GAB Decision 357
November 15, 1982 Arkansas Department of Human Services; Docket Nos.
82-9-AR-HC 82-161-AR-HC Settle, Norval; Teitz, Alexander Ford, Cecilia
The Arkansas Department of Human Services appealed two decisions by
the Health Care Financing Administration (respondent) disallowing claims
under Title XIX of the Social Security Act. The respondent disallowed
appellant's claim for $12,043,152 in federal financial participation
(FFP) for Intermediate Care Facility/Mental Retardation (ICF/MR)
services provided during the period October 1, 1978 through June 30,
1980. After performing an audit, the respondent also disallowed
$4,505,024 for ICF/MR services during the period July 1, 1980 through
June 30, 1981. /1/ The respondent disallowed both amounts on the
grounds that the state plan provided only for reimbursement of per diem
rates, established prospectively through the use of prior period costs
and adjusted by an inflation factor, and that the appellant's claims
were in excess of those rates.
The issue in both appeals is whether the state plan may be
interpreted to allow the appellant to claim FFP for actual costs
incurred by stateowned ICF/MRs in excess of rates determined on the
basis of actual costs from a prior period and adjusted for inflation.
The parties submitted written arguments addressing this issue, and the
Board held a conference at which both parties presented arguments and
examined witnesses who testified about the interpretation of the plan.
The appellant included the $12 million claim as an adjustment on the
quarterly statement of expenditures for medical assistance payments,
submitted for the quarter ended March 31, 1981. The claim represented
actual costs incurred by six state-owned ICF/MRs in excess of the amount
previously paid to the facilities on the basis of the per diem rates set
by the appellant.
(2) The $4.5 million disallowance represented costs paid to the six
stateowned ICF/MRs by the appellant on the basis of rate adjustments
which reflected the actual costs incurred during the period to which the
rates applied.
We conclude that the approved state plan did not provide for an
additional payment to reflect the difference between the rates paid to
ICF/MRs and actual costs incurred, nor did the plan provide for
adjustment of rates on the basis of actual costs incurred during the
period to which the rates applied. We therefore sustain the
disallowance for the period October 1, 1978 through June 30, 1980 in an
amount adjusted to reflect the unpaid inflation factor which the
respondent has agreed is allowable under the plan. We also sustain the
disallowance for the period July 1, 1980 through June 30, 1981 to the
extent it does not include an amount representing an allowable inflation
factor.
The parties presented evidence about the appellant's intent to
reimburse ICF/MRs for actual costs, about the possible interpretations
of the language of the plan, and about the appellant's reimbursement
methods as practiced from 1978 to the present. We do not base our
conclusions on the appellant's use or nonuse in the plan of the specific
terms "prospective" and "retrospective;" rather, those terms,
as defined
in federal regulations and guides, are a starting point in determining
what the language of the plan indicates about the appellant's intentions
regarding reimbursement methods. Below, we present a summary of the
applicable statutory provisions and regulations, descriptions of the two
basic reimbursement methods represented by the terms "prospective"
and
"retrospective," and portions of the state plan, as a framework for
evaluating the parties' arguments and the testimonial evidence.
Statutory Background
Title XIX of the Social Security Act, 42 U.S.C. 1396 et seq.,
provides for the establishment of cooperative federal-state programs,
commonly called "Medicaid," to provide payments for "necessary
medical
services" rendered to certain "needy individuals whose income and
resources are insufficient to meet the cost of these services." 42 U.S.
C. 1396. States are not required to institute a Medicaid program, but
if they choose to do so, they must submit to the Secretary a
satisfactory "State plan" which fulfills all requirements of the Act.
42 U.S.C. 1396a. The Secretary must approve a plan which meets all
requirements of the statute and implementing regulations. 42 U.S.C.
1396a(b). A state thereupon becomes entitled to federal funds
reimbursing a portion of the expenditures which it has made in providing
specific types of medical assistance (including intermediate care/mental
retardation services) to eligible individuals under the plan in
accordance with federal conditions. 42 U.S.C. 1396b.
(3) Under the Medicare program (Title XVIII of the Act), long-term
care facilities were reimbursed for reasonable costs incurred in
providing certain services. In addition, proprietary (privately-owned)
facilities received additional amounts reflecting net capital equity.
Generally, the Medicaid program allowed states to adopt the same form of
reimbursement for long-term care facilities providing services under
Medicaid. The Social Security Amendments of 1972 added a requirement
that state plans for medical assistance programs must provide for
payment of skilled nursing facility (SNF) and intermediate care facility
(ICF) services provided under the plan on a reasonable cost-related
basis, as determined by methods and standards developed by a state on
the basis of cost-finding methods approved and verified by the
Secretary. 42 U.S.C. 1396a(a)(13)(E) (Section 1902(a)(13)(E) of the
Act).
Congress amended the Social Security Act to reflect a requirement for
payment on a reasonable cost-related basis because it was concerned
about the effects of overpayment and underpayment of providers of
long-term care services, and because it was aware that the reasonable
cost reimbursement approach used by Medicare and Medicaid at that time
was not entirely satisfactory. SEN. REP. No. 1230, 92nd Cong., 2d Sess.
287 (1972).
The statute does not define or explain the meaning of reasonable
cost-related basis. In 1976 the respondent promulgated regulations
implementing section 1902(a)(13)(E) of the Social Security Act. When
the respondent published the regulations, it included a preamble which
contained a lengthy and thorough discussion of provider reimbursement.
41 Fed. Reg. 27300, July 1, 1976 (Preamble). The Preamble said that the
respondent developed its description of reasonable cost-related payments
on the basis of the legislative history. The Preamble stated that there
is a distinction between reasonable costs and reasonable cost-related
payments, and that the statute did not require that states reimburse
each facility for its reasonable costs. It emphasized that states are
free to develop simpler and less expensive methods than Medicare's
reasonable cost reimbursement system (which was previously also used for
Medicaid) and that a rigid requirement for full reimbursement to each
facility would eliminate the use of these options. The respondent
pointed out in the Preamble that rates set prospectively on the basis of
past experience cannot reimburse the actual costs of each facility with
the same degree of precision possible under the reasonable cost formula
used under Medicare and would inevitably result in some degree of over-
or underpayment. The Preamble pointed out, however, that Congress
clearly intended to sacrifice a certain amount of precision in order to
afford states the option of using simpler and less expensive methods.
41 Fed. Reg. 27303.
(4) Applicable Regulations
During the time period in question here, 42 CFR 450.30(a)(1) (1977)
required that a state plan for medical assistance under Title XIX of the
Social Security Act must include a description of the policy and the
methods to be used in establishing payment rates for each type of care
of service that is included in a state's medical assistance program.
42 CFR 450.30(a)(3)(iv)(A) through (D) (1977) stated:
(iv) The State plan shall set forth the methods and standards used by
the State to determine reasonable cost-related payment rates, and shall
set payment rates on the basis of such methods and standards, to be
effective no later than January 1, 1978.The State plan shall provide:
(A) Methods and standards that reasonably take into account actual
costs of the items of allowable cost.... (Payment rates shall not be set
lower than the level which the State reasonably finds, or in the case of
a prospectively determined rate, the level which the State reasonably
expects, to be adequate to reimburse in full such actual allowable costs
of a facility that is economically and efficiently operated);
(B) Methods and standards that reasonably take into account economic
conditions and trends during the time period covered by the rates;
(C) That payment rates which are determined prospectively will be
redetermined at least annually;
(D) Where rates of payment are determined on a class basis, the
criteria on which the class and the class rate of payment are
determined, which criteria shall be reasonable;
These requirements were rewritten without substantial modification,
and redesignated as 42 CFR 447.301,.302,.303,.304, and.305 (1978), and
were effective throughout the period in question here.
42 CFR 450.30(a)(3)(v) (redesignated as 42 CFR 447.311) required that
the plan provide assurance that the state will pay the amount determined
according to the methods and standards set forth in the plan pursuant to
section 450.30(a)(3)(iv).
The Preamble pointed out that there are a variety of acceptable
methods for provider reimbursement and that the states have freedom to
define and set the methods they will use. It also clearly pointed out,
however, (5) that the Secretary had to seek to assure that the methods
will result in reasonable cost-related reimbursement in order to carry
out his statutory mandate to review, approve, and verify the states'
methods. 41 Fed. Reg. 27300.
The Department promulgated certain general regulations implementing
the statute's mandate concerning the significance of state plans. In
particular, 45 CFR 205.5 (1977) stated:
(a) State plan requirements. A State plan under title I, IV-A, VI, X,
XIV, XVI, or XIX of the Social Security Act must provide that the plan
will be amended whenever necessary to reflect new or revised Federal
statutes or regulations, or material change in any phase of State law,
organization, policy or State agency operation.
(b) Federal financial participation. Except where otherwise provided,
Federal financial participation is available in the additional
expenditures resulting from an amended provision of the State plan as of
the first day of the calendar quarter in which an approvable amendment
is submitted or the date on which the amended provision becomes
effective in the State, whichever is later.
General Explanation of Prospective and Retrospective Reimbursement
The Preamble discussed the history of the amended section 1902(a)(
13)(E) and its purpose. It explained that the amended Act provided
maximum flexibility to states to develop methods for payment,
particularly to develop methods less cumbersome and expensive than the
retrospective system previously used. 41 Fed. Reg. 27300. Although the
Preamble stated that a variety of reimbursement methods might be
acceptable, it discussed two basic reimbursement systems, prospective
and retrospective.It described these two systems in the following way:
Prospective rate setting systems, as defined for purposes of this
regulation, involve payment rates not subject to further adjustment on
the basis of the actual costs of a particular provider of long-term care
services.
In the case of retrospective payment systems (i.e., systems in which
there is any retrospective determination of payment or settlemet of
costs), the use of a Medicare ceiling determination is continued.
(6) 42 CFR 447.272 (1978) set out certain definitions for reasonable
cost-related payment for long-term care facility services. It included
a definition for a retrospective payment system:
(A) system in which payment is made on the basis of a provisional
payment rate set prospectively for an accounting period, and in which
payments may be retrospectively adjusted on the basis of the cost
experience during the accounting period.
All the testimony offered by the respondent about the meaning of the
two terms agreed with these definitons, and, in fact, when the
appellant's witnesses were asked to define the words prospective and
retrospective, they also stated similar definitions. Transcript, p.
71. The respondent explained that these two methods are separate and
distinct from each other, although a retrospective system uses a
prospectively-set rate as an interim rate. The respondent also stated
that hybrid systems may be used, if a state describes the method in its
approved plan. Transcript, pp. 175 and 242.
The State Plan
The appellant's 1978 state plan established specific classes for
reimbursement rates. The classes consisted of SNFs, ICFs, ICF/MRs, and
a class for the Benton Service Center. /2/ Chapter 1-1, F., p. 1-4.
The plan stated, in the section entitled, Determining a Reasonable
Cost-Related Prospective Rate for Long Term Care Facilities (Chapter
1-1, G.), that the Division of Social Services would use "the
prospective method of reimbursement." p. 1-4. It further stated: "This
method does not allow for retrospective adjustments." Chapter 1-1, G.,
p. 1-4. The plan established an interim cost reporting period for the
first six months of 1977, and, thereafter, cost reporting periods which
would coincide with the calendar years. The costs for those periods
were to be used to figure an interim rate for the first six months of
1978, and, thereafter, an annual rate for each fiscal year (July 1 -
June 30), beginning six months after the cost period ended. The plan
stated:
The interim period will allow an opportunity to gather economic data
and statistical data which will substantiate the validity of these
procedures or justify appropriate revisions. The Division reserves the
right to modify the rate methodology to insure the most equitale
treatment to all concerned and continued availability of sufficient
Facilities to meet the needs of Medicaid recipients.
Chapter 1-1, G., pp. 1-4 to 1-5.
(7) In Chapter 1-2, the plan discussed basic reimbursement rates,
which were to be established for each class by level of care. The plan
stated, "Costs above these basic per diem rates will not be considered
for reimbursement." p. 1-5.
The specific portion of the state plan upon which the appellant
relied for its position appeared under the section entitled, Basic
Reimbursement Rates, and stated, at p. 1-6:
(2) Upper limits of the basic per diem reimbursement rates will be
calculated by grouping the costs of each class of Facility by level of
care and services provided.The classes are Skilled Nursing Facilities,
Intermediate Care Facilities, and Intermediate Care Facilities/Mental
Retardation and the Benton Service Center. To this rate will be added a
reasonable inflation factor for cost increases anticipated within the
succeeding twelve months period. The following procedures will apply to
all participating Facilities.
(a) All Title XIX Long Term Care Facilities: All cost reports will
be grouped by class of Facility and assembled in per diem order by level
of care from low to high, except for ICF/MR's. The 80th percentile per
diem, adjusted for projected inflation factor, per level of care will be
the upper limit per diem allowed for each class and each level of care
within each class as the basis for allowing management efficiency.
Since the per diem rate is a composite of all costs we believe it is
appropriate to add the inflation factor to these rates. The 80th
percentile will not be changed as a result of audit findings, new
facilities, change of ownership, corrections to cost reports, etc. All
adjustments will be handled within the established 80th percentile for
each rate period.
(b) We have grouped Minimum Care Facilities with Intermediate Care
Facilities for reimbursement.
(c) Intermediate Care Facilities/MR will be reimbursed actual cost
determined to be allowable and reasonable by the Division.
Chapter 1-2, A., p. 1-6.
Those facilities with a per diem cost less than the 80th percentile
would also receive the difference between adjusted per diem and the 80th
percentile, up to $2.00 per day per patient, as an incentive for cost
containment. Chapter 1-1, E., Cost Containment and Management
Efficiency, p. 1-3.
(8) Selected Amendments to the Plan
A 1979 revision of the state plan amended Chapter 1-1, E., Cost
Containment and Management Efficiency, by adding a sentence to a
paragraph describing the use of the 80th percentile as a cost
containment mechanism. The new sentence read:
Intermediate Care Facilities/MR will be excepted from the 80th
percentile requirement and will receive reimbursement based directly on
each facility's per diem costs, as desk reviewed, plus an inflation
adjustment.
In 1980 the appellant amended the plan to indicate the ICF/MRs would
be subject to quarterly cost reporting periods rather than annual
periods.
The appellant revised its plan, effective July 1, 1981, in order to
institute changes made by the Omnibus Reconciliation Act, Pub. L.
96-499, which deleted the requirement that a reasonable cost-related
basis be used for SNFs and ICFs. The appellant's amended plan
established an interim rate methodology for SNFs and ICFs. /3/ The
amendment stated:
C. Skilled Nursing Facilities and Intermediate Care Facilities
Prospective interim per diem rates shall be incorporated based on the
per diem rates established by the calendar year 1979 cost reports
submitted by SNF and ICF facilities.
1. A uniform class per diem rate by level of care shall be
implemented at the existing 80th percentile per diem rates established
for the rate period July, 1980, through June, 1981, plus an average 4.1%
factor, which takes into account estimated increase in costs of care and
prospective inflation....
D. Intermediate Care Facilities for the Mentally Retarded and the
Benton Services Center Nursing Home shall continue to be reimbursed by
individual facility/level of care per diem rates based on actual
allowable costs determined by the division to be reasonable.
(9) Why the Interpretation of the State Plan Is Critical
What the state plan says about the appellant's methods for
reimbursing long-term care facilities for servides provided under
Medicaid is critical because the appellant is entitled to FFP only for
expenditures made in accordance with its State plan and with federal
regulations. 42 U.S.C. 1396b. Federal regulations required the state
plan to provide for payment methods and standards, and required a state
to amend its plan whenever there was a material change in state policy
or agency operation. See section on Applicable Regulations above. The
respondent stated in the preamble to its 1976 regulations:
(there) is no room for doubt that Congress intended the Secretary to
have power to review, approve, and validate both the cost-finding and
the reimbursement methodologies.
In light of the concern expressed in the legislative history of
section 249 about the dangers of the objectives of the Medicaid statute
of either underpayment or over-payment of long-term care facilities, the
Secretary, in carrying out his statutory functions of reviewing,
approving, and verifying the States' methodologies, has the
responsibility to seek to assure that the methodologies will in fact
result in reasonable cost-related reimbursement, by establishing certain
minimum standards for approval.
41 Fed. Reg. 27300, July 1, 1976.
While it is clear, then, that states have a great deal of flexibility
in developing reimbursement methods and in changing those methods, the
respondent has the ultimate authority to approve those changes. In
order to fulfill this statutory mandate, the respondent has required
that the states specify in their plans what those methods will be, and
notify the respondent of changes in the methods by amending the plans.
The Appellant's Proposed Evidentiary Burden
The appellant asserted that a state plan should be analogized to an
administrative regulation, because it is written by the state that
administers it, and because the state has great latitude in devising its
plan. Under such an analogy, the appellant argued, its interpretation
of its own state plan should be given great deference. In support of
this assertion, the appellant cited the Supreme Court's decision in
Udall v. Tallman, 380 U.S. 1 (1965). In that case the Court resolved a
dispute over the interpretation of a statutory provision by deferring to
(10) the administrative interpretation of the statute because it was
reasonable and consistently applied. The appellant urged that the
standard applied by the Court in that case be used in this appeal; the
standard was that an administrative interpretation of a regulation has
controlling weight unless it is plainly erroneous or inconsistent with
the regulation. Udall v. Tallman, supra, at 16-17.
In this instance the interpretation of the State plan is at issue.
Neither party has submitted a written administrative interpretation of
the State plan; thus, we are faced with evaluating the appellant's
position as it has argued it in this appeal, and as supported by the
evidence. The Court in Udall v. Tallman pointed out that administrative
practice should be particularly considered when it involves a
contemporaneous construction by those charged with the responsibility of
setting a statute or regulation in motion. Udall v. Tallman, supra, at
16. It is not clear that Udall v. Tallman should be applied to this
appeal since the only evidence of an interpretation of the state plan is
the statement made by the appellant in litigation before this Board.
Nevertheless, we do consider the evidence presented about the
appellant's administrative practice under the plan to have considerable
weight regarding the appellant's construction of the plan
contemporaneous with its drafting. The evidence of administrative
practice will be discussed in the Analysis.
Facts
Initially, the appellant used the actual costs incurred by ICF/MRs in
the first six months of 1977 to figure the per diem rates for the first
six months of 1978; this was an interim period. Thereafter, the
appellant used the actual costs incurred for calendar year (CY) 1977 to
figure the per diem rates for fiscal year (FY) 1979. The appellant
added an inflation factor of 3.9% to the rate paid in FY 1979 to ICF/
MRs and no inflation factor thereafter. /4/
Beginning in July 1980 the appellant used a quartery cost reporting
period rather than an annual one. It continued to set rates by a method
which used actual costs from a prior period, but it began adjusting
those rates to reflect the actual costs for the quarter to which the
rate applied. Transcript, pp. 100-102.
The table shown in the appendix to this decision shows the average
rates paid to the ICF/MRs for two levels of care over the pertinent
periods. This table indicates that in CY 1978, the facilities received
an average (11) rate of $967.20 for level of care B, /5/ when their
actual costs averaged $1104.40 (as shown by the rate for FY 1979, which
was based on reported costs for CY 1978). Therefore, these figures
indicate that in CY 1978 the ICF/MRs were not reimbursed for an average
of $137.30 at level of care B. There would have been a similar
difference for level of care C. In CY 1979, for level of care B, the
facilities received an average rate of $1024.38. The average actual
costs for that level of care for CY 1979 were $2134.13 (as shown by the
rate for the quarter ended September 1980, which was based on actual
costs for CY 1979). Transcript, p. 102. Thus, these figures indicate
that the average amount of unreimbursed costs would have been over
$1000. A simple example shows what happened:
1977 1978 1979 1980 Actual
Costs Per Diem $10/day $15/day $20/day $25/day Per Diem Rate
Received $10.+.39 n6 $15/day $20/day
Difference -$4.61/day -$5/day -$5/day
The appellant's witnesses stated that between 1978 and 1980 the costs
for the ICF/MRs accelerated rapidly, and then leveled off. Transcript,
p. 189. The escalation in costs was due to such factors as:
doubledigit inflation, increased costs as the appellant upgraded its
ICF/MRs to meet federal standards, and the addition of a new facility
which had heavy start-up costs and was not filled to bed capacity during
its initial period. Transcript, pp. 190-194. These factors were
exacerbated because costs are budgeted two years in advance by the
legislature, and because the state legislature allocated to the
state-owned facilities first a low, and then no, inflation factor,
instead of the 17% and 15% factors which the proprietary facilities
received. Furthermore, although the state plan indicated that the
appellant would reevaluate the feasibility of its rate-setting system at
the end of the six-month interim period from January to June 1978, the
high turnover in Commissioners and other staff during those years led to
a breakdown in communications between the pertinent divisions, and no
evidence has been presented that such an evaluation occurred. The
Division of Mental Retardation-Developmental Disabilities Services
(MR-DDS), which operated the ICF/MRs, did not tell the Division of
Social Services, which set the rates and then reimbursed the ICF/MRs
based on those rates, until sometime (12) in 1980 that the rates were
inadequate, /7/ and that MR-DDS had been absorbing the excess costs
incurred. When the figures were compiled, the appellant discovered that
some $12 million had not been claimed because not all the ICF/MR costs
had been reimbursed to MR-DDS. It was that discovery which led the
appellant to reevaluate its payment method and alter it to the one used
between July 1980 and June 1981. Transcript, pp. 149-151; Exhibit M.
Testimonial Evidence Offered by the Parties
The key statement at issue was in Chapter 1-2, A.(2)(c). That
statement said that ICF/MRs would be reimbursed actual costs which were
allowable and reasonable. The parties each presented arguments about
the interpretation of the statement in the context of the plan, and
presented witnesses who offered testimony about the intent of the
drafters with regard to reimbursement for ICF/MRs. Prior to analyzing
the arguments, we summarize the testimony and evaluate the weight of the
evidence.
The appellant offered two witnesses: the current Commissioner of
Social Services, who testified about her understading of the intent of
the plan, based upon her study of the plan and other documents related
to it; and the current Director of Finance for Social Services, who
testified about his understanding of the plan, as well as about the
general assumptions made by those persons administering the plan between
1978 and 1981.
The Commissioner was not one of the drafters of the plan, and was not
appointed Commissioner until 1981; therefore, she had no personal
knowledge about the drafting of the plan and could only provide an
historical perspective based on her study of the written history of the
plan and what was told to her by other persons. She testified that,
originally, the ICF/MRs were paid on a prospective basis, and that the
appellant did not know if that metod would cover the ICF/MRs' actual
costs. Transcript, p. 30. Her testimony about the conclusions she
reached as to the meaning of the state plan are perhaps some evidence
that a reasonable person could believe that the appellant intended to
reimburse the ICF/MRs for all of their actual costs.
The Director of Finance testified that he believed it was possible to
have a reimbursement method which would reimburse actual costs, by using
a prospective interim rate and adjusting that rate whenever it does not
(13) reimburse 100% of actual costs incurred during the period of time
to which the rate applied. Transcript, pp. 61-63. He also testified
that the method under which the $12 million was claimed was an
adjustment of the payment to the state-owned ICF/MRs in order to meet
actual costs incurred, rather than a retrospective adjustment of the
rates, although he also indicated that they were basically the same.
Transcript, p. 52. The Director also testified abut the reasons for the
sharp escalation in costs for the ICF/MRs between 1978 and 1980, and, to
some extent, discussed why the Division of Social Services did not know
sooner that the rates did not reimburse the ICF/ MRs for their costs.
The Director testified that, to his knowledge, no one thought a plan
amendment was necessary to pay ICF/MRs on a retrospective basis, though
the appellant did amend the plan to reflect the change in cost reporting
periods. Transcript, pp. 68-70. /8/
The Director of Finance was not one of the drafters of the plan. He
was appointed in 1977, however, and, as such, had general knowledge
about the understanding of those persons with authority to interpret the
plan. He also had knowledge about the appellant's actual practices with
regard to reimbursement.
The respondent offered testimony from three witnesses: two persons
who worked both for the appellant and the respondent, and one person who
is currently the Chief of the respondent's Long-Term Care section,
Division of Alternative Reimbursement, Bureau of Program Policy. /9/
One witness worked for the appellant between 1977 and 1980, first as a
financial examiner, and then as administrator of the cost evaluation
section of the appellant's Office of Long Term Care. He worked for the
respondent's (14) Regional Office in Dallas for one year beginning
October 1980 on an Intergovernmental Personnel Act (IPA) detail, and now
works for the State of Texas. During his employment for the appellant,
the witness was responsible for desk reviewing cost reports in order to
determine reimbursement rates, and he also drafted a 1979 amendment to
the state plan concerning the reimbursement method. He testified that
his understanding of the reimbursement system was that all facilities
were to be reimbursed on a prospective basis and that the use of a low
inflation factor and, later, of no inflation factor, was intended to
hold down costs in the stateowned facilities. That witness testified
that "retrospective reimbursement... was never envisioned." Transcript,
p. 111. He also testified that he participated in discussions during
1980 about the possibility of using retrospective adjustments and that
he cautioned state officials on more than one occasion that an amendment
to the plan would be necessary in order to effect retrospective
reimbursement. He stated that he was asked to draft such an amendment,
but did not complete it before he left his position to work for the
Health Care Financing Administration (HCFA) Regional Office. The
witness also testified that he was an employee working under
supervision, employing techniques as instructed. Transcript, p. 125.
Thus, we find that he could not speak with authority regarding what the
state plan allowed. His testimony is evidence, however, regarding the
appellant's administrative practice about ICF/MR reimbursement between
1977 and 1980.
Another witness for the respondent was Chief of the Management and
Budget Branch, HCFA Regional Office, and had worked for the federal
government for 25 years, except for a period of over one year when he
worked for the appellant while on an IPA detail. He offered testimony
about his role as Acting Director of the appellant's Office of Long-Term
Care during 1980, and about his opinions as to the meaning of the state
plan and federal requirements generally. He testified that when he was
asked in 1980 to devise a method for recovering the ICR/ MRs' actual
costs, he determined that a state could choose a different method for
reimbursing ICF/MRs than for other classes of facilities, and he
suggested to an official working for the appellant that a change be made
in the plan to effectuate a retrospective system for ICF/MRs. He set up
the system used by the appellant since July 1980, and stated that he
asked the cost evaluation section of the Office of Long-Term Care to
prepare an amendment to the plan because the method he devised was
retrospective, and he believed that the plan did not provide for
retrospective reimbursement. He assumed that the appellant had
submitted an amendment, although he did not check with the section to
see whether they actually drafted anything. He also testified that no
mention was made to him about claiming costs retroactively for 1978-80
using the retrospective system he set up. Transcript, p. 152.
He testified that he believed that reimbursement systems are either
retrospective or prospective. Transcript, p. 156. He admitted,
however, that there were two schools of thought at the state level about
(15) what the plan allowed. Transcript, p. 166. The witness' testimony
is evidence of the appellant's practices and intentions during the year
1980 when the witness was an employee of the appellant, and about the
information he provided, as a knowledgeable federal employee, to the
appellant concerning reimbursement methods.
In summary, the testimony by both parties' witnesses regarding the
appellant's administrative practice was consistent. The parties'
witnesses differed, however, with regard to the intent manifested by the
state plan and the appellant's practices, and the proper interpretation
of the plan and its amendments.
Analysis
A.The Interpretation of the State Plan Prior to 1981
The state plan specifically stated that the appellant would use a
prospective method of reimbursement, and that this method did not allow
for retrospective adjustments. See section on state plan above. The
claims at issue in this appeal represent adjustments (either through
lump-sum payments or rate adjustments) to the amount paid to the
state-owned ICF/MRs under rates determined by using all reported actual
costs from a previous cost period. These basic rates were prospectively
determined, as described in the state plan, but they varied, in the use
of lower or no inflation factors, from the rates for other facilities in
the state, which were fixed exactly as the method described in the plan.
The two disallowances appealed here represent two different methods of
paying actual costs incurred above the rates determined on the basis of
actual costs from a previous cost period. The $12 million disallowance
represents simply the difference between the rates paid and the actual
costs incurred. The $4.5 million disallowance represents the difference
between the interim rates, fixed on a prospective basis, and the final
rates, fixed on the basis of the actual costs incurred during the period
to which the rates applied.
The appellant claimed that the fact that its plan specified a
prospective system is not determinative of whether it may claim
additional payments made to the state-owned ICF/MRs because the plan
also stated an intent to reimburse ICF/MRs for their actual costs.The
appellant asserted that the $12 million claim is a one-time "special"
claim which represents a "settling up" of a large gap between the
rates
paid to state-owned ICF/MRs for the period October 1, 1978 through June
30, 1980 and actual costs incurred for the same period. Transcript, pp.
11-13. The appellant also asserted that its use of interim and final
rates during FY 1981 was permissible under the same rationale --
reimbursement for actual costs. The appellant pointed out that in the
plan it specifically reserved the right to modify the rate methodology.
p. 1-5, quoted above at p. 6.The appellant argued that this allowed it
to adjust its reimbursement method in order to pay the ICF/MRs' actual
costs, as it had always intended to do. (16) Below, we analyze the
parties' arguments in light of the evidence presented at the conference
in order to determine how to interpret the state plan provisions with
regard to the method for reimbursing ICF/MRs.
1. The Meaning of the Sentence Referring to Actual Cost Reimbursement
The parties disagreed about the meaning of the provision referring to
the reimbursement of ICF/MRs, found at Chapter 1-2, A.(2)(c). Quoted at
p. 7 above. The appellant argued that subletters (a), (b) and (c) are
specific limitations upon the general application of the reimbursement
rate set out in subsection (2). The appellant maintained that the
correct interpretation of subletter (c) is that ICF/MRs were to receive
100% of their actual costs. The appellant argued that it always
intended to treat the ICF/MRs in a different manner than the other
facilities, and that, since the State Constitution forbids deficit
spending, the intended result of the plan must have been to reimburse
the state-owned facilities as fully as possible. Furthermore, the
appellant pointed out that state legislation enacted in 1974 allowed
state institutions to be paid individually on a reasonable cost basis,
and private facilities on a negotiated set rate basis. Arkansas Act 56,
July 22, 1974 (Exhibit G). The appellant pointed to the places in the
state plan where state-owned ICF/MRs were treated differently from other
facilities. These differences were that they could opt to use cash
basis accounting, rather than accrual basis accounting as other
facilities use (p. 1-2), and that they were exempted from the 80th
percentile limit. The appellant also stated that this meant that
ICF/MRs did not receive the cost containment incentive payments referred
to in Chapter 1-1, E. Transcript, p. 203. The appellant suggested that
these differences show an intent on the part of the state to reimburse
the ICF/MRs for all their costs of operation. In support of its
position, the appellant offered the minutes of the Legislative Joint
Performance Review Committee, which conducted a Nursing Home Study in
1978. The minutes, contemporaneous with the drafting of the plan,
described the method for setting the 80th percentile and profit
incentive. The description included a statement almost exactly like the
one in the plan which said that ICF/MRs would be reimbursed actual costs
determined to be allowable and reasonable. The appellant also stated
that the fact that it paid its state-owned facilities a very low
inflation factor in one period and no inflation factor in others was
evidence that it intended to reimburse them for all costs incurred. The
appellant also stated that the pertinent portion of the plan, Chapter
1-2, A.(2)(c), was not altered by either the 1979 or 1981 plan
amendments.
The 1974 state statute allowing state and private institutions to be
reimbursed on different bases from each other may provide some evidence
of the drafters' intent, but the fact that federal guidelines
(HCFA-AT-77-114, December 14, 1977) advised that state and private
facilities must be paid on the same basis counterbalances that evidence.
If we were to accept appellant's version, the state plan would not
conform to federal guidelines. The state plan did contain some
variations in how (17) the ICF/MRs were treated, however, and, thus,
offers some evidence that ICF/MRs were viewed differently, in comparison
to other facilities in the state.
We believe that all states intend to recoup as many of their costs as
possible, and, therefore, we do not accord the State Constitution's ban
on deficit spending any particular weight here, although the appellant
asked that we do so. We cannot conceive of any state deliberately
ignoring available federal funds once it has elected to participate in
the partnership with the federal government. Finally, some evidence was
presented that indicated that the state legislature limited all state
facilities, offices, and personnel costs to a very low or no inflation
(cost-of-living) adjustment. See p. 11 above. Therefore, we do not
necessarily accept appellant's argument that the lack of an inflation
factor was evidence of appellant's intent to reimburse ICF/MRs for all
of their costs on a retrospective basis.
The respondent contended that the sentence about reimbursement of
actual costs meant nothing more than that the ICF/MRs were exempted from
the 80th percentile limit and therefore could receive a prospective rate
based on 100% of their actual costs plus an inflation factor. The
respondent maintained that this was only a variation on how prospective
rates would be set and did not necessarily refer to reimbursement in
addition to the rates paid, or adjustment of the rates.
The respondent argued that the plan as a whole sets up a prospective
system and that this one sentence does not vary that system, but should
be interpreted in the context of the entire plan. As support for its
position, the respondent pointed to the revision in the state plan,
submitted in 1979, which amended Chapter 1-1, E., Cost Containment and
Management Efficiency.That amendment did not specifically alter Chapter
1-2, A.(2)(c), but stated that ICF/MRs would be excepted from the 80th
percentile requirement and receive reimbursement based on each
facility's per diem costs plus an inflation adjustment. The person who
wrote that amendment testified that the amendment did not change the
plan but merely clarified the fact that all facilities were to receive
an inflation factor. Transcript, pp. 109-110.
Neither party presented any witnesses who participated in drafting
the plan, or who had contemporaneous knowledge of what those persons
believed who drafted the plan or who had authoritative responsibility
for stating what the plan meant. The minutes of the legislative
committee which were made contemporaneously with the plan merely restate
the same language from which the dispute before us arises and do not
elucidate further the intent of the drafters.
We believe that the respondent's interpretation of the disputed
portion of the state plan is a reasonable one since actual costs are
used to figure prospective rates. Transcript, p. 129. The language
could indeed (18) mean no more than that all of the actual costs
incurred by the ICF/MRs during the cost reporting period, rather than
the 80th percentile, were to be used to figure the rate. This is
particularly true because the state plan specifically stated that a
prospective method would be used and that there would be no
retrospective reimbursement. The state plan did not specifically exempt
ICF/MRs from that statement. State plan, p. 1-4, Chapter 1-1 (Exhibit
E).
According to the appellant, however, the disputed language stated its
intent to reimburse the ICF/MRs for their actual costs through the use
of prospective rates. Transcript, pp. 30. When the rates it paid the
ICF/MRs did not match the actual costs, however, it determined that it
could achieve 100% reimbursement by adjusting the rates on a
retrospective basis as it did between July 1980 and June 1981 and by
simply paying the difference between the amount reimbursed by the rates
and the costs actually incurred, as it did in the 1978 to June 1980
period. Even if we were to find that the appellant intended to actually
reimburse the ICF/MRs for all of their costs, however, we must still
consider the effect of such an intent.
2. The Effect of Stating An Intent to Reimburse ICF/MRs for Their
Actual Costs
The evidence presented by the appellant as to how it actually
reimbursed its ICF/MRs before 1980 shows that its system for reimbursing
ICF/MRs between 1978 and 1980 fit the federal description of a
prospective system, and that the change the appellant made in 1980 in
its method of reimbursing state-owned ICF/MRs and the manner in which
the appellant figured the costs claimed here as a "settling up" for
1978
through 1980, fit the federal description of a retrospective system.
The appellant essentially maintained that its state plan permitted
use of any method which would reimburse the ICF/MRs for all costs
incurred, and that the two means of reimbursing the ICF/MRs for all of
the costs incurred between 1978 and 1981 were, therefore, permissible
under the state plan. Furthermore, the appellant argued that its state
plan specifically reserved the right to modify the reimbursement
methods. The appellant did not argue that the regulations requiring the
plan to state changes in methods and standards for payment rates did not
apply, although one witness stated that it was a "gray area."
Transcript, p. 68.
The respondent's position was that there are basically two forms of
reimbursement rate-setting methods, prospective and retrospective, and
that a method is either one or the other. The respondent maintained
that the State plan specifically stated that a prospective system of
reimbursement is used and that no mention was made of any other form of
(19) reimbursement. /10/ The respondent asserted that the appellant's
claim represents a retrospective form of reimbursement, and that it is,
therefore, not provided for in the plan. The respondent asserted that a
state cannot use a method which has not been included in the state plan
and, therefore, has not been approved. Transcript, p. 175.
Furthermore, the respondent stated that, under a prospective system,
the only circumstances under which a later adjustment can be made in a
rate is if there were unallowable charges or errors included in the cost
reports, or if an error was made in calculating the rate according to
the prescribed formula, or if there is a provision in the plan for
extraordinary expenses of a catastrophic nature. Transcript, p. 156.
The appellant admitted that none of these circumstances applied to the
claim made by the appellant here. /11/
The respondent argued that simply reserving the right, in the State
plan, to change the stated payment method, does not allow a state to
change its method without amending its plan. Federal regulations
require that the plan set forth methods and standards used by a state,
42 CFR 450.30, and amendment of a plan whenever a state changes its
policy or practice. 45 CFR 205.5.
The parties have agreed that the appellant could have chosen to use a
retrospective system of reimbursement for ICF/MRs when it drafted the
1978 plan. Stipulation read into record, Transcript, p. 243. Thus, we
can conclude that it could have also chosen to amend the plan to include
a retrospective system. Furthermore, there is some indication that the
appellant could have adopted a hybrid system.
We think that stating an intent to reimburse ICF/MRs for their actual
costs does not state a method by which the rates would be determined.
There is no statement in the plan that specifically points to any type
(20) of reimbursement method other than a prospective system, although
the appellant argued in its brief of September 28, 1982 that the method
was a "hybrid prospective system." at p. 5. The only pertinent changes
the appellant made in the state plan during the applicable time periods
were to emphasize that ICF/MRs would receive reimbursement based on
their full costs plus an adjustment for inflation (1979), and that the
length of cost reporting periods would change from annual to quarterly
periods for ICF/MRs (1980). /12/
The evidence presented shows that the appellant did not
retrospectively adjust rates to assure recovery of actual costs until
1980, and that its administrative practice until 1980 was to use a
prospective system of reimbursement for all classes of facilities. In
fact, there is testimony that indicates that the appellant believed that
the prospective system would reimburse the ICF/MRs for their actual
costs. Furthermore, the respondent pointed to the fact that the
appellant reimbursed proprietary ICF/MRs in a different manner than
state-owned ICF/MRs (that is, the proprietary ICF/MRs received the large
inflation factor paid to all facilities other than state-owned ICF/MRs),
and that the plan offered no indication of that difference. Thus, the
weight of the evidence about the administrative practice during 1978
through 1980 supports the respondent's interpretation of the state plan.
We find on the basis of the evidence presented that the appellant did
not specify in its plan that it would use anything other than a
prospective system, and that the appellant expected the prospective
system to reimburse ICF/MRs for their costs. Federal regulations
required amendment of the plan to reflect material changes in "any phase
of State law, organization, policy or State agency operation." 45 CFR
205.5 (1977). The appellant argued that no material change occurred in
its state policy or operation prior to July 1, 1981 (Brief, 82-161,
September 28, 1982, p. 4); nevertheless, there is no question that the
appellant changed its method of reimbursement in July 1980, without
modifying the language of the state plan in any substantive manner. The
state plan amendment describing quarterly cost periods did not indicate
any change in the actual method of figuring the rates, such as the fact
that prospectively-figured rates would be interim rates, adjusted later
on the basis of actual costs. Yet, the evidence shows that the
appellant specifically revised its (21) method of reimbursement as of
July 1980 without amending the State plan to indicate that rate
adjustments would be made to reflect actual costs of the period to which
the rates applied. We think this was a material change. We think that
respondent's position is reasonable, and that a state plan amendment was
necessary to notify the respondent of a change in the appellant's
methods. Furthermore, since the state plan is the most complete
compilation of a state's procedures, the plan must be updated whenever
procedures actually change.
B. Summary
The appellant argued that because (1) it always intended to reimburse
these facilities for all of their costs, (2) it stated in its plan that
it reserved the right to modify the methodology, and (3) there is a
provision in its constitution which forbids deficit spending, it
therefore has manifested the flexibility in its plan which would allow
it to use a retrospective system of reimbursement to recoup those past
costs. If we were to accept that reasoning, in the face of clear
regulations requiring that the methods be stated in the plan and
approved, we would be allowing states to arbitrarily change their
methods of reimbursement without notifying the respondent, any time they
discover that their method of reimbursement was not adequate. We do not
believe that this is what the respondent intended. Clearly Congress and
the respondent intended for the respondent to exercise some control over
how states reimburse their facilities, in order to contain cost
inflation and help insure adequate reimbursement to facilities. The
respondent cannot bear the responsibility, however, for states'
inaccurate predictions about their own costs, or for states' failures to
check their rates to see if they are adequately reimbursing facilities.
The respondent should not bear the responsibility for a state's choice
of reimeursement method.
The appellant now bears a costly burden because it did not discover
for two years after instituting a prospective system that the rates
established under that system did not adequately reimburse its ICF/MRs,
and because it elected not to amend its plan when it changed its method
of reimbursement. The respondent presented testimony that states take a
risk, when they use a prospective system, that not all costs will be
reimbursed, since the amount of reimbursement depends upon the amount of
costs incurred in a previous time period plus the state's assessment of
how much those previous costs will escalate during the upcoming period.
Furthermore, the respondent pointed out that the accuracy of a rate in
relation to costs depends upon a state agency's ability to project
costs. Transcript, p. 197. Here he appellant did not adequately
forecast how much the ICF/MRs' costs would escalate, and it did not
notice that error until the reimbursed costs had been accumulated for
two years.
Therefore, even if we accepted the appellant's arguments about its
intend to reimburse its ICF/MRs fully for costs incurred, we cannot (22)
ignore the fact that it never specifically stated any method other than
prospective reimbursement, and never stated how it intended to reimburse
ICF/MRs for their actual costs other than by use of the prospective
method indicated in the plan. This clearly contravenes federal
regulations and Congressional intent. We conclude that stating an
intent to reimburse facilities for their actual costs is not the same as
providing a statement of how this would be accomplished. The appellant
did not specify in its state plan that it intended to use any
reimbursement method other than the prospective one outlined. One much
conclude, then, that the appellant intended to use prospective rates to
reimburse actual costs as nearly as possible. Furthermore, the same
general sentence cannot describe both the method used from 1978 to 1980
and the method used from 1980 to 1981. The appellant used both methods
without indicating in the plan that it would do so, and without amending
the plan to indicate the change in method other than to change the
length of the cost reporting period. Therefore, the appellant cannot
reimburse its ICF/MRs for the actual costs incurred over the rates it
set using the system set forth in its plan.
Furthermore, we also note that even if we were to find that the state
plan allowed the appellant to retrospectively adjust rates or to
otherwise reimburse for actual costs on a retrospective basis, there
would be an upper limit or ceiling applied to those costs. We do not
know whether that ceiling would permit all of the claims at issue here
to be paid.
Conclusion
We conclude that this disallowance must be sustained because the
appellant did not specify in its state plan that it would use a
reimbursement system other than a prospective one. This does not
preclude the payment to the appellant of an amount representing an
inflation factor agreed to in any negotiations between the parties (see
fn. 11).
(23)
*3*Appendix Average Rate Average Rate Per Diem
Rate Period Level of Care BLevel of Care C January - June
1978 $989.83 (based on actual costs during 1st 6
months of 1977) July 78 - June 79 $944.37
$930.50 (based on actual costs during CY 1977 + 3.9% inflation factor)
* July 79 - June 80 $1104.40 $1089.02
(based on actual costs during CY 1978) July 80 - September 80
$2134.13 $2072.89 (based on costs for CY 1979) ** October -
December 80 $1975.92 $1857.19 (based on actual
costs for previous quarter) January - March 81
$2356.74 $2237.09 (based on actual costs for previous quarter)
This table was created using the information presented in the
appellant's Exhibit H, page 2, and the explanation of that exhibit
offered at the hearing. Transcript, pp. 100-102. Exhibit H showed the
rates paid to each ICF/MR for each period from January 1978 through
March 1982, broken down by level of care. We averaged these rates and
show those figures in this table. /1/ The disallowance for the later
period and the appeal from that disallowance did not come before
the Board until after the record for the earlier appeal was completely
developed. Since both appeals addressed essentially the same issue, the
parties agreed that the Board would jointly consider the two appeals.
The parties submitted limited briefs in the later appeal. /2/
The Benton Service Center was a state-owned ICF. /3/ The
disallowance letter for the second claim referred to the July 1981
amendment as the first amendment of the state plan which specifically
changed the reimbursement method. The appellant discussed the relevance
of the amendment in the brief submitted September 28, 1982. /4/
The 220 SNFs and ICFs, as well as the one proprietary (privately-owned
for profit) ICF/MR received a 17% inflation factor for FY 1979 and a 15%
inflation factor for FY 1980. /5/ The average rates for the
interim period January through June 1978 were averaged again with the
average rates for FY 1979 to obtain the average rate paid for CY 1978.
The same method was used to figure the average rate for CY 1979,
combining the average rates for FY 1979 and FY 1980. /6/
One-time inflation factor of 3.9%. /7/ The testimony indicated
that MR-DDS reported all costs incurred, and that no errors were made in
the cost reports. Transcript, p. 187. Presumably, therefore, if the
Division of Social Services had conducted an evaluation, it would have
noticed that there was a discrepancy between the rates paid and the
costs incurred. This would have been somewhat after the fact, however,
and perhaps MR-DDS was in the best position to predict future escalation
of costs, and therefore, should have alerted the Division of Social
Services. /8/ Both witnesses mentioned that they believed the appellant
had tacit approval from the respondent to retrospectively adjust rates
to reflect actual costs because they have been claiming costs on their
quarterly expenditure forms on the basis since 1980, and the respondent
had not questioned the costs. A witness for the respondent testified
that the respondent's failure to take action to disallow a claim
submitted on a quarterly expenditure form does not constitute tacit
approval of the claim or the method upon which the claim is based
because the respondent does not look at every item in depth at that
point in time. Transcript, p. 148. His statement is borne out by the
respondent's action in disallowing $4.5 million which was claimed on the
basis of the rate adjustments made during July 1980 through June 1981.
/9/ The last witness testified primarily about the respondent's basic
position based on federal guidelines and regulations, and did not offer
testimony referring to the intent of the appelant. His testimony is,
therefore, not individually identified in this discussion. /10/
Furthermore, the respondent stated that if it had been told that the
appellant intended to reimburse costs on a retrospective basis, the
respondent would have required a specific statement about the ceiling on
payment rates which is required for retrospective methods. Transcript,
pp. 217-219. /11/ Both parties agreed that in the event the
Board concluded that the actual costs could not be paid and claimed
under the state plan, the appellant would be entitled to and could claim
an inflation factor equivalent to that paid other facilities during the
first period in question. That amount was calculated by the appellant
as $2,995,362. Exhibit C. Apparently the parties believe that the
failure to pay an inflation factor equivalent to that paid the
proprietary ICF/MRs would be viewed as an error in calculating the rate
and a recalculation could be made and the difference paid at this time.
/12/ The appellant pointed out that the July 1, 1981 amendment only
affected SNFs and ICFs and that the amendment specifically stated that
ICF/MRs would continue to be reimbursed based on actual allowable costs
determined to be reasonable. We do not think the July 1981 amendment
has much weight as to the appellant's intent because it was drafted
after the original plan and after the period in question here. The
amendment was made because the Omnibus Reconciliation Act eliminated the
requirement that SNFs and ICFs be paid on a reasonable cost-related
basis. Furthermore, the fact that this amendment stated that a system
shall continue does not clarify what the system is. * The rate for FY
1979 included a 3.9% inflation factor; the rates thereafter included no
inflation factor. Transcript, pp. 97-100. ** Beginning October 1980,
the rate paid for a quarter was based on the previous quarter's costs.
Beginning July 1980, the rates were adjusted to reflect the actual costs
of the quarter to which the rate applied. Transcript, pp. 102-103.
SEPTEMBER 22, 1983