GAB Decision 396
March 8, 1983
New Jersey Department of Human Services;
Ford, Cecilia; Garrett, Donald 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), disallowing federal financial
participation (FFP) claimed by the State under title XIX (Medicaid) of
the Social Security Act for the period January 1970 through June 1979.
The State appealed $10,026,018 of the $10,342,684 disallowed, conceding
that the remaining amount was not properly documented. (State's brief
dated September 20, 1982, p. 2; Transcript of Hearing held December
14-15, 1982 (Tr.), pp. 74-75) The State later noted that, after the
appeal was filed, the Agency paid part of the claim (for the year ended
June 30, 1979), reducing the amount in dispute to $9,321,087. (State's
reply brief dated November 15, 1982, p. 3) The Agency agreed that the
latter amount was the amount in dispute before the Board, although it
stated that payment by the Agency for the year ended June 30, 1979 was
not an admission that the claim was valid. (Tr., p. 36)
The amount in dispute represented the difference between interim
Medicaid payments to four State psychiatric hospitals, which were
computed using the final Medicare per diem rate, and final Medicaid
settlements, /1/ which involved several adjustments to the Medicare cost
report on which the interim Medicaid payments were based. /2/ The Agency
has acknowledged that two of the adjustments, the exclusion of the
inpatient routine nursing cost salary differential and the addition of
hospital based physicians costs, were justified in principle, although
it has not reviewed the specific computations made by the State. (Tr.,
pp. 265-266) Accordingly, with the parties' agreement (see Confirmation
of Telephone Conference, dated January 12, 1983), the Board is remanding
this portion of the appeal (2) to the Agency as provided in the
Conclusion of this decision. The remaining adjustments made as part of
the final settlements involved breaking down "inpatient routine costs"
as shown on the Medicare cost report (Form HCFA-2552) for each of the
State psychiatric hospitals into three separate cost centers:
Children's Unit, Medical/Surgical Unit, and All Other Inpatient Units.
This resulted in higher Medicaid reimbursement since more Medicaid
services were rendered in the higher cost Children's Unit and
Medical/Surgical Unit than in other units. The Agency disallowed the
costs on the ground that the State did not obtain Agency approval prior
to using this "discrete costing method." (Notice of disallowance dated
May 11, 1982, p. 3) For the reasons discussed below, we find that the
applicable regulations require that routine costs of the type involved
in this case be treated as a single unit, and that the additional
federal financial participation claimed on the basis of the separate
identification of Children's Units and Medical/Surgical Units is not
allowable.
This decision is based on the parties' submissions pursuant to 45 CFR
16.8, the hearing transcript, and the parties' written, post-hearing
summations. The Agency moved to exclude from the record a letter dated
February 1, 1983 from an official of the State's fiscal intermediary,
which was attached to the State's summation, on the grounds that the
letter introduced irrelevant matters, that its author had not been
qualified as an expert, and that there was no opportunity for
cross-examination. The letter arguably rebuts testimony by an Agency
witness at the hearing, and is therefore relevant (although we do not
reach the issue raised by the testimony and the letter in deciding this
case). Since we do not rely on the letter, the absence of an
opportunity for cross-examination or to attack the author's credentials
does not prejudice the Agency. Accordingly, the Agency's motion is
denied.
AGENCY'S ARGUMENTS
The Agency took the position that the State was not permitted to
break down general routine services into discrete cost units in
computing its final Medicaid settlements since it had not received
approval to do so in computing final medicare settlements. It cited in
support of its position a provision of the Medicare perinciples of
reimbursement, 42 CFR 405.452(d)(7) (1980), which directs that a state
use "the total allowable cost for routine services" in the computation
of the Medicare per diem rate. (Tr., p. 186) The Agency contended that
the only exception was articulated in the Provider Reimbursement Manual
(HIM-15), Part I, Section 2336, which it asserted required that a
hospital obtain the Agency's prior approval to use a "discrete costing"
approach to determine reimbursement (3) under Medicare. The Agency
asserted that such approval had not been requested, /3/ and that it was
likely that such approval would have been denied if requested on the
ground that the psychiatric hospitals did not meet the cost accounting
criteria set forth in Section 2336. (Agency's brief dated October 27,
1982, pp. 7, 9-10; Tr., p. 199) The Agency asserted, and the State did
not dispute, that the State's actual practice under Medicare was
applicable to the Medicaid program, in the case of hospitals
participating in both programs, under the State's title XIX plan,
effective January 1, 1971. /4/ That plan provided, in pertinent part,
that --
For each hospital also participating in the Health Insurance for the
Aged program under Title XVIII (Medicare) of the Social Security Act,
the state agency will apply the same standards, cost reporting period,
cost reimbursement principles, and method of cost apportionment
currently used in computing reimbursement to such hospital under Title
XVIII of the Act . . . .
The State's title XIX plan also provided that --
For each hospital not participating in the program under Title XVIII
of the Act, the State agency will apply the standards and principles
described in . . . (42) CFR 405.402-405.454 (Medicare cost reimbursement
principles) . . . .
The agency admitted that, under the latter provision,
non-participating hospitals could theoretically use the discrete costing
method. (Participating hospitals, in the Agency's view, could not use
this method under the applicable plan provision because it was not
"currently (4) used" to determine Medicare reimbursement.) However,
the
Agency asserted that the Hospitals which were (in part)
non-participating for part of the period involved in this claim (Trenton
and Ancora, see R., p. 184) were nevertheless required to obtain prior
approval to use the discrete costing method under HIM-15, Part I,
Section 2336, and 42 CFR 447.261(a) (1980). The latter provides that --
The Medicaid agency must pay the reasonable cost of inpatient
hospital services under methods and standards developed by the State and
approved by the Regional Medicaid Director before implementation.
(Agency's brief dated October 27, 1982, pp. 13-14)
The Agency also asserted that it was possible that, in using the
discrete costing method to calculate Medicaid reimbursement, the State
might have violated section 1902(a)(13)(D) of the Social Security Act,
which provides that the reasonable cost of inpatient hospital services
provided under a state's title XIX plan "shall not exceed the amount
which would be determined . . . as the reasonable cost of such services
for purposes of title XVIII . . . ." (Agency's brief dated October 27,
1982, p. 11)
Finally, the Agency suggested that the manner in which the State
determined the costs of the separately identified units as well as the
Medicaid patient days for each unit may not have been proper. (Agency's
brief dated October 27, 1982, p. 18; Tr., pp. 303, 310) /5/
STATE'S ARGUMENTS
The State took the position that the Medicare principles of cost
reimbursement did not prevent it from making adjustments in the Medicare
cost report to reflect differences between Medicaid and Medicare
coverage and usage of services. The State asserted that, because of
these differences, the psychiatric hospitals were not adequately
reimbursed upon interim settlement for the reasonable cost of the
Medicaid services they provided. The State argued that it was entitled
to make adjustments to (5) assure adequate reimbursement based on 42
U.S.C. 1395x(v)(1)(A), which provides in pertinent part that regulations
establishing the methods to be used to determine the reasonable cost of
Medicare services shall --
provide for the making of suitable retroactive corrective adjustments
where, for a provider of services for any fiscal period, the aggregate
reimbursement produced by the methods of determining costs proves to be
either inadequate or excessive.
The State also relied on 42 CFR 405.402(b)(3) (1980), which provides
that one of the goals of the Medicare principles is --
That there be a division of the allowable costs between the
beneficiaries of this program and the other patients of the provider
that takes account of the actual use of services by the beneficiaries of
this program and that is fair to each provider individually.
In addition, the State cited in support of its position 42 CFR
405.403(b) (1980), which states that, in establishing methods of
apportioning cost for the Medicare program --
The objective has been to adopt methods . . . that would, to the
extent reasonably possible, result in the program's share of a
provider's total allowable costs being the same as the program's share
of the provider's total services. This result is essential for carrying
out the statutory directive that the program's payments to providers
should be such that the costs of covered services for beneficiaries
would not be passed on to nonbeneficiaries, nor would the cost of
services for nonbeneficiaries be borne by the program.
(State's brief dated September 20, 1982, Attachment 3, pp. 1-3)
The State asserted in particular that the services provided in the
Children's Unit of the hospitals were not a covered service under
Medicare, and argued that the cost of the Children's Units was properly
segregated from the general inpatient routine costs in order to assure,
in accordance with the authorities cited above, that the costs borne by
the program related to the costs associated with providing care for its
beneficiaries. (State's reply brief dated November 15, 1982, p. 10) The
State also noted that nursery costs, a non-covered service under
Medicare, are treated separately from routine costs under Medicare, and
argued that the Children's Units could be separately identified (for
purposes of Medicaid reimbursement) by analogy. (State's reply brief
dated November 15, 1982, p. 10) Similarly, the State argued (6) that
when a state's title XIX plan covers services not covered under Medicare
such as dental, dietary or podiatric services, the state is not
considered to have violated the Medicare principles of reimbursement in
treating the cost of these services as allowable Medicaid costs. (Tr.,
pp. 257-259; State's Summation dated February 4, 1983, pp. 2, 4)
In addition, the State noted that during the time when Trenton
Psychiatric Hospital was decertified for Medicare purposes, it was
permitted to claim reimbursement under Medicaid for the Children's Unit
only. It asserted that this amounted to discrete costing of the
Children's Unit, yet was not considered a departure from Medicare
principles. The State asserted that discrete costing was also permitted
for the Children's Unit at Ancora State Hospital when that unit was
decertified, at which time the costs incurred in the unit were excluded
from the rate calculation. The State asserted that, in both cases,
discrete costing had been permitted on a retroactive basis with no
requirement that the hospitals qualify under Section 2336 of HIM-15,
Part I, or that the State submit a plan amendment.
The State argued further that the separate identification of the
Children's Unit and the Medical/Surgical Unit was proper on the ground
that they each qualified as a "cost center" as defined in HIM-15,
Part
I, Section 2302, which states that a cost center is --
A division, a department, or subdivision thereof, a group of services
or employees or both; or any other unit or type of activity into which
functions of an institution are divided for purposes of cost assignment
and allocations. (Tr., p. 146)
The State also relied on the instructions on Form HCFA-2552, which,
according to the State, specify that the categories of services printed
on the form are only general and may be tailored to fit the needs of a
particular institution, and on the fact that blank lines are available
on the form for the addition of other categories. The State argued that
the failure of the HCFA-2552 to show the type of breakdowns which the
State made in this case was attributable to the fact that it was a
Medicare and not a Medicaid form, and did not mean that the breakdowns
were not permitted. (Tr., p. 149, 151) The State also asserted that it
was permitted to adapt the cost report form to the needs of the Medicaid
program under 42 CFR 405.401(d) (1980), which states that --
the (Medicare) principles (of reimbursement) are flexible on many
points. They offer certain alternatives and options designed to fit
individual circumstances. (Tr., p. 151)
(7) The State argued further that HIM-15, Part I, Section 2336 did
not apply to psychiatric hospitals, but rather to general acute care
hospitals, and that in any event it was only an interpretation of
applicable regulations, and was thus not binding on the State. In
addition, the State asserted that Section 2336 did not apply because the
State did not wish to establish distinct cost entities with separate
provider numbers as provided in that section. (Tr., pp. 72-74, 87-88,
164) The State also argued, in the alternative, that even if Section
2336 did apply, the hospitals had adequate accounting capability to
qualify under that section. (State's Summation dated February 4, 1983,
p. 3)
The State also argued that a requirement of prior approval would
frustrate congressional intent in enacting section 306 of Pub. L.
96-272, which establishes 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 it would be unfair "to invite states to resolve
outstanding issues . . . and then deny these claims on the basis that
retroactive claims cannot be accepted." (State's brief dated September
20, 1982, p. 14)
Finally, the State asserted that the use of discrete costing would
not cause it to exceed the upper limits on Medicaid costs established by
section 1902(a)(13)(D), as the Agency suggested, since the amount of
Medicaid reimbursement was properly compared to the amount that would
have been reimbursed under Medicare if Medicare had covered the same
services. (Tr., p. 170)
DISCUSSION
Applicability of HIM-15, Part I, Section 2336
As indicated above, the Agency took the position that prior approval
for discrete costing was required under HIM-15, Part I, Section 2336.
We agree with the State, however, that Section 2336 is not applicable in
this case since that section pertains specifically to general hospitals.
Section 1861 of the Social Security Act separately defines the terms
"hospital", "psychiatric hospital," and "tuberculosis
hospital" (at
subsections (e), (f) and (g), respectively). We think it is reasonable
to assume that the term "general hospital" as used in Section 2336
(8)
is synonomous with "hospital" as defined in the Social Security Act,
and
that Section 2336 thus has no application to the psychiatric hospitals
in question in this case. /6/
Medicare Cost Reimbursement Principles
Although we do not agree with the Agency that there was an exception
to the Medicare principles which required that psychiatric hospitals
obtain prior approval for discrete costing, we do agree with the Agency
that the Medicare principles otherwise provide for the treatment of the
routine costs in question here as a single unit. The Medicare cost
reimbursement principles, found in 1980 at 42 CFR Part 405, Subpart D,
provide two methods, the departmental method, and the combination
method, for apportioning the total allowable costs of a Medicare
provider between Medicare beneficiaries and other patients. Pursuant to
section 405.453(d), the State psychiatric hospitals involved in this
case were required to use the departmental method of cost apportionment
since they had elected to use the stepdown method of cost finding (cost
finding being defined at section 405.453(b)(1) as the process of
recasting the data derived from the accounts ordinarily kept by a
provider to ascertain costs of the various types of services rendered).
Under the departmental method of cost apportionment, costs are
classified as incurred for either routine services or ancillary
services. Routine services are defined at section 405.452(d)(2) as --
the regular room, dietary, and nursing services, minor medical and
surgical supplies, and the use of equipment and facilities for which a
separate charge is not customarily made.
Ancillary services are defined at section 405.452(d)(3) as --
the services for which charges are customarily made in addition to
routine services.
The costs of each type of service are then broken down by department.
Departments under routine services include general routine and, for
hospitals, any "intensive care type inpatient units." Departments
(9)
under ancillary services include operating rooms, delivery rooms,
pharmacy, x-ray, laboratory, and others. For each department under
routine services, the costs allocable to Medicare beneficiaries are
determined "on the basis of a separate average cost per diem for general
routine patient care areas, . . . and in hospitals a separate average
cost per diem for each intensive care unit, coronary care unit, and
other intensive care type inpatient hospital units." Section
405.452(b)(1). /7/ Nursery costs are required to be excluded from
routine costs (on the basis that there is no Medicare coverage). 42 CFR
405.452(d)(7). The per diem cost for each of the departments within
routine services is multiplied by the number of Medicare patient days to
arrive at the costs allocable to Medicare beneficiaries.
Thus, the Medicare cost principles provide for a breakdown of routine
services into the following units: general routine, intensive
care-type, and nursery. Although the principles do not expressly
preclude the identification of other types of units, HIM-15 states that
--
If the (cost) unit does not meet the definition of a special care
unit (the terminology under superseded regulations at 45 CFR 405.452(
b)(1) (1977) for intensive care type units), then the cost of such
services cannot be included in a separate cost center, but must be
included in the general routine service cost center.
Provider Reimbursement Manual, Part I, Section 2202.6. The State
asserted, and we agree, that HIM-15 does not have the binding effect of
a regulation; however, we believe that it is entitled to some weight as
the Agency's official interpretation of the Medicare cost reimbursement
principles, of which the State had notice.
State's Computation of Final Medicaid Settlements
The method used by the State to compute final Medicaid settlements
for the State psychiatric hospitals is clearly different from the method
prescribed by the Medicare cost reimbursement principles indicated
above. For each of the psychiatric hospitals, the State took the costs
shown on the Medicare cost report for "general routine inpatient,"
and
divided them into three units: Children's Unit, Medical/Surgical Unit,
and All Other Inpatient Units. The latter category included acute
psychiatric, geriatric, and admissions.
(10) (Notice of disallowance dated May 11, 1982, p. 2) Per diem costs
were computed for each of these three units based on costs for each unit
divided by total patient days in each unit. The costs allocable to
Medicaid were determined by multiplying the per diem cost for each unit
by the number of Medicaid patient days for that unit. Since the per
diem cost of the Children's Unit and the Medical/Surgical Unit was
higher than the per diem cost of all other units, and there were more
Medicaid days in the first two units than in all other, the amount of
the final Medicaid settlements exceeded the amount of the interim
Medicaid settlements, although the total routine costs and total patient
days remained the same. (Tr., pp. 92 158-159)
We conclude that, in computing final Medicaid settlements in this
manner, the State violated the provisions of its title XIX plan which
required that it apply Medicare cost reimbursement principles to
determine reimbursement under Medicaid. /8/
The State's title XIX plan calls for the application of the Medicare
principles to calculate Medicaid reimbursement. There is no indication
in the language of the plan of any intent to allow the State to adapt
the Medicare principles to fit any distinguishing features of the
Medicaid program. Moreover, the Medicaid regulations specify only two
adjustments to the Medicare principles which should be made in
calculating Medicaid reimbursement where a state has elected to use the
Medicare principles. Section 447.261(c) of 42 CFR (1980) provides that
--
If the Medicare standards and principles are adopted, they must be
modified to --
(1) Exclude the inpatient routine nursing salary cost differential
under Sec. 405.430 of this chapter; and
(11) (2) Apply the limits (on reimbursable provider costs)
established by the Secretary under Sec. 405.460 of this chapter.
Neither of the adjustments described in (1) and (2) above have any
relationship to the discrete costing method used by the State in this
case to calculate Medicaid reimbursement. Furthermore, this provision
does not appear to contemplate any adjustments other than the ones
described.
Moreover, the use of methods of reimbursement other than the Medicare
principles incorporated by reference in the State's title XIX plan
violated 42 CFR 447.261(a), requiring the Regional Medicaid Director's
prior approval of such methods (provision quoted on p. 4 of this
decision). The methods specified in the plan were approved upon
approval of the plan itself; use of other methods would have required a
plan amendment. (Since additional expenditures resulting from a plan
amendment are allowable only "as of the first day of the calendar
quarter in which an approvable amendment is submitted . . . ," 45 CFR
205.5(b) (1974), a plan amendment submitted now would not cover the
State's claim here.)
Inadequate Reimbursement of Reasonable Costs under Medicaid
As noted above, however, the State argued that if the Children's
Units and the Medical/Surgical Units were not identified separately from
other routine costs, the hospitals would be reimbursed less than the
actual cost incurred for Medicaid. The Agency in fact acknowledged that
this was true, (although it correctly pointed out that the cost of these
units was included in determining the Medicare per diem rate). (Tr.,
pp. 237-238; Agency's Summation dated February 22, 1983, pp. 5-6)
Nevertheless, we are not persuaded that this situation contravened any
of the provisions of law or regulation cited by the State.
Section 1395x(v)(1)(A) of 42 U.S.C. requires, in effect, that the
Agency allow retroactive adjustments where a provider has been
inadequately reimbursed using the methods of determining reasonable
Medicare costs prescribed by the Agency.The fact that the hospitals were
reimbursed less than their actual costs does not necessarily mean that
they received inadequate reimbursement within the meaning of the
statute, however. It is arguable that the hospitals were adequately
reimbursed as long as they received their average cost. We note, in any
event, that section 1395x(v)(1)(A) is specifically applicable to
Medicare, and that there is no dispute that the providers were
adequately reimbursed for their costs under that program.
(12) The State also cited two provisions of the Medicare principles
for the proposition that the Medicare program and the Medicaid program
should each bear their fair share of the costs incurred by a provider,
maintaining that unless discrete costing were employed, the Medicaid
program would bear less than its fair share. However, the provisions
cited by the State -- 42 CFR 405.402(b)(3) and 405.403(b) -- are
specifically identified as statements of goals or objectives of the
Medicare principles, and as such do not authorize methods of cost
apportionment other than those specified in the Medicare principles.
A related regulation in the Medicaid regulations, not cited by the
State, provides that --
Payment rates mut not be set lower than rates that the agency
reasonably finds to be adequate to reimburse in full the actual
allowable costs of a facility.
42 CFR 447.302(b) (1980). However, although the hospitals in
question in this case received less than their actual costs for
Medicaid, the State acknowledged that they may have been overreimbursed
under Medicare. (Tr., pp. 133, 157-158) The net effect of Medicaid
underpayments and the Medicare overpayments would approximate full
payment of the actual allowable costs of each hospital as a whole.
Thus, the State would receive the benefit of this regulation even if
discrete costing were not permitted.
Analogy to Other Services Not Covered by Medicare
We are not persuaded, moreover, that discrete costing of the
Children's Units is justified on the basis that similar treatment is
accorded to nursery, dental, dietary and podiatric services. As noted
previously, under the State's title XIX plan and the applicable Medicaid
regulation at 42 CFR 447.261(c), the Medicare principles are to be
applied directly to the Medicaid program, with only two modifications
not relevant here. Thus, the fact that the Medicare principles (at 42
CFR 405.452(d)(7)) specifically provide for the exclusion of nusery
costs from routine costs is not authority for similar treatment of the
costs of the Children's Unit. Moreover, it should be noted that the
State does not seek to exclude the cost of the Children's Units from its
calculations, but rather to identify it as a separate line item for
which it will be reimbursed. Thus, the treatment of nursery costs under
the Medicare principles is not in fact analogous to the treatment sought
by the State for Children's Units. The State may have intended to argue
that it should be permitted to separately identify the Children's Unit
in computing Medicaid reimbursement because nursery costs, although
excluded from the Medicare cost report, are permitted to be added (13)
back to compute Medicaid reimbursement. However, we agree with the
Agency that the analogy does not work because the cost of the services
provided in the Children's Unit as well (as the Medical/Surgical Unit),
unlike nursery costs, is already included in the Medicare cost report.
(Agency's Summation dated February 22, 1983, p. 6)
Furthermore, with respect to the dental, dietary, and podiatric
services, there is no dispute that these services may be identified
separately from other routine costs in calculating Medicaid
reimbursement only where a state's title XIX plan specifies that they
will be covered by Medicaid. We agree with the Agency (Tr., pp.
259-260) that a state which has provided in its plan for Medicaid
coverage of these services has in effect adopted an alternative to the
Medicare principles of reimbursement (as authorized by 42 CFR 447.261(
b)(2) (1980)). The treatment of dental, dietary, and podiatric services
under such circumstances is plainly not analogous to the situation
presented here where the State is operating under a title XIX plan which
unambiguously elects the Medicare principles as the method of
determining Medicaid reimbusement.
Certification or Decertification of Children's Unit Only
We are also not persuaded that discrete costing was involved when,
Trenton Psychiatric Hospital having been decertified for Medicare
purposes, the Agency permitted Medicaid reimbursement to be calculated
based on the cost of its Children's Unit only. In our view, the
Children's Unit was at that time a separate provider, since no eligible
services were being provided in other parts of the hospital. A separate
provider is entitled to be reimbursed based on the costs which it alone
incurs. This situation did not exist where the hospitals were certified
in their entirety to provide Medicare and Medicaid services. Similarly,
when the Children's Unit at Ancora State Hospital was decertified, the
costs of that unit were properly excluded from the rate calculation only
because the unit was in effect a separate provider. Thus, we do not see
any authority for discrete costing of the Children's Units under other
circumstances. (We note in any event that the State did not provide any
detail regarding how reimbursement for Trenton and Ancora was calculated
under the circumstances described here. Thus, it is not clear that the
calculations even resembled the type of discrete costing on which the
claim before us is based.)
Definition of Cost Center
We agree with the State that the Children's Unit and the Medical/
Surgical Unit are properly classified as separate cost centers under
HIM-15, Part I, Section 2302. However, that section indicates that this
(14) classification is made "for purposes of cost assignment and
allocations." The process involved in this case, on the other hand, is
cost apportionment, the division of costs between programs which comes
after cost assignment and allocation (also termed "cost finding" in
the
regulations). The fact that the Children's Unit and Medical/Surgical
Unit were properly treated as separate cost centers for one purpose does
not mean that they may be separately identified under all circumstances.
Form HCFA-2552
As indicated above, the State argued that the instructions and format
of the Medicare cost report form (HCFA-2552) indicated that
modifications of the preprinted cost categories were permitted. We do
not find any language in the instructions of that form which authorizes
a provider to modify the form in any way, however. In any event, the
State did not allege that the form provided any indication of what type
of modifications might be necessary; accordingly, it cannot be viewed
as authority for making modifications which would not otherwise be
permissible. We find the State's point that the form could not possibly
specify adjustments relating to Medicaid because it was a Medicare form
to be without any basis since HIM-15 clearly indicates that the
HCFA-2552 is to be used "for the computation of reimbursable hospital
and subprovider component inpatient costs applicable to titles V and
XIX" of the Social Security Act as well as to compute Medicare
reimbursement. HIM-15, Part II, Sec. 300.
Flexibility of Medicare Principles
In our view, moreover, the State has misread 42 CFR 405.401(d) in
taking its reference to the flexibility of the Medicare principles as
authority for discrete costing. That provision clearly indicates that
the flexibility of the principles lies in the fact that the principles
themselves "offer certain alternatives and options designed to fit
individual circumstances." In this case, however, the State is not
seeking to avail itself of any of the alternatives and options which are
built into the principles, but rather to utilize a method of cost
apportionment other than those provided for in the principles.
Conflict with Section 306 of Pub. L. 96-272
As noted above, the State argued that a requirement of prior approval
would frustrate congressional intent in enacting section 306 of Pub. L.
96-272, a statute of limitations for retroactive claims under several
titles of the Social Security Act. However, the disallowance of
additional costs based on violations of the state's title XIX plan and
applicable regulations does not deprive the State of the right accorded
(15) by Pub. L. 96-272 to assert retroactive claims. The issue here is
whether reimbursement was calculated in a proper manner, not whether it
was claimed in a timely fashion.(Cf., New Jersey Department of Human
Services, Decision No. 383, January 31, 1983, p. 4)
Upper Limits on Medicaid Reimbursement
As also noted above, the State argued that use of the discrete
costing method would not result in its exceeding the Medicaid upper
limits in violation of section 1902(a)(13)(D) of the Social Security
Act. Since we conclude that use of the discrete costing method was not
authorized, we do not reach this issue.
Program Purposes
We note that our determination that discrete costing is not legally
permissible under the circumstances of this case may serve program
purposes as well. As indicated at p. 12 of this decision, the use of
discrete costing to determine Medicaid reimbursement arguably may have
required an adjustment in Medicare reimbursement as well. Thus, to
permit discrete costing only on a prospective basis assures that the
necessary adjustments are made in both programs. In addition, the
requirement that discrete costing be provided for in a state plan would
make it more likely that providers had the necessary accounting
capability to support this method of determining Medicaid reimbursement.
Ancillary Services
In testimony at the hearing, the State indicated that there were a
number of ancillary services provided in the Children's Units which were
improperly included as part of routine costs. (Tr., p. 89) It is not
clear how this asserted fact would justify identifying the Children's
Units separately from other routine costs. Nevertheless, if any of the
ancillary services referred to by the State met the definition of that
term in 42 CFR 405.452(d)(3), the State should be permitted to list them
separately from routine costs for purposes of computing Medicaid
reimbursement.
CONCLUSION
We find that the State was required under its title XIX plan to use
the Medicare principles of reimbursement at 42 CFR Part 405, Subpart D,
to determine reimbursement for State psychiatric hospitals under
Medicaid; that the Medicare principles require that all routine costs
of the type involved in this case be treated as a single unit; and that
neither the (16) State plan nor the applicable Medicaid regulations
permit the State to modify the Medicare principles by identifying the
costs of the Children's Units and Medical/Surgical Units separately from
other routine costs in computing Medicaid reimbursement. Accordingly, we
sustain that portion of the disallowance which reflects additional
federal financial participation claimed on the basis of the separate
identification of the costs of the Children's Units and Medical/Surgical
Units. It having been agreed that there is no legal issue present in
the case with respect to the allowability of additional federal
financial participation claimed based on the addition of hospital based
physicians costs offset by the exclusion of the inpatient routine
nursing cost salary differential, we remand that portion of the appeal
to the Agency. The Agency should proceed to review any documentation
made available by the State /9/ and should within 90 days (or such
longer period found by the Agency to be necessary and to which the State
consents) issue a written determination regarding the amount found
allowable. If the matter is not resolved to the State's satisfaction,
it may appeal to the Board within 30 days of its receipt of the Agency's
determination. In addition, at the time it makes available the
documentation referred to above, the State may also request that the
Agency determine whether the cost of certain ancillary services
specifically identified by the State which were previously included as
routine services may be treated separately, and if so, the amount of any
additional federal financial participation resulting from such
treatment.
/1/ The State did not seek final Medicaid settlements for any of
these institutions for a period of nearly ten years. /2/ The
Medicare program is authorized under title XVIII of the Social Security
Act, Part A of which provides for hospital insurance benefits for the
aged and disabled. The Medicaid program is authorized under title XIX
and provides for grants to states for medical assistance programs. /3/
Although the State did at one time make a request to establish
the Medical/Surgical Units as separate cost entities under Section 2336,
the request was not official since it was submitted to the fiscal
intermediary for Medicare and not the Agency as required by Section
2336. (Tr., pp. 65-66, 252-253, 271) It should also be noted that the
State asserted that the purpose of the request was to establish Medicaid
coverage for the 21 to 65 age group, a group not covered by the instant
claim, and that the request thus does not necessarily constitute an
admission by the State that Section 2336 is applicable here. (Tr. pp.
134, 137, 164) /4/ Although part of the State's claim was for a
priod prior to the January 1, 1971 effective date of this State plan
provision, the State stated that it was bound by the Medicare principles
of reimbursement for the prior period as well. (Tr., p. 167)
/5/ The Agency also argued initially that prior approval of discrete
costing for all of the hospitals was necessary under a regulation
requiring prior approval of "more sophisticated methods of cost finding"
(42 CFR 405.453(d)(2)(ii) (1980)); however, the Agency later stated
that it did not consider discrete costing a more sophisticated method
within the meaning of the regulation. (Tr., pp. 266-267) /6/ In
view of this conclusion, we do not reach the question, raised by the
State, whether the establishment of separate cost entities within a
general hospital provided for in Section 2336 is different from the
identification of discrete elements within routine costs. We also need
not reach the question whether the hospitals had adequate accounting
capability to qualify under Section 2336. /7/ For cost reporting
periods prior to January 1, 1972, the Medicare principles do not
identify intensive care type inpatient units separately from other
routine services. 42 CFR 405.452(d)(7). /8/ It is not necessary
for purposes of this case to distinguish between the plan provision
applicable to hospitals participating in the title XVIII program and
that applicable to non-participating hospitals, since we have found that
HIM-15, Part I, Section 2336, did not constitute an exception for
psychiatric hospitals to the requirement of the Medicare principles that
general routine costs be treated as a single unit. (If such an
exception had been available, the non-participting hospitals, under the
relevant plan provision, might arguably have been permitted to avail
themselves of it, while the participating hospitals could not since no
request for the exception was made for Medicare purposes. See pp. 3-4
of this decision.) /9/ Although the five boxes of documentation
offered in evidence by the State at the hearing were not admitted and do
not constitute part of the record for this Decision No. 396, the Agency
may of course consider them.
OCTOBER 22, 1983