New Jersey Department of Human Services, DAB No. 383 (1983)

GAB Decision 383

January 31, 1983 New Jersey Department of Human Services; Docket No.
82-90-NJ-HC Garrett, Donald; Ford, Cecilia Teitz, Alexander


The New Jersey Department of Human Services (State) appealed from the
determination of the Regional Administrator, Region II, Health Care
Financing Administration (Agency), dated April 22, 1982, disallowing
federal financial participation (FFP) in the amount of $16,059,110
claimed under title XIX of the Social Security Act. The amount claimed
represented additional depreciation costs for State psychiatric
hospitals for the period 1970 to 1980 and for intermediate care
facilities for the mentally retarded (ICFs/MR) for the period 1978 to
1980. Depreciation was originally claimed based upon the historical
cost of property, plant, and equipment; in the State's revised claim,
depreciation was based on the higher replacement cost of these assets.
The Agency disallowed the revised claim (representing the difference
between replacement cost and historical cost) on the ground that the
applicable regulations required that depreciation be based on historical
cost. The Agency also disallowed the claim on the ground that the State
was unable to provide documentation in support of the claim. As
explained more fully below, we find that the additional depreciation
claimed was unallowable because it was improperly based on replacement
rather than historical cost.

Applicable Regulations

The regulations on which the Agency relied for the portion of the
disallowance relating to the State psychiatric hospitals were 42 CFR
405.415(a)(2) which provides that depreciation "must be based on the
historical cost of the asset. . .," and 42 CFR 405.415(b)(1), which
defines the term "historical cost" as "the cost incurred by the present
owner in acquiring the asset." Section 405.415(b)(1) continues, "(for)
depreciable assets acquired after July 1, 1970, the historical cost
shall not exceed the lower of current reproduction costs. . . or fair
market value at the time of purchase." 1

(2) These regulations cited above pertain to grants under title XVIII
(Medicare) of the Social Security Act, while the State's claim was under
title XIX (Medicaid). However, the Agency took the position that they
were nevertheless binding under the following logic: Under section
1903(a)(1) of the Social Security Act, the State may be reimbursed only
for Medicaid expenditures made "under the State plan." New Jersey's
State plan under title XIX provided, effective January 1, 1971, that
"the State agency will apply the same standards, cost reporting period,
cost reimbursement principles, and method of cost apportionment. . ." to
compute reimbursement to a hospital under title XIX as are used in
computing reimbursement to the hospital under title XVIII of the Social
Security Act (Medicare). /2/ Since the State utilized the cost
reimbursement principles at 42 CFR Part 405, including sections
405.415(a)(2) and 405.415(b)(1), to compute reimbursement for State
psychiatric hospitals under Medicare, these regulations applied in
computing reimbursement under Medicaid as well. Even hospitals which
did not participate in Medicare were nevertheless subject to the same
regulations under another provision of the State plan which stated that,
for those hospitals not participating in Medicare, "the State agency
will apply the standards and principles described in . . . (42 CFR
405.402 - 405.454)."


The regulation on which the Agency relied for the portion of the
disallowance relating to ICFs/MR was 45 CFR Part 74, Subpart Q, Appendix
C, Part II, B.11. (1973), which stated:

a. Grantees may be compensated for the use of buildings, capital
improvements, and equipment through use allowance or depreciation. . .
.

b. The computation of depreciation or use allowance will be based on
acquisition cost. Where actual costs records have not been maintained,
a reasonable estimate of the original acquistion cost may be used in the
computation. . . ."

Part 74 of 45 CFR is specifically made applicable to state Medicaid
programs by 45 CFR 201.5(e) (1973).

In disallowing the entire claim for lack of documentation, the Agency
relied on 45 CFR 201.5(a)(3) (1970), 42 CFR 433.32 (1979), and 42 CFR
431.17 (1979), which, taken together, require that only actual
expenditures, (3) supported by fiscal records adequate to assure that
claims for federal financial participation are in accord with applicable
federal requirements, be reported on the quarterly statement of
expenditures.

State's Arguments and Discussion

The State argued that it was not required to claim depreciation on
the basis of historical rather than replacement cost, for a number of
reasons, discussed individually below. The State also argued that its
claim was properly documented. Since we conclude that the State's claim
was improperly based on replacement cost, however, we do not reach the
question of documentation.

I. The State asserted that 42 CFR 405.415(b)(1) included an
"exception for depreciation on post-1970 assets," apparently taking the
position that the State psychiatric hospitals qualified for such an
exception. (State's brief dated August 2, 1982, p. 6) As the Agency
pointed out, however, the regulation authorized depreciation based on
current reproduction (replacement) cost for assets acquired after July
1, 1970 "only if the cost to replace the asset is less than the cost of
acquiring the asset." (Agency's brief dated October 7, 1982, p. 4) this
clearly was not the case here, or there would be no claim for additional
depreciation.

II. The State argued that the computation of depreciation based on
replacement cost was "not a documented departure. . ." from Medicare
principles or at least not a significant enough departure from those
principles to require that the State plan be amended before that method
of computation could be used. It asserted that "deviations (from the
State plan) of a lesser nature can be accomodated without the need for a
plan amendment. . ." (State's brief dated August 2, 1982, p. 12) The
State did not dispute, however, that its title XIX plan required that it
use the same principles for Medicaid as it utilized for Medicare, or
that it in fact used the principles at 42 CFR Part 405 to compute
reimbursement for State psychiatric hospitals under Medicare. Since it
is clear that 42 CFR 402.415(a)(2) requires that historical cost be the
basis for computing depreciation here, we conclude that the State did in
fact depart from the Medicare principles which governed reimbursement of
State psychiatric hospitals under Medicaid as well.

Furthermore, we do not find any basis for the State's position that
it is entitled to reimbursement contrary to the terms of its State plan
on the ground that minor violations of a state plan do not justify a
plan amendment. The magnitude of the State's departure from the terms
of its title XIX plan is not relevant where its claim was disallowed
based in its failure to comply with the regulations made applicable by
that plan. (4) In our view, moreover, a $16 million claim computed on a
basis clearly not permitted by the regulations applicable under the
State plan represents more than a minor deviation from the State plan
and required a plan amendment under 45 CFR 205.5(a) (1974). That
section provides that "(a) State plan under title . . . 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."

III. The State argued that to require a state plan amendment would
frustrate congressional intent in enacting section 306 of Pub. L.
96-272, which established a two-year time limit for filing claims for
expenditures incurred on or after October 1, 1979, and requires that
most claims for expenditures incurred prior to that date be filed before
January 1, 1981 (later extended by regulation to May 15, 1981). The
State asserted that Congress did not "intend that needless procedural
barriers be raised to early and final resoltuion of the claims, such as
this, submitted in response to Pub. L. 96-272." (State's brief dated
August 2, 1982, p. 13) However, the Agency's disallowance of additional
depreciation costs based on the violation of applicable regulations does
not deprive the State of the right accorded by Pub. L. 96-272 to assert
retroactive claims. The issue here is whether the costs are allowable
costs, not whether they were claimed in a timely fashion.

IV. The State argued that 45 CFR Part 74, Subpart Q, Appendix C, Part
II, B.11. was "of questionable applicability to ICFs/MR . . ." on the
ground that Appendix C applied to "direct grants to state and local
activities. . ." and not to grants requiring a state plan. It argued
that title XIX providers are subject instead to state plan provisions
regarding reimbursement, and that, although New Jersey's state plan had
no provision regarding depreciation costs for ICFs/MR, it was more
appropriate to extend the State plan provision applicable to nursing
homes (permitting depreciation based on replacement cost) to ICFs/MR
than to apply the provision of Part 74. (State's brief dated August 2,
1982, p. 7, footnote)

The State did not argue, however, that it plan provision applicable
to nursing homes (ICFs) included ICFs/MR as a type of nursing home and
was thus directly applicable in this case. /3/ Moreover, the Agency
pointed out (5) that the State had an approved plan for reimbursement of
ICFs/MR effective January 1, 1980 which incorporated Medicare principles
of reimbursement. (Agency's brief dated October 7, 1982, p. 6) Thus,
assuming that 45 CFR Part 74 was not binding in this case, it would be
more appropriate to look to the January 1, 1980 State plan provision
specifically applicable to ICFs/MR than to the State plan provision
applicable to nursing homes to determine the permissible basis for
computing depreciation. (We note also that since the State's claim
extended to September 1980, the January 1, 1980 plan provision for
ICFs/MR would be directly applicable for part of the period in dispute.)


V. The State argued that 45 CFR Part 74, Subpart Q, Appendix C, Part
II, B.11., gave it discussion "to go beyond mere historical cost. . . "
in computing depreciation. (State's brief dated August 2, 1982, p. 7)
It noted specifically that B.11.b. provided that "(where) actual cost
records have not been maintained, a reasonable estimate of the original
acquisition cost may be used in the computation." Since the issue here
is whether the State properly used replacement cost to compute
depreciation, however, the authority contained in the regulation to
estimate historical cost is not relevant. The State also asserted that
it was not limited to historical cost in view of the following language
in B.11.e.:

No depreciation or use charge may be allowed on any assets that would
be considered as fully depreciated: provided, however, that reasonable
use charges may be negotiated for any such assets if warranted after
taking into consideration the (following factors). . . .

However, this provision merely permits, under certain circumstances,
use charges on assets which have been fully depreciated; it does not
speak to the issue of the basis on which depreciation should be
computed.

VI. The State asserted that the use of replacement cost depreciation
had been approved by the Agency in two other health are payment systems:
New Jersey Diagnostic Related Group payment system for acute care
hospitals and New Jersey Medicaid Nursing Home Reimbursement System. /4/
It argued that "(considering) the similarities between these systems (6)
and those associated with the types of facilities in issue here, no real
substantive objections can be raised to New Jersey's implementation of
the same type of system for psychiatric hospitals and ICF/MR's."
(State's brief dated August 2, 1982, p. 10) The State also argued that
historical cost depreciation was inadequate. (State's brief dated August
2, 1982, pp. 8-9, 13) However, the Board has no authority to allow costs
based on equitable arguments where there is a clear violation of the
applicable regulations, since 45 CFR 16.14 (1981) clearly provides that
"(the) Board shall be bound by all applicable laws and regulations."
(See, e. g., Utah Department of Social Services, DGAB Decision No. 178,
May 27, 1981; New Jersey Department of Human Resources, DGAB Decision
No. 120, September 30, 1980.)


Conclusion

For the foregoing reasons, we conclude that the State's claim for
additional depreciation based on the replacement cost of assets was not
allowable under the regulations to State psychiatric hospitals and
ICFs/MR. Accordingly, we sustain the disallowance of $16,059,110 FFP
claimed under title XIX of the Social Security Act. /1/ The regulations
cited here were previously codified at 20 CFR 405.415. They
were effective November 22, 1966 (31 FR 14810), except for the second
sentence of section 405.415(b)(1) regarding depreciable assets acquired
after July 1, 1970, which was added effective August 1, 1970 (35 FR
12330). /2/ Although the State plan provision noted here was not
in effect during the first year covered by the State's claim (January 1,
1970 to January 1, 1971), the State did not argue that the plan
provision previously in effect was substantially different. /3/
In an effort to clarify this point, the Board requested copies of any
State plan provisions under Title XIX of the Social Security Act for
reimbursement of nursing of any type for the period 1978 to 1980.
(Letter to parties dated January 11, 1983, confirming oral request on
January 7, 1983; January 25, 1983 telephone call to State's
representative). However, these documents were never received.
/4/ Both parties' briefs seem to assume that there is some distinction
between the State plan provision regarding nursing homes referred to in
IV. Above and the New Jersey Nursing Home Medicaid Reimbursement
System. If there is no distinction, then the State's Argument, and the
Board's position, are the same as in IV.

OCTOBER 22, 1983