154, March 4,
1980). The legislative history supports this conclusion. The history
tells us that the Agency had not been enforcing Section 1903(g) to
Congress' satisfaction. At Congress' urging, the Agency (9) began to
enforce the statute strictly, with the result that twenty States
received notices of large disallowances. Congress postponed these while
it considered further legislation; it was concerned about penalizing
the States without allowing them additional time to bring their
procedures into compliance. Thus, Congress enacted P.L. 95-142, which
sought to modify the immediate harsh effects of the Congressional
mandate for enforcement of the utilization control requirements. The
amendments set guidelines for the period in which the Agency must notify
the States of disallowances, provided for an unconditional waiver of
earlier penalties and a conditional waiver designed to provide the
States with additional time to comply (Section 1903(g)(3)( B)), set a
specific standard of tolerance for the annual review requirement, and
modified the penalty to more accurately reflect the number of
violations. Thus, we conclude that the statute does not authorize the
Secretary to waive penalties except under the specific conditions set
forth in the statute.
As discussed above, the State's allegations imply that the result of
the waiver provision was not only to waive the 1977 reductions, but also
to transform reviews conducted by the State prior to October 1, 1977
into adequate and timely annual reviews for purposes of meeting the
annual review requirements in 1978. We refer again to the plain
language of Section 1903(g)(3)(B). It specifically applies to waiver of
"reductions." It does not refer to any other consequences, and the
legislative history refers to the State's full compliance after December
1977.
The 1980 amendment of Section 1903(g)(3)(B) allowed the States until
the end of 1978 to comply with the Section's requirements in order to
qualify for waiver of the 1977 penalties; however, this created the
possibility that there would be 1978 quarters during which the States
might not have yet effected compliance and for which they would be
subject to penalties. We recognize that a conclusion that the waiver
provision does not apply to such 1978 quarters may seem inconsistent
with affording the States until the end of 1978 to qualify for the
waiver. The original waiver provision could not have produced this
result because it required the States to fully comply immediately after
the quarters to which the waiver would apply. The legislative history
of the 1980 amendment did not address these problems. Instead, it
contains the identical language used in the legislative history for the
enactment of the original waiver provision, and, in addition, contains
language which clearly refers only to the waiver of reductions in 1977.
/6/ In view of the plain language in the 1980 amendment, (10) and the
legislative history of the waiver and amendment, we have no option but
to conclude that Section 1903(g)(3)(B) refers only to a waiver of the
reductions for the four quarters of 1977. We reiterate our previous
conclusion that the Secretary does not have the discretion to generally
waive penalties under the statute. Furthermore, we conclude that the
waiver of the reductions does not affect the validity of the reviews
conducted prior to October 1, 1977, and therefore, does not affect the
State's showings in the 1978 quarters.
B. Whether the State's showings for the first two quarters of 1978 were
unsatisfactory and invalid.
(1) The basis of the Agency's finding that the showings were
unsatisfactory and invalid.
(a) The meaning of satisfactory and valid under the statute.
The Agency, in the validation survey conducted for the quarter ending
December 31, 1977, learned that the reviews conducted by the State prior
to October 1, 1977 did not meet Federal requirements for annual reviews.
Consequently, the Agency considered any reviews listed in the State's
showings for 1978 quarters which had been performed prior to October 1,
1977 as violations of Section 1903(g)(1)(D) because the showings
indicated that the State had not conducted a review meeting Federal
requirements in the previous four quarters ending on the last day of the
quarter for which the showing was made (Agency Response to Order to Show
Cause, pages 3 and 4). In the Background, we discussed the fact that
the quarterly showings submitted by States do not provide any indication
that the annual review requirements, other than the ones referring to
timeliness and composition of the MR team, were met. The purpose of the
Secretary's validation is to "assure actual -- rather than paper
--compliance with the... statutory requirements." (S. Rep. No. 92-1230,
September 26, 1972, page 45). Therefore, a showing indicating that
timely reviews were performed in all facilities may later be found
unsatisfactory and invalid because a validation survey showed that other
annual review requirements were not met. The standards for annual
reviews (as set forth at 42 CFR 450.23 and in Action Transmittals) are
the same for "satisfactory" and "valid" showings; practically
speaking,
however, the Agency cannot verify whether certain standards are met on
the basis of the quarterly showings alone. A State must meet the
requirements; if it does not, the State must bear the consequences if
the Agency undertakes a validation survey which discloses any violation.
(b) Whether a validation survey is a condition precedent to a
disallowance.
The State asserted that "sample onsite surveys" (the language used
in
Section 1903(g)(2)) are a condition precedent to imposition of a
reduction, and further, that such surveys were not performed in the
State prior to taking the disallowance.
(11) Section 1903(g)(1) states, in part, that the FMAP "shall be
decreased... unless the State... makes a showing satisfactory to the
Secretary...." Section 1903(g)(2) provides that the Secretary "shall,
as
part of his validation procedures under this subsection, conduct timely
sample onsite surveys of private and public institutions...." There is
nothing in the statute that requires the Secretary to validate every
showing, nor does the statute specify what procedures the Secretary
should use for validation other than the "sample onsite surveys."
Section 1903(g)(2) does not require that such surveys be conducted every
quarter. Therefore, we conclude that the validation procedures, whether
sample onsite surveys or any other method, are not a condition precedent
to imposition of a penalty, and that the Secretary has considerable
discretion with regard to how and whether to perform a validation.
The State's allegations imply that when checking the State's
compliance with Federal requirements during 1978 quarters, the Agency
should have ignored the fact that reviews conducted prior to October 1,
1977 were faulty. Furthermore, the State alleged that the Agency could
not base disallowances on problems existing prior to October, 1977
because Congressional intent "was to allow the states to start anew and
to be evaluated on a current basis" (State's Response to Order to Show
Cause, page 4). The Agency varies the type of validation surveys it
performs (see Background). If a State makes a quarterly showing that is
satisfactory on its face and either a validation survey does not
disclose violations or a validation survey is not performed, then the
State will not be subject to a penalty. This does not excuse the State,
however, from responsibly meeting the utilization control requirements
in the quarters not affected by the waiver provision. This Board has
previously held that where the Agency finds violations (whether it
discovers them on the basis of the quarterly showing or a validation
survey), it has no discretion to waive the consequent penalty (supra).
Here the Agency conducted a validation survey for the quarter ending
December 31, 1977 and a validation survey for the quarter ending June
30, 1978. These surveys disclosed that reviews performed by the State
prior to October 1, 1977 did not meet Federal standards. The State's
quarterly showings for 1978 showed that, for many facilities, no reviews
had been performed after October 1, 1977. Therefore, the Agency could
appropriately apply the knowledge about the inadequacy of the
pre-October 1, 1977 reviews in evaluating the quarterly showings
submitted for the quarters ending March 31, and June 30, 1978.
(c) The meaning of the annual review requirement.
The key question is whether the State met the requirements of Section
1903(g)(1)(D), 42 CFR 450.23, and applicable Action Transmittals during
the quarters ending March 31, and June 30, 1978. There are two aspects
to the annual review requirements: the adequacy of the reviews, (12) as
described by 42 CFR 450.23 and the Action Transmittals, and timeliness.
The record shows that the Agency had previously determined that the
State's reporting procedures for annual reviews did not provide
information about individual patients and that the Federal reviewers had
learned that inspection of patients' records was done on a sample basis
only. The State agreed with these findings. /7/ The validation survey
performed by the Agency for the fourth quarter of 1977 showed that the
State had not changed its methods prior to October 1, 1977. The State
has not denied that reviews performed prior to October 1, 1977 did not
meet all of the requirements set out at 42 CFR 450.23.
In addition to meeting the substantive requirements of Section
450.23, annual reviews must be timely (see South Carolina Department of
Social Services, Decision No. 177, May 27, 1981). The statutory and
regulatory provisions require that these reviews be made "annually."
The
Agency first set out its interpretation of "annual" in Action
Transmittal SRS-AT-76-79, May 14, 1976. This indicated that a review
must be performed every 12 months. Action Transmittal SRS-AT-76-88,
June 3, 1976 confirmed and clarified this policy; Action Transmittal
SRS-AT-76-176, December 8, 1976, indicated that the actual due date for
a review would be the last day of the anniversary month, rather than 12
months to the exact date of the last review. Finally, Action
Transmittal HCFA-AT-77-106, November 11, 1977, announced that the 1977
amendments to Section 1903(g) required a change in the definition of
"annual." The standard was relaxed so that "effective with quarters
(13)
beginning on or after January 1, 1977, a MR or IPR will be timely if it
is conducted by the end of the anniversary quarter of the facility's
entry into the program or of the last prior review" (pages 3-4). /8/
When the Agency performed the validation survey for the quarter
ending December 31, 1977, it determined that it could not accept the
reviews performed by the State prior to October 1, 1977 because thr
reviews did not meet the Agency's requirements. If the State's showings
for the first two quarters of 1978 indicated that the last review made
for a facility was prior to October 1, 1977, the Agency found that the
State had not met the timeliness requirement because no review meeting
Federal standards had been performed within the last four quarters.
The Agency's basis for its 1978 findings is that, in each of the two
quarters, the Agency could not find that the State had performed
adequate reviews for certain facilities within the previous four
quarters, and, therefore, the Agency determined that the annual review
requirements were not met (Response to Order to Show Cause, pages 21,
23). We find this analysis consistent with Agency regulations and
interpretations and conclude that the State did not meet the
requirements for an annual review in certain of its facilities during
the first two quarters of 1978 and, therefore, its showings for those
quarters were unsatisfactory and invalid.
(2) Applicability of the waiver provision in Section 1903(g)(4)(B).
The State alleged (Response to Order to Show Cause, page 2) that the
statute "requires only an effective program of review; it does not
mandate a perfect program of medical review." We agree that the statute
does not require a perfect program because the 1977 amendments added
Section 1903(g)(4)(B), which sets a "standard of reasonableness" (see
previous discussion). To make a showing of an effective program,
however, a State must be able to meet at least the standard set forth in
that provision.
Section 1903(g)(4)(B) provides:
The Secretary shall find a showing of a State... to be
satisfactory... with respect to the requirement (14) that the State
conduct annual onsite inspections in mental hospitals, skilled nursing
facilities, and intermediate care facilities under paragraph (26) and
(31) of section 1902(a), if the showing demonstrates that the State has
conducted such an onsite inspection during the 12-month period ending on
the last date of the calendar quarter --
(i) in each of not less than 98 per centum of the number of such
hospitals and facilities requiring such inspection, and
(ii) in every such hospital or facility which has 200 or more beds,
and that, with respect to such hospitals and facilities not inspected
within such period, the State has exercised good faith and due diligence
in attempting to conduct such inspection, or if the State demonstrates
to the satisfaction of the Secretary that it would have made such a
showing but for failings of a technical nature only.
In order to qualify for the waiver on the basis of good faith, the
State must have met the review requirements in 98 percent of the
facilities in the State, including all facilities containing 2 or more
Medicaid beds. The record shows (Notice of Disallowance) that, for each
of the two quarters in 1978 involved in this disallowance: 50% of the
MHs were not reviewed; 44% and 20% respectively of the SNFs were not
reviewed; and, 48% and 25% respectively of the ICFs were not reviewed.
Previous decisions of this Board have interpreted Section 1903(g)(
4)(B) so that a State need not meet the 98%, 200-bed requirement in
order to be excused for a technical failing (Ohio Department of Public
Welfare, Decision No. 66, October 10, 1979; Utah Department of Health,
Decision No. 168, April 30, 1981; South Carolina Department of Social
Service, Decision No. 177, May 17, 1981).
The statute does not provide a precise definition of technical
failings, but the legislative history stated that technical
noncompliance would include instances where a State reviewed patients in
most facilities on time with the remaining facilities reviewed "several
weeks after the deadline for completion of all reviews." (S. Rep.
95-453, September 26, 1977, page 41). We do not find the State's
actions with regard to the annual reviews within the description of
technical failings provided by that report or technical in any sense
that the word might ordinarily be used. Therefore, we conclude that
neither the good faith nor technical failings exception of Section (15)
1903(g)(4)(B) applies to the circumstances of this appeal, and that the
State did not make an "effective" showing.
C. Adequacy of the Agency notice to the State about how the annual
review requirement is met and how a satisfactory and valid showing is
made.
As noted above, the notice issue originally turned on whether the
State received adequate notice from the Agency about what the State must
do to qualify for the waiver provided in Section 1903(g)(3)(B). This is
no longer the issue since the State qualified for the waiver under the
provision as amended. The State, in its Response to the Order to Show
Cause (page 4), argued that Congress had concluded that the Agency's
notice to the State about its review system was inadequate and "that HEW
should be estopped from imposing further penalties if the states showed
that they were making progress in correcting alleged deficiencies."
There is nothing in the legislative history which can be construed as
a belief on Congress' part that the States had received inadequate
notice about whether their annual review systems complied with
requirements. Congress was concerned about the adequacy of notice to
the States that there would be stricter enforcement of the utilization
control requirements, including that of annual reviews, and wanted to
ensure that the States would understand that they could no longer retain
systems which violated Section 1903(g). There seems to be little doubt
that the State had adequate notice of and, in fact, understood what it
must do to comply with Federal requirements for annual reviews (see n. 7
and discussion in Section A regarding the interpretation of "annual").
Furthermore, the legislative history does not indicate that the States
should not be penalized "if they were making progress." The legislative
history does say, "Section 20 provides an additional 6-month period to
States to meet the requirements" and "(the) committee has approved
an
amendment which would give States an additional 6 months to demonstrate
full compliance with the law." (H. Rep. No. 95-393, Part II, July 12,
1977, pages 83 and 85). The history of the waiver provision's most
recent amendment includes the statement, "(the committee) fully expects
and intends that Colorado and all other States participating in medicaid
will take the necessary steps to remain in full compliance." (H. Rep.
No. 96-589. Part II, April 23, 1980, page 85.)
The State had clear notice of what was expected for compliance with
the annual review requirements. A review must be conducted within four
quarters after the quarter in which the last prior review was conducted,
and the reviews must meet Federal requirements. Whether the Agency
elected to try to validate the State's performance is irrelevant to
whether the State was required to meet the standards each quarter. The
State has not pointed to any language in the (16) statute, regulations,
or any other communication from the Agency, which might have indicated
that the State was relieved by the waiver from meeting the annual review
requirements in those quarters. Furthermore, HCFA-AT-77-106 stated, at
page 8:
In order to enable the Department to judge the satisfactoriness of
States' showings under the statute as amended, the requirements for
quarterly showing submissions are hereby modified.... Effective with the
showing ending December 31, 1977, States are to include... a list of all
facilities... which did not receive an appropriate review during the
12-month period ending on the last date of the showing quarter... and
should state the reasons, if any, why the facility did not receive a
timely and/or appropriate review.
We conclude that the State received adequate notice of what it must
do in the 1978 quarters to meet the annual review requirements.
Therefore, there is no need to consider whether the Agency was estopped
from imposing the disallowance. Even if we were to consider the
question, the State has not pointed to any statements which could
reasonably have misled the State with regard to 1978 quarters nor has
the State offered any proof that the Stated relied on such statements to
its detriment. Hampton v. Paramount Pictures Corp., 279 F.2d 100, 104
(9th Cir. 1960); U.S. v. Georgia Pacific Co., 421 F.2d 92, 96 (9th Cir.
1970); Choat v. Rome Industries, Inc., 462 F. Supp. 728,730 (N.D. Ga.
1978).
D. Adequacy of Agency notice of disallowance for the first two quarters
of 1978.
Section 1903(g)(3)(A)(iv) provides that notice of a reduction must be
"provided to the State no later than the first day of the fourth
calendar quarter following the calendar quarter with respect to which
such showing was made." The Agency provided the State with a brief
notice of the disallowance on December 29, 1978, which was timely under
the above provision. That notice informed the State that it would
receive a more detailed official notice later.
The State received a second notice, dated January 22, 1979, which set
forth the reasons for the disallowance in great detail. The State, in
its Application for Review, asserted that neither notice met both the
requirements of Section 1903(g) and 45 CFR 16.91.
There is no requirement that one document meet the purposes and
requirements of both provisions. The purpose of the statutory
provision, which is to ensure that the State not be subjected to
uncertainty as to whether a reduction will be imposed (H. Rep. No.
95-393, Part II, (17) July 12, 1977, page 85, and S. Rep. No. 05-453,
September 26, 1977, page 41), was met by the first notice. The second
notice was the one which triggered the running of the time period for
appeal to the Board. The purpose of 45 CFR 16.91, which is to enable
the grantee to respond to a disallowance, was met by the second notice,
which was very complete. No interests of the State have been
prejudiced. We therefore conclude that the State received adequate
notice of the disallowance.
E. Computation of the Penalty
The State raised two issues with regard to the computation of the
penalty. (1) The Agency improperly used facilities rather than the
number of patients for computation of the penalty. (2) The "60- and
90-day exemptions" have not been accounted for in the computation.
(1) Section 1903(g)(5) provides the formula for computation of the
penalty. It states:
(The) percentum amount of the reduction of the State's Federal
medical assistance percentage for that type of services under paragraph
(1) is equal to 33 1/3 per centum multiplied by a fraction, the
denominator of which is equal to the total number of patients receiving
that type of services in that quarter under the State plan in facilities
or institutions for which a showing was required to be made under this
subsection, and the numerator of which is equal to the number of such
patients receiving such type of services in that quarter in those
facilities or institutions for which a satisfactory and valid showing
was not made for that calendar quarter.
The Agency has a policy, clearly stated in the attachment to any
notice of disallowance issued under Section 1903(g), that where it does
not have exact patient data, it estimates the penalty based on the
number of facilities out of compliance. The State may supply exact
recipient data, and if the Agency believes that it is accurate, it will
use the data to recalculate the penalty. This Board has previously held
that such a policy is reasonable, given the difficulty the Agency would
have acquiring exact data unless the State, which keeps the records,
supplies the data (Ohio Department of Public Welfare, Decisions No. 66,
October 10, 1979, page 14, and No. 191, June 24, 1981, page 7).
The State asserted (Response to Order to Show Cause, page 5) that it
cannot supply these figures because a validation survey must determine
the number of patients who should comprise the numerator and the State
is unaware of whether the facilities' records have been validated. We
(18) have already concluded that a validation survey is not a necessary
precedent to a disallowance. Furthermore, the notice of disallowance
clearly indicated which facilities should be included in the numerator,
so that the State should have known what to supply for those facilities.
The State argued that the Agency should provide the data because the
burden of proof is on the party seeking to impose the penalty. The
Agency has already proved that the penalty should be imposed. The issue
is only how the penalty is calculated, and the party with access to the
data is the State. If the State is unwilling or unable to provide exact
patient data, the Agency is justified in using facility data.
The State also argued that the use of facility data "can seriously
distort the outcome" (page 5). It provides an example which it admits
is "extreme" (page 5). Although we recognize that the use of facility
data in the penalty may result in a different penalty amount than the
use of exact patient data, we do find the State's example exaggerated.
It assumes that 50% of the facilities have one-quarter of the State's
patients and the other 50% have three-quarters of the patients; then it
assumes that the 50% of the facilities with the bulk of the patients was
the 50% in which no violations were found. This is unrealistic. In the
quarter ending March 31, 1978, nearly 50% of all facilities in the State
had not been reviewed in a timely and adequate manner. Because of the
nature of the State's violations, it can be assumed that all patients in
those facilities were unreviewed in an adequate and timely manner;
therefore, using a more realistic assumption that 50% of the State's
patients resided in 50% of its facilities, the figures would be very
close, no matter which type of data was used. For the quarter ending
June 30, 1978, the same proposition would be true for MH level of care.
For the other two levels of care, although we cannot automatically
assume that one-fifth or one-quarter of the State's patients resided in
one-fifth or one-quarter of the State's facilities, we can assume that
it was considerably more proportionate than in the State's example. The
Agency indicated at the time the disallowance was taken, and reiterated
the point in its Response to the Application for Review (page 36), that
it would recalculate the penalty if the State supplied exact patient
data. The State has never supplied this data. We conclude that the
Agency's use of facility data under these circumstances is reasonable.
(2) The State apparently uses the terminology "60- and 90-day
exemptions" to refer to the language in the first paragraph of Section
1903(g) which makes the requirements applicable only to those patients
residing in facilities for periods longer than 60 or 90 days, depending
on the level of care, and which makes reductions only in the FMAP
furnished after those periods. The Agency explained, in its Response to
the Application for Review (pages 34-35), that in the absence of exact
data on the length of stay for each patient in the State, it estimates
the exemption by automatically excluding from the penalty (19)
calculation the first 60 and 90 days of services for which expenditures
are claimed in any fiscal year. The penalty calculations show that this
was done. The State has not provided more accurate data, nor has it
provided an alternative method of figuring the exemption. Considering
the difficult task of calculation for each patient, we believe the
Agency has acted reasonably. There is no basis in the record for
upholding the State's mere allegations.
F. Other issues raised by the State.
The State originally raised two other issues: (1) the
constitutionality of the penalty provision, and (2) the lack of uniform
treatment by the Agency of similarly situated States. We indicated in
our Order to Show Cause that we would not address the issue of
constitutionality of the penalty provision since 45 CFR 16.8(a) binds
this Board to applicable laws and regulations. The State did not
provide any evidence for its second allegation, either in the
Application for Review or in its Response to the Order to Show Cause;
the Agency (Response to Application for Review, pages 36-37) pointed out
that the other states qualified for the waiver, despite having similar
burdens placed upon them and receiving the same notice as this State.
Therefore, we conclude that there is no basis in the record for revising
the disallowance because of this allegation.
Conclusion
We conclude that the reduced disallowance in the amount of $2,881,309
should be upheld for the reasons discussed above. /1/ The applicable
regulation was 45 CFR 250.23 until September 30, 1977, at which
time it was redesignated as 42 CFR 450.23. /2/ The Board's Order to
Show Cause, issued July 9, 1981, discussed most of the issues related to
the reductions for the 1977 quarters and the interpretation of the
waiver provision with relation to the fourth quarter of 1977 on the
theory that these were crucial to the basis for the disallowance taken
for the first two quarters of 1978. Thus, the statement of the issues
in the Order to Show Cause differs somewhat from that presented here.
/3/ The legislative history of P.L. 96-499 supports this statement. See
H. Rep. No. 96-589, Part II, April 23, 1980, pages 85 and 132.
/4/ "The committee has left to the Secretary's discretion the amount of
the decrease which may be waived. It fully expects that where previous
violations of the law have been of sufficient magnitude, the Secretary
may impose a portion of the penalty. In cases where the State is not
able to show a satisfactory program that is validated by the Secretary,
the committee expects that all previous reductions will be taken." (H.
Rep. No. 95-393, Part III, July 12, 1977, page 85.) /5/ Section
1903(g)(4)(B) contains a waiver of any penalty required to be taken for
violations of the annual review requirement in Section 1903(g)(1)(D),
where a State has not reviewed a small number of facilities and meets
certain other conditions. We will discuss in Section B whether the
State met the standard provided in Section 1903(g)(4)(B). /6/ In
fact, the legislative history specifically referred to the amount of the
waived reduction for Colorado, i.e., $8 million. This figure
corresponds to the penalty amount for only 1977 quarters. (H. Rep. No.
96-589, Part II, April 23, 1980, page 85.) /7/ On September 24,
1976, the Regional Commissioner of the constituent agency then
responsible for Title XIX programs (Social and Rehabilitation Service)
wrote to the State concerning a utilization control validation survey
being conducted for FY '75. That survey focused on the annual medical
review requirement of Section 1903(g)(1)(D) and 45 CFR 250.23 (see n.
1). The letter summarized the statutory, regulatory, and other policy
requirements to which the State was subject, and stated that the
Regional Office reviewers had found that the State's procedures did not
comply with the requirements involving review of individual patients.
The Commissioner requested further documentation regarding the medical
reviews that might enable the Agency to validate the reviews, and for a
complete description of the State's utilization control procedures. The
letter concluded by warning the State that a "substantial penalty"
might
be assessed if validation was not possible. The Executive Director of
the State's Department of Social Services responded on October 7, 1976.
In that letter he agreed with the Agency's assessment of the
shortcomings of the State's documentation process (page 5), and
indicated that the State was taking steps to reform that process (page
6). The letter showed that the State officials understood why and where
their system failed to comply with Federal requirements. /8/ The
Agency's basis for this interpretation was the language of Section
1903(g)(4)(B), which says, ... if the showing demonstrates that the
State has conducted an onsite inspection during the 12-month period
ending on the last date of the calendar quarter....
SEPTEMBER 22, 1983