GAB Decision 452
Docket No. 82-237
July 29, 1983
New York Department of Social Services;
Garrett, Donald; Settle, Norval Teitz, Alexander
The New York State Department of Social Services (State) appealed
from a determination by the Health Care Financing Administration
(Agency) disallowing five claims totalling $26,336,793 in federal
financial participation (FFP). The claims were for per diem rates
reimbursing certain state-operated (public) facilities for medical
assistance services provided under Medicaid for the last three quarters
of 1981. Specifically, the Agency disallowed the portion of the rates
which represented costs of vacation leave earned by employees of the
facilities. The basic question is whether the State may obtain FFP for
portions of the rates prior to the State's actual disbursement of State
funds for those amounts. A summary of the Board's decision is provided
below. We conclude that the disallowance should be reversed for the
reasons set forth in our analysis.
Our decision is based on the written record, including the parties'
responses to the Board's Tentative Findings and Conclusions and Order to
Develop the Record, and a telephone conference in which the parties
responded to questions by the Board and generally discussed the issues.
Summary of the Decision
The Agency questioned the State's claims for portions of the per diem
rates because the State did not actually pay to the facilities amounts
identified as the full per diem rates. Instead, the State paid the
facilities' current operating costs, and recorded the long-term accrued
vacation costs accrued by employees of the facilities in an "account
group" which did not reflect currently available sources of revenue.
The Agency claimed that the State violated certain general federal
guidelines for financial management by claiming the per diem rates for
FFP on an accrued basis. The Agency asserted that the State was not
using an accrual method of accounting at the State level and, therefore,
was treating the vacation costs inconsistently, in violation of OMB
Circulars A-87 and A-102. Moreover, the Agency asserted that the State
did not minimize the amount of time which elapsed between the State's
drawdown of federal funds under its letter of credit and the State's
disbursement of funds for the full portion of the rates, thereby
violating 45 CFR (2) 74.61(e) and 74.92. Finally, the Agency questioned
the timing of the State's claim for FFP by taking the position that the
State had not made an "expenditure" under section 1903(a)(1) of the
Act
until it had made the appropriate accounting transaction. The Agency
claimed that the State must make a disbursement of State funds for the
full amount of the rates in order to make the appropriate accounting
transaction.
We conclude that the State was using accrual accounting, under the
definitions set out in Agency regulations and generally accepted
accounting principles, and that the State did not treat the costs
included in the per diem rates inconsistently. Furthermore, we conclude
that any "float" of the federal share which occurred as a result of
the
State's cash flow system was not improper under applicable regulations,
and that the State's claim for the full per diem rates was an
"expenditure" under section 1903(a)(1) of the Social Security Act
(the
Act). We conclude that a requirement that the State make an actual
disbursement for the full rates paid to public facilities would be
inconsistent with the Agency's present articulations of the general
guidelines for financial management and of the statutory and regulatory
scheme of Medicaid reimbursement for these facilities. Therefore, we
conclude that the Agency has not shown that these principles require the
State to make a disbursement for the full per diem rates prior to
claiming them for FFP, or that imposing such a requirement is fair or
serves any meaningful purpose here.
Our conclusions do not prevent the Agency from reviewing the accuracy
of the amount claimed, nor do they prevent the Agency from developing a
policy on a prospective basis which would provide clear notice to the
states that they must implement the financial management guidelines in
the manner argued by the Agency here.
Background
Title XIX of the Act provides for the establishment of cooperative
federal-state programs, commonly called "Medicaid," to provide payments
for necessary medical services rendered to certain needy persons. If a
state chooses to institute a Medicaid program, it must submit to the
Secretary of the Department of Health and Human Services a satisfactory
"State plan" which meets all requirements of the Act. A state which
has
an approved State plan becomes entitled to federal funds reimbursing a
portion of the "expenditures" which the state has made for specific
types of medical assistance.
(3) The following information and issues are not disputed by the
parties:
* The types of medical assistance and facilities involved in this
disallowance are generally eligible for federal medical assistance
funding. See sections 1902(a) and 1905(a) of the Act.
* The State's approved plan provided that payment to both kinds of
facilities involved in this appeal (institutions for mental diseases and
intermediate care facilities-mentally retarded) would be determined in
accordance with Medicare principles of reimbursement, and would be on a
reasonable cost basis. /1/ State's submission, January 27, 1983,
Attachments B and C.
* The type of costs claimed have been incurred by the State, i.e.,
vacation benefits have been earned by State employees rendering Medicaid
services. (See discussion below concerning the calculation of the
amount.)
* The Agency has acknowledged that any such costs recognized by the
State as "expenditures" are allowable. Agency Responde to Order, p.
15, n. **.
* Both Medicare and Medicaid regulations require that allowable costs
must be reported by facilities on the accrual basis of accounting and in
accordance with generally accepted accounting principles. The
regulations also provide that where governmental institutions operate on
a cash basis of accounting, the institutions may report cost data on
that basis. 42 CFR 405.453(a) and (e); 42 CFR 447.274(c).
* The Medicare principles allow facilities to change their method of
reporting costs from a cash basis to an accrual basis of accounting. 42
CFR 405.453(c) and the Medicare Provider Reimbursement Manual (HIM-15)
(Commerce Clearing House, 1979), section 2146.4. The Provider
Reimbursement Manual, sections 2146.2 through 2146.4, sets out basic
principles for reporting vacation costs. Those principles include a
formula for conversion from cash accounting to accrual accounting for
vacation costs. /2/
(4) * The Agency has not questioned the State's use of Medicare
reimbursement principles and the reasonable cost reimbursement method,
or its method of calculating the per diem rates. Agency Response to
Order, pp. 18-19.
Vacation time is a benefit which is added to the base pay of
employees in public facilities. The facilities' personnel costs and,
thus, the per diem rates, are affected by the amount of vacation time
earned by the employees. If a facility is on a cash basis of
accounting, vacation time is taken into account only at the time it is
actually paid, either when an employee uses earned vacation time or when
an employee receives a lump sum for unused vacation time (up to the
maximum amount payable) upon termination. The accrual method of
accounting for vacation costs is generally required, however, because it
is "recognized as the most accurate basis for determining costs."
42 CFR
405.453(e). If a facility is on an accrual method of accounting, the
amount due to an employee for vacation earned, even if it has not been
used or otherwise paid for, is considered a liability for which the
facility will eventually have to make a payment. It is reported as a
liability in the facility's records and reported for the calculation of
the facility's per diem rate.
The amount included in the per diem rates claimed by the State
represents an amount calculated according to the formula set forth in
the Provider Reimbursement Manual for converting vacation costs from a
cash to an accrual method of accounting. State Reply Brief, Affidavit
of I. Semeiks, March 21, 1983, pp. 1-2. The amount represents vacation
costs paid in the year of conversion, the amount of vacation earned
during the period for which the claims were made, but (5) not paid for
during that period, and the accrued amount of vacation earned for prior
periods under Medicaid and not paid as of the end of the conversion
year. /3/ Provider Reimbursement Manual, section 2146.4. As stated
above, the Agency acknowledged that a portion of this amount, to the
extent that the State recognizes the costs as "expenditures," is
allowable. The Agency has reserved the right to review the claim
concerning the calculation method for the value of the amount of accrued
vacation costs included in the rates. (Agency's Response to Order, p.
19)
The State said that for years subsequent to this claim, the State
will accrue new vacation costs only to the extent that the costs exceed
the vacation cost payments made in that year. Moreover, the State said
that if actual payments exceed newly accrued obligations, there will be
a negative adjustment in the accrued amount. The significant amount of
money claimed here is a one-time occurrence due to the conversion from
cash to accrual accounting. Thereafter, the State should be claiming or
returning much smaller amounts. The State alleged that its methods
ensure against double counting and claiming of previously accrued
vacation costs. Affidavit of I. Semeiks, p. 4, para. 5.
The Basis for the Disallowance
The Agency's notice of disallowance set forth the following reasons
for the disallowance:
* Under section 1903(a)(1) of the Social Security Act (the Act) and
42 CFR 433.10(a), FFP is available only for "expenditures," and a
state
may claim only amounts "actually expended" for FFP. 45 CFR 201.5(a)(
3).
(6) * The Agency asserted that the State used cash accounting, which
does not treat vacation costs as an "expenditure" until a cash payment
is made (upon an employee's termination).
* The Agency claimed that, because the State used cash accounting, it
had not made "expenditures" for the accrued vacation costs which it
claimed as part of the per diem rates for public facilities. As support
for this, the Agency cited the regulatory definitions of cash and
accrual accounting, found at 42 CFR 447.272. The Agency also referred
to 45 CFR 95.13(b) (1981), which sets forth the time at which the Agency
considers a state to have made an "expenditure" for purposes of
determining when the regulatory limitation begins to run on filing a
claim for costs incurred. The Agency considered that an "expenditure"
is made under section 1903(a)(1) when there is an "expenditure" as
it is
defined for accounting purposes.
* The Agency also referred to two Office of Management and Budget
(OMB) Circulars, one requiring that grantees report program outlays and
income to the Agency on the same accounting basis that they use for
their own accounting, OMB Circular A-102, section 74.73(b); and the
other requiring that for costs to be allowable, they must be consistent
with policies, regulations and procedures that apply uniformly to
federal and nonfederal funds. OMB Circular A-87, Attachment A, C.l.d.
The Agency stated that because the State used a cash basis of
accounting, it was not treating the costs consistently if it claimed
them as accrued costs for FFP.
The State alleged that it did not use a cash basis of accounting any
longer, but had changed to an accrual method of accounting for the
fiscal year ended March 31, 1981. The State's Reply Brief contained
affidavits that public facilities and the State itself had changed their
methods of accounting to the accrual basis. Thus, the State argued,
during the period involved in this disallowance (the last three quarters
of 1981), the State was reporting vacation costs on the same accounting
basis which it used in its accounting system.
In response, the Agency claimed that the State's description of its
accounting system did not fully develop the State's treatment of
vacation costs and that the affidavits were misleading because they did
not indicate that the State used a "modified accrual" method of
accounting for vacation costs. The Agency pointed to selected portions
of the State's revised Accounting Policies Manual and alleged that,
although the State's system recorded accrued vacation costs, the (7)
Manual specifically said that the State did not recognize them as
expenditures. Thus, the Agency argued, the State could not claim them
as "expenditures" for FFP. During the telephone conference, the Agency
also mentioned an argument which it had not developed during the
briefing. It noted that the State did not actually pay its public
facilities the full per diem rate claimed, but paid only their actual
operating expenses, and that, under the State's revised accounting
system, the State did not appropriate state funds for the accrued
vacation costs.
In its Order to Develop the Record, the Board requested that the
Agency further develop this and other arguments. The Agency's response
alleged that, although the State claimed and received the federal share
of per diem rates which included accrued vacation costs, the State paid
only the current operating expenses of the public facilities rather than
the full amount of the rates claimed. Thus, the Agency alleged, the
State did not actually pay for some of the accrued vacation costs
claimed as part of the rates during the periods to which the rates
applied. The Agency also alleged that the State, having deposited the
federal share in a general fund containing current operating revenues,
used the money for current operating expenses of the public facilities.
The Agency argued that the State's revised Accounting Policies Manual
specifically said that the State did not treat long-term accrued
vacation costs (i.e., those not considered current operating expenses)
as "expenditures." The Agency alleged that since the State did not
disburse its own funds by paying the full rates to the facilities or by
treating the vacation costs as an accrued expenditure, the State did not
match its share of the vacation costs at the time it reported them and
claimed the ensuing per diem rates for FFP. Instead, the Agency
alleged, the State contributed its share only at the time employees were
actually paid for the vacation by using the time or by terminating their
employment. Essentially, the Agency pointed out, this was a "float"
of
federal money which did not minimize the length of time between transfer
of funds from the federal government and the State's disbursement of the
funds. The Agency asserted that the "float" was not the result of
claiming accrued expenditures but was the result of the State's
inconsistent treatment of the costs by reporting them on an accrued
basis for FFP, but not accruing them in its accounting records.
Finally, the Agency argued that the State was claiming costs which
were not "expenditures" under the form of accounting used by the State,
and, therefore, the State could not claim the costs as "expenditures"
under section 1903(a)(1) of the Act. The Agency acknowledged that if
the State used a "full accrual accounting system" for these types
of
costs, or (8) included the expenses of the public facilities in those
accounting funds which used full accrual accounting, the claims for the
costs would be consistent with State policies and the costs would be
"expenditures." Agency Response to Order, p. 15.
How the State Pays its Facilities
The following information was provided in the State's response to the
Board's Order and in an affidavit submitted by the Agency as part of its
response.
Public facilities report their costs to the State Medicaid agency,
which examines the costs for reasonableness and consistency with
Medicare cost principles and calculates per diem rates based on the
costs reported. Accrued vacation costs are reported by the facilities
and are included in the per diem rates. Those rates are applied to the
number of Medicaid days for which the public facilities expect to incur
costs during a quarter and that amount is claimed on the State's report
of projected expenditures for the subsequent quarter. Federal funds in
the amount of the federal medical assistance percentage are advanced
quarterly to the State based on these estimates. See 45 CFR Part 201.
The Agency prepares a grant award and the State draws federal funds
through a letter of credit. Affidavit of R. Nawrot, June 28, 1983,
Agency Response to Order.
Payment to public facilities for their services is accomplished as
follows. The public facilities' current operating costs for both
Medicaid and non-Medicaid patients are paid by the State from a general
fund containing State funds. This is accomplished through vouchers
submitted to the State Department of Audit and Control. The vouchers
are based on reports submitted by the facilities to the State
departmental divisions which operate them. State Response to Order, p.
4.
A separate process exists for reimbursing public facilities for the
federal share of services rendered to Medicaid patients. The facilities
bill the Medicaid agency, on a monthly basis, for an amount which is the
total of the number of days of care rendered to Medicaid patients times
the per diem rate. No individual costs are claimed in these bills.
State Response to Order, p. 5. The Medicaid agency submits a voucher
for the federal share of this amount to the State Comptroller, who draws
funds against the State's letter of credit and deposits the funds in an
account used solely for federal funds. The Comptroller then issues a
check against that account for the amount of FFP owed to the facilities.
A special public benefit corporation established to construct public
facilities draws part of these funds for its costs (9) (interest and
amortization on public authority bonds). The balance is then
transferred to a Patient Income account held by the divisions operating
the facilities. This account replenishes the general fund from which
the facilities' operating costs are paid (the same one in which State
funds are placed for this purpose). State's Response, pp. 5-6.
Thus, the divisions operating the facilities receive federal funds
based on the per diem rates claimed for the number of Medicaid patient
days of care rendered. The facilities themselves never receive funds,
but have their operating costs paid from the general fund within the
State's accounting system. Eventually, both federal and state funds are
put into this fund and are used to pay operating costs of the
facilities.
Statement of the Problem
The Agency has acknowledged that earned vacation costs may be accrued
generally under the applicable principles of reimbursement (see above).
The Agency has not questioned whether the public facilities incurred
vacation costs, and it is clear that State employees performed services
which make the State liable for the vacation benefits earned as a result
of those services. Moreover, the Agency has not questioned the
facilities' reporting accrued vacation costs and the State Medicaid
Agency's calculating rates which include those costs. Thus, the Agency
is not questioning that the type of costs included in the rates are
generally allowable, and that the public facilities are eligible to
claim rates which include such costs. If the State used a cash
management system which actually paid public facilities an amount
equivalent to the rates claimed for FFP, it is doubtful that the Agency
would question the State's claim on the bases raised here. Nor would
the Agency question the claim on the bases alleged here if the State had
otherwise paid its full share of the rates at the time it claimed FFP.
However, since the State pays only the actual current operating costs of
the public facilities and neither pays to the facilities an amount which
is identified as a full per diem rate nor appropriates State funds so as
to match the federal share of the rate claimed, the Agency has
challenged the State's claim on the principles identified above. The
Agency has not questioned the rates in toto because the remainder of the
rates represents current operating costs which were paid by the State
for the facilities.
Thus, it seems clear that the Agency acknowledges its liability for
the federal share of a rate which includes allowable costs and which has
been properly calculated according to an approved State plan. However,
the Agency has questioned the timing of federal payment for any portion
of (10) the rate which they claim is not yet an "expenditure," or
in
which certain general federal guidelines of financial management
otherwise preclude federal participation at a particular time. The
basic question we are faced with in this appeal, then, is whether the
State, having incurred the costs included in the per diem rates claimed,
may obtain FFP for a portion of the rates prior to the State's actual
disbursement of State funds for that amount.
The validity of this disallowance, then, depends upon --
* whether the general financial management principles in 45 CFR Part
74 and OMB Circulars A-87 and A-102 relied on by the Agency apply to
this claim;
* whether the State's accounting system treats the claimed costs
inconsistently;
* whether there was an improper "float;" and
* whether the State has claimed an "expenditure."
Analysis
I. Whether the general financial management principles relied on by the
Agency apply to this claim.
45 CFR Part 74 is generally applicable to all grantees with the
Department of Health and Human Services, with certain exceptions. See
45 CFR 74.4 and definitions of "grant" and "grantee" in
section 74.3.
Section 74.171 incorporates by reference the principles set forth in OMB
Circulars for determining the allowable costs of activities conducted by
governments. /4/ Therefore, the general principles relied on by the
Agency apply here unless they are inconsistent with the federal
statutes, regulations, or other terms of Medicaid reimbursement which
apply to this claim. 45 CFR 74.4(a). We are not considering here
whether these financial management principles should apply generally to
Medicaid provider reimbursement. The record in this appeal does not
develop how states generally manage their cash flow, and we are aware
(11) that there is some conflict between states and the Agency about the
application of general federal requirements to state financial
management practices. In this decision we will examine only the
question of whether the Agency's position is inconsistent in this
instance with the statutory and regulatory scheme already set out in
great detail for Medicaid reimbursement of public facilities.
This question arises here because the per diem rates claimed are for
public facilities rather than for private facilities. The State not
only pays private facilities the federal share of the applicable rates,
but also pays the State's share of the rates. Thus, the State pays to
private facilities the full per diem rates which it claims for FFP.
Both parties agree, therefore, that the State's claims for FFP in rates
paid to private facilities would not violate any of the principles
identified here because the State treats the rates for private
facilities consistently, matches the federal share concurrently with the
State share, and treats the payment of the rates as an "expenditure."
The requirements of Part 74 and OMB Circulars do not apply directly to
private facilities since they are not the grantees under Medicaid, and
there is no requirement that private facilities retain the portion of
the rate representing accrued vacation costs until they actually pay for
those costs. They may use both the federal and State shares for current
operating expenses, and they are not required to account for the funds
received on a dollar-for-dollar basis.
The application of these general principles to reimbursement of
public facilities presents a problem because public facilities in the
State do not actually receive payment for their services. Their
operating costs are paid directly by the State after vouchers are
submitted for the amount of the costs. Therefore, although public
facilities may be distinct from the State in their role as providers of
Medicaid services, they are not separate from the State for purposes of
cash flow. If the principles of Part 74 and the Circulars (12) are
interpreted in the manner argued by the Agency, then the State must
comply with a requirement not otherwise applicable to those providing
services under Medicaid.
Below we examine the Agency's position about the allowability of the
State's methods, and conclude that the Agency's regulations and
generally accepted accounting principles do not support the Agency's
position about what the State must do to meet the general guidelines in
Part 74 and the Circulars and to claim the per diem rates for FFP. We
conclude that the Agency's position is inconsistent with the Agency's
principles of Medicaid reimbursement for public facilities. We further
conclude that the State has not violated the general financial
management guidelines relied on by the Agency.
II. Whether the State treated the rates or costs constituting the rates
inconsistently.
A. The State's method of accounting for the rates owed to its public
facilities.
The Agency examined whether the State's claiming practice for FFP in
Medicaid reimbursement of public facilities conformed with federal
management and reporting standards generally applicable to grantees,
including states. The Agency looked at the State's treatment of the
accrued vacation costs because the State does not pay the public
facilities per diem rates but rather pays the actual operating costs of
the facilities. The Agency claimed, both in the notice of disallowance
and in its final explanation of the disallowance, that the State used a
different method of accounting when claiming the per diem rates than it
did for actually operating the facilities. OMB Circular A-102, section
74.73(b). The Agency claimed that, in effect, the State was still using
cash accounting for the public facilities and, thus, could only claim
the portion of the rates which it paid in cash. Below, we examine what
the record reveals about the State's methods and decide whether the
Agency is correct in its assertion that the State did not use an accrual
method of accounting for the costs included in the portion of the rates
which it did not actually pay.
The State's revised Accounting Policies Manual indicates that it uses
both "full accrual accounting" and "modified accrual accounting."
The
State uses full accrual acounting for Proprietary funds (University,
Enterprise, and Internal Service funds) and for Non-Expendable Trust and
Pension Trust funds. The State uses modified accrual accounting for
Governmental funds. Under the modified accrual method used by the
State, revenues are recognized when they are measurable and available
for current expenditures, and expenditures are recognized in the
accounting period in which (13) the fund liability is incurred and is
objectively measurable. /5/ Agency Response, April 8, 1983, Exhibit I,
p. 4.
The portions of the State's Manual contained in the record show that
the State records accrued vacation costs when they are earned. The
costs which are not considered current operating expenses are recorded
in a long-term liabilities "account group" whose liabilities will
be
paid from the Governmental funds. The account group is an "accounting
record" of the State's long-term liabilities. Agency's Response, April
8, 1983, Exhibit II, p. 1.
The Agency's regulations, at 42 CFR 405.453(b)(2) and 447.272, define
cash and accrual methods of accounting:
"Cash method of accounting" means that revenues are recognized only
when cash is received, and expenditures for expense and asset items are
not recorded until cash is disbursed for them.
"Accrual method of accounting" means that revenue is reported in
the
period when it is earned, regardless of when it is collected, and
expenses are reported in the period in which they are incurred,
regardless of when they are paid.
Both parties noted in their written submissions that Financial
Accounting Standards Board Concept No. 3, para. 81, defines accrual
accounting as an attempt to "recognize non-cash events (such as vacation
costs) and circumstances as they occur."
Applying these definitions to the information contained in the record
of this appeal about the State's accounting system, we find that the
State is not using a cash system of accounting because it is recording
the costs prior to disbursement of cash for the costs. The State
records the (14) expenses in the period in which they are incurred, and
thus, under the Agency's definition, is using accrual accounting.
The Agency argued that the State is not using accrual accounting
because the State's Manual says it is using "modified accrual"
accounting and because the State's Manual says it does not "recognize"
the cost as an "expenditure."
We cannot agree with the Agency that the State's modified accrual
accounting method is not accrual accounting. The State has indicated
through affidavits that it uses accrual accounting. The Agency has not
provided us with any basis, such as generally accepted accounting
principles, for concluding that "modified accrual" accounting is not
accrual accounting. It is entirely possible that the term means merely
that form of accrual accounting used for governmental entities (see p.
13, n. 5). The State has also indicated that it reports and records the
costs when they become owed, in accordance with generally accepted
accounting principles. This certainly complies with the Agency's
regulatory definition of accrual accounting. The Agency has not shown
that there is any requirement that an accounting method must include
funding a liability, in order for the method to be considered accrual
accounting. Therefore, we see no basis upon which to conclude that
modified accrual accounting is not a form of accrual accounting.
The Agency selected one sentence from the State's Manual as evidence
that the State is not using an accrual method of accounting. That
sentence says, "Expenditures are recognized in the accounting period in
which the fund liability is incurred and is objectively measurable." /6/
Agency's (15) submission, April 8, 1983, Exhibit I, p. 4. We cannot
reach the same conclusion as the Agency on the basis of that one
sentence. First, since liabilities recorded in the "account group"
are
funded from the Governmental funds, we cannot find that there is no fund
liability incurred at the time the costs are recorded in the "account
group." We note, moreover, that the sentence referred to by the Agency
is directly followed by another sentence, which says, "However, there
are certain exceptions . . . discussed in the appropriate sections of
this Manual." The record in this appeal does not indicate where or what
these exceptions are and whether they include vacation costs. Nor does
the Agency explain what effect this qualification may have on the
sentence to which it referred. Furthermore, the record does not show
how much of the costs claimed here would have been actually recorded in
the account group for long-term liabilities, and how much would be
recorded in the current operating funds. Finally, the Agency has not
shown that, under generally accepted accounting principles, recognizing
an expenditure is anything more than recording the costs in the
accounting records.
Thus, we do not think that the Agency has supported its assertion
that the State does not use accrual accounting. In the absence of any
specific principles or definitions which support the Agency's position,
we accept the State's characterization of its method of accounting, and
find that the State's system falls within the definitions of accrual
accounting as put forth by the Agency and generally accepted accounting
principles.
B. OMB Circular A-87
The general guideline set forth in OMB Circular A-87, Attachment A,
C.1.d., says:
To be allowable under a grant program, costs must meet the following
general criteria:
* * *
d. Be consistent with policies, regulations, and procedures that
apply uniformly to both federally assisted and other activities of the
unit of government of which the grantee is a party.
(16) The only basis the Agency offered for the State's alleged
violation of this principle was that the State did not use accrual
accounting in its own operations but claimed the per diem rates on an
accrued basis. We have concluded above that the State did use accrual
accounting. The Agency has not alleged any other policies or procedures
that the State has applied inconsistently. It is possible that the
Agency may also have been alluding to the State's practice of paying the
facilities' actual operating costs rather than simply reimbursing them
for the flat per diem rate. However, as we discuss below in section
III, it is impractical and meaningless to require that the State, as
accountant for its own facilities, enter into such a practice. Thus, we
cannot conclude that the State treated the per diem rates or the
underlying costs inconsistently.
III. Whether there was an improper "float."
Even though we have concluded that the State was not treating the
costs inconsistently by using two different methods of accounting, we
must still examine whether the State's methods of cash flow somehow
created a "float" which was improper under the federal regulations
requiring that the amount of time between drawdown of federal funds and
State disbursement of those funds be minimized. 45 CFR 74.61(e) and
74.92.
Section 74.61(e) appears in Subpart H, Standards for Grantee and
Subgrantee Financial Management Systems and Audits, and applies directly
to grantees as well as any subgrantees. Section 74.92 appears in
Subpart K, Grant and Subgrant Payment Requirements, and also applies to
grantees and subgrantees. It is very similar in language to section
74.61(e). Section 74.92 says:
Methods and procedures for making payments to recipients shall
minimize the time elapsing between the transfer of funds and the
recipient's disbursements.
The State argued that Part 74, Subpart K (and, presumably, Subpart H)
was intended to limit the ability of grantees to draw down cash under
their federal grants in advance of the event that justifies federal
payment. The State argued that the event justifying federal payment
here is the provision of medical assistance services; therefore, the
State said, there is really no advance of federal funds at all because
the provision of medical assistance services occurred prior to the
State's claim for FFP in the rate which is payment for the services.
The Agency's position is that the event justifying federal payment is
the appropriate accounting transaction which would (17) treat the claim
as an "expenditure." The Agency argued that the appropriate accounting
transaction would be State disbursement of funds for its share of the
full per diem rates, including that portion representing accrued
vacation costs.
We agree with the State that once medical assistance services have
been rendered, the provider is entitled to payment, including the
federal share. See our discussion in section IV. However, we are faced
with an artificial distinction between the State as grantee of Medicaid
funds and the State as operator of the facilities that provide Medicaid
services. This distinction is relevant to whether the State itself is
entitled to claim FFP simply because the public facilities are entitled
to payment for services rendered.
The requirements of sections 74.61 and 74.92 and the
Intergovernmental Cooperation Act of 1968 (upon which those sections are
based) are cash management techniques. The General Accounting Office
Report on Letter of Credit Procedures Used by the Department of Health
and Human Services discussed the purpose of requiring these techniques:
The theory behind the act was that by controlling the release of
grant funds, agencies could preclude State grantees from earning
excessive interest on grant advances. While the act allows States to
keep any interest earned on grant-in-aid funds pending disbursement for
program purposes, it was not intended to create a financial windfall.
In order to provide equity between Federal and State needs for funds,
and also a basis for sound cash management, States should not be
required to fund Federal programs with their own funds, nor should the
Federal Government be required to advance funds prematurely, incurring
additional borrowing costs and losing interest unnecessarily.
39 Federal Contracts Report 116-117, January 10, 1983. /7/
(18) The "float" here occurred when the State received federal funds,
in advance of either paying the per diem rates to public facilities or
accruing the vacation costs in such a way that the State's share of the
unpaid portion of the rates was set aside at the time the State received
the federal share. The State used the federal share to pay current
operating costs of the facilities.
The concern of the Agency in applying sections 74.61(e) and 74.92 is
to balance the burdens incurred and the benefits received by the State
and the Agency. It is advancing federal funds to the State before the
State pays out any money for the portion of the rates that represent
accrued vacation costs, and, therefore, the Agency loses the use of that
money for other federal purposes. However, if the State were to
appropriate its share of the rates and either set it aside in
anticipation of paying the accrued vacation costs or pay that amount to
the public facilities, the Agency would not take this disallowance,
since the Agency acknowledged that any costs which the State treats as
an "expenditure" are allowable. In that case, the Agency would still
not have the benefit of retaining its share, but it would apparently be
satisfied because the State had conducted an accounting transaction
which would set aside the State's share at the same time.
If the State has the use of the federal share of the per diem rates
in advance of paying for the costs included in the rates, it would seem
that the State benefits from applying the federal money received to the
current operating expenses of the public facilities. Furthermore, the
State is not directly contributing its full share of the rates at the
same time.
There are several reasons why the mere fact that the State realizes a
benefit should not form a basis for a disallowance here. The private
facilities realize this same type of benefit under Medicaid. They have
the use of both federal and state money until such time as they must pay
the costs of accrued vacation time. However, once having provided the
services, they are entitled to the full per diem rate regardless of
whether they pay cash for the costs included in that rate at the time
they receive payment. There is no requirement that private facilities
earmark federal funds specifically for the payment of the costs for
which the funds were claimed. Likewise, there is no requirement that
the public facilities account for federal funds on that basis. The
extensive body of regulations and Agency guidance which exists for
Medicaid reimbursement has never set forth this particular distinction
between private and public facilities. On the contrary, funds paid to
states for allowable costs incurred or services rendered lose their (19)
character as federal funds once they are deposited in a state's
treasury. 43 Comp. Gen. 697, 699 (1964). Thereafter, the funds are
available to the state to be applied wherever it chooses, so long as the
costs for which the funds were paid were allowable and the state met the
terms and conditions of the grant award.
Another point is that the State probably incurs costs for the public
facilities which are not included in the per diem rates claimed, either
because they are not allowable under Medicare reimbursement principles,
or because they are over the upper limit which retrospective
reimbursement places on the amount of costs facilities may claim. If
the State did incur such costs and these, together with the allowable
operating costs of which the State paid its share, constituted an amount
equal to the per diem rates, one could argue that the State has paid the
public facilities the equivalent of the full per diem rates and that the
public facilities used that money as they saw fit, a practice in which
private facilities may engage.
The Agency has not alleged that the State is claiming incorrect
rates, or that the costs constituting those rates were never incurred.
/8/ Furthermore, the State has set a limit on how long such vacation pay
may be accrued by recording the leave on a first-in, first-out basis and
by setting a maximum amount which may be accrued. This conforms to
federal guidelines. See Provider Reimbursement Manual, section
2146.2(B). Thus, the State argued persuasively that in effect it has
attempted to minimize the amount of time between receipt of federal
funds and State disbursement of the funds and, in fact, the State is not
benefitting unduly from receipt of federal funds.
The State also argued that there is no requirement that a State's
match must be satisfied by cash payment. 45 CFR 74.52(a) provides that
a matching requirement may be satisfied by "allowable costs incurred by
the grantee . . . ." Section 74.53(d) provides that costs counting
towards satisfaction of a matching requirement "must be verifiable from
the records of recipients . . . ." The State alleged (20) that the costs
and the rate can be verified by the facilities' cost reports, the proper
calculation of the rates according to the State plan, and the State's
accounting system, which records the costs claimed as part of the rates
when they are incurred. We know of nothing which would contradict this
view. The Agency has not shown that the State did not minimize the
amount of time between receipt of federal funds and State disbursement
of them or that payment of the State's share is required at a specific
time. Therefore, we must conclude that, at least for the period in
question here, the "float" was not improper.
Moreover, it is not clear what purpose would be served by requiring
the State to pay out State funds at the same time it claims the federal
share for the per diem rates. The State alleged that it would "serve no
purpose other than to add another layer of appropriations and accounts
to the cash management system already in use." State Response to Order,
p. 10. Under the Agency's arguments, the State has two choices. It can
use a cash accounting system and either claim the costs included in the
per diem rates on that basis or pay the full rates to the facilities.
Or it can use full accrual accounting and appropriate its full share of
the rates claimed. This would mean either paying the full rates to the
public facilities or putting the money for the unpaid portion of the
rates in one of the State's accounting funds. For all intents and
purposes, the State pays its public facilities only by putting money
into accounting funds and then paying the facilities' expenses. Thus,
putting the money in the Governmental fund from which the facilities'
expenses are paid would be the same as paying the rates. The facilities
would then be able to use this money for all their costs, both those
included in the rates as allowable and those not included. Since some
of the allowable costs included in the rates, such as accrued vacation
costs, would not be paid until a future period, that money would be
unusued unless they applied it to other costs. If the appropriated
funds were not disbursed, they might lapse at the end of the fiscal
period for which they were appropriated, and the facilities would lose
the money, leaving the accrued costs unfunded. See, e.g., Agency Brief,
Exhibit II, p. 6, definition of "Appropriation."
The State alleged tha had it known what the Agency required, it could
have arranged for a "disbursement,"
with legislative concurrence, by a restructuring of the State's
appropriation and cash flow system to take this concern into account.
The State could have, for example, appropriated directly to . . . the
single State agency both the State and the Federal share of the . . .
Medicaid reimbursement rate . . . . (The single State agency) could
have processed a voucher for the (21) entire amount of the (cost of
Medicaid services to eligible recipients) (both State and Federal share)
and paid . . . for the full amount of the rate.
State Response to Order, p. 9.
Thus, the State could perform a paper transaction that would have
little real meaning since the public facilities do not handle their own
money. The State argued that to require it to use such a process would
"exalt form over substance" and that it "would have no substantive
effect on reimbursement for patient care." State Response, p. 9.
Moreover, requiring the State to use cash accounting for purposes of
claiming federal funds, when the State is otherwise using accrual
accounting, would cause the State rather extensive complications in its
bookkeeping and reporting records. Finally, if we were to uphold the
disallowance, it could well be an exercise in futility since the State
may have actually made disbursements for these accrued costs since 1981,
because of its "use-or-lose" restrictions on employees' accrual of
vacation time, and thus, could claim FFP for the costs paid as part of a
rate anyway.
The consequences here of imposing a requirement that the State must
make a disbursement before it can claim FFP are far-reaching and would
seem to serve no meaningful purpose. Medicaid reimbursement is subject
to many guidelines and standards, set out in a complex body of
regulations and literature. The nature of state governments adds an
additional complicating factor to this area. The Agency has not put
forth any policy reasons for concluding that the State's cash flow
system should have any relevance to whether the State may receive the
federal share of the full per diem rates to which public facilities are
entitled. Nor is there any evidence that the State had notice that such
a requirement existed in this context. Therefore, we conclude that the
general principles of financial management do not include a requirement
that the State make a cash disbursement before it can claim FFP for
Medicaid reimbursement of its public facilities. This conclusion does
not prevent the Agency, if it believes there are policy reasons for
imposing such a requirement on states, from clearly stating, on a
prospective basis, that either states must restrict their accounting to
a cash method, or that they must appropriate the State's share of the
full per diem rates prior to claiming them for FFP.
(22) IV. Whether the State has claimed an "expenditure."
Section 1903(a)(1) of the Act says, in part:
. . . (The) Secretary . . . shall pay to each State which has a plan
approved under this title, for each quarter . . .
(1) an amount equal to the Federal medical assistance percentage . .
. of the total amount expended during such quarter as medical assistance
under the State plan . . . .
The Agency addressed federal matching of medical assistance at 42 CFR
Part 433, Subpart A. Section 433.10(a) states that section 1093( a)(1)
provides for payment to states for part of their "expenditures" for
services under an approved State plan.
Neither the statute nor the Agency's regulations specifically define
the term "expenditure" for purposes of section 1903(a)(1). The State
argued that the Agency's construction of "expenditure" in this appeal
is
inconsistent with basic principles of Medicaid reimbursement. /9/ The
State argued that it is entitled to FFP in the rates calculated for the
services provided by the public facilities. The State argued that the
"Medicaid reimbursement process does not and was (23) never intended to
mirror the State's cash flow system on a dollar-for-dollar basis." State
Response to Order, p. 4. /10/
The State also pointed out that section 1902(a)(13)(E) of the Act
specifies that a state plan must provide for payment of services
"through the use of rates (determined in accordance with methods and
standards developed by the State) which the State finds, and makes
assurances satisfactory to the Secretary, are reasonable and adequate to
meet the costs which must be incurred. . . ." The Agency has published
several discussions of Medicaid reimbursement, and promulgated a
considerable number of regulations on the subject. It is significant
that all of these focus on creating a rate by cost-finding and
cost-reporting. Costs are never reported directly to the Agency but are
always transformed into rates. Although the allowability of the rates
is verified through the cost reports and the methods used to calculate
the rates, the rates themselves are the form of payment on which the
Agency focuses. As we developed in our analysis above and our statement
of the problem, there does not seem to be any question that the rates
claimed here were based on allowable costs and the appropriate methods
as approved by the State plan. Thus, we agree with the State that
public facilities are generally entitled to payment of the per diem
rates when they have provided the services to which the rates apply and
neither the methods for (24) calculating the rates nor the costs
reported are questioned by the Agency. We think the Agency
fundamentally has no problem with this rationale for what constitutes
the "expenditure."
However, the State has not paid the public facilities through rates,
but instead compensates them by paying their actual operating costs.
Thus, the Agency is challenging the point at which the rates claimed
become "expenditures" rather than whether they are "expenditures"
at
all.
The Agency relied on 45 CFR Part 95, which sets a limit on how long
states may wait to file claims, and specifically, section 95.13(b), for
its definition of when a claim becomes an "expenditure." Section 95.13(
b) states:
We consider a State agency's expenditure for services under title .
. . XIX to have been made in the quarter in which any State agency made
a payment to the service provider.
The Agency recently issued a clarification of Part 95 in a Medicaid
Action Transmittal. State's Brief, January 27, 1983, Attachment H, p.
5. That action transmittal included a definition of "expenditure"
for
purposes of section 95.13(b). It stated that an expenditure occurs at
the time of the appropriate accounting transaction, and that for a
public facility or provider, an "expenditure" is made when the expense
is paid or recorded, whichever is earlier, by any State agency. The
Agency also relied on the definitions of cash and accrual accounting, as
set out in its regulations (see section II), for its position that the
State had not yet made an accounting transaction which constituted an
"expenditure."
The Agency acknowledged that an "expenditure" may be either a cash
outlay or an accrued expenditure, Agency Response to Order, p. 21, and
this is supported by section 74.71 and OMB Circular A-102, Attachment
H.2.f. /11/
(25) We have already concluded above in section II that the State is
using accrual accounting. As we discussed in section II, A, we think
that the State has paid or recorded the entire per diem rate by
recording the accrued vacation costs in its accounting records and by
paying the current operating expenses of the public facilities as it is
billed. We find that these costs are reported as "amounts becoming
owed" for future benefit payments, under section 74.71 and OMB Circular
A-102. Thus, we think that the State has complied with the definition
of "expenditure" provided in section 95.13(b) and the clarification
of
that regulation issued by the Agency.
Conclusion
Based on the above analysis, we conclude that the State has not
treated inconsistently the accrued vacation costs claimed as part of the
per diem rate for three quarters of 1981, that there was no improper
"float," and that the State has properly claimed these costs as
"expenditures." Thus, we conclude that the disallowance must be reversed
in the amount of $26,336,793. This does not prevent the Agency from
reviewing the amount claimed for accuracy, as discussed at p. 4. /1/
Although the State does not refer to this method as
"retrospective," generally "reasonable cost reimbursement"
involves
retrospective reimbursement. /2/ In its response to the Board's
Tentative Findings and Conclusions, the Agency noted that ultimate
approval of the public facilities' conversion to accrual accounting
depends on whether its use is otherwise consistent with Medicaid
policies and procedures. However, the Agency has not questioned whether
the use of accrual accounting by the State's public facilities here was
consistent with Medicaid principles, and as noted above, use of accrual
accounting is allowed. 42 CFR 447.274(c). However, the Agency did point
out that the Financial Accounting Standards Board (FASB) deferred a
decision about the application to state and local governments of its
Statement No. 43 on the use of accrual accounting for compensated
absences. We note that the FASB deferred that decision because "the
appropriate structure for setting accounting standards for state and
local governmental units is currently under discussion." FASB Statement
No. 43, p. 1340, State's Brief, Exhibit G. /3/ The State
indicated that its policy on accrued vacation leave includes a
limitation which conforms to the requirements of section 2146.2(B) of
the Provider Reimbursement Manual. Employees are entitled to a minimum
of 13 days per year, increasing to a maximum of 20 days with greater
seniority. Employees are entitled to accrue a maximum of 300 hours
(approximately two or three years' earned leave, depending on the
employee's seniority). Accrued vacation is considered used or
extinguished on a first-in, first-out basis. Payment to employees upon
termination is limited to a maximum of 225 hours. State submission,
April 25, 1983, p. 7, n. 1. Thus, unpaid amounts claimed for the year
of conversion and periods prior to that year cannot exceed a total of
300 hours per employee. /4/ The State argued that OMB Circular
A-87 does not apply to grants with "publicly-owned hospitals and other
providers of medical care subject to requirements promulgated by the
sponsoring Federal agencies." OMB Circular A-87, 46 Fed. Reg. at 9549,
January 28, 1981. See, also, 45 CFR 74.4(c). Furthermore, the State
argued, the Circular is not intended to identify the circumstances or
dictate the extent of FFP in a particular grant. We note, however, that
the Medicaid grant is with the State, not directly with publicly-owned
hospitals or other providers. Thus, although there may be merit to an
argument that the intent behind that exclusion also applies to
reimbursement of public facilities for Medicaid services, the language
does not specifically apply to this situation. Furthermore, it would
not preclude application of Part 74 and OMB Circular A-102. /5/
The National Council on Governmental Accounting has applied the term
"modified accrual" accounting to the adaptations of the accrual basis
of
accounting which are necessary to account for the conditions surrounding
government activities and financing. Accountant's Handbook, Sixth Ed.,
Vol. 2, Seidlert and Carmichael (1981), section 44.27. One of the most
obvious limitations on government financing is that state appropriations
available as revenue are appropriated for a fiscal period and the
availability of those funds often expires at the end of that period.
/6/ Financial Accounting Standards Board Statement No. 43 indicates that
an employer shall accrue a liability for employee's vacation time if:
the liability is attributable to services already rendered; the right
to vacation is vested and can accumulate; payment is probable; the
amount can reasonably be estimated. State's Brief, Exhibit G The State's
Manual indicates that it accrues liabilities where those conditions are
met, and distinguishes unused vacation leave from unused sick leave,
which the State discloses only in "footnotes." Agency's Response to
Order, Exhibit I, p. 1. /7/ This report concerned the Department
of Health and Human Services' attempt to implement letter of credit
procedures for "delay-of-drawdown" in public assistance programs.
The
procedures would delay cash withdrawal under the letter of credit until
after the states issued checks to payees. The Agency has not indicated
in this appeal that such a procedure would be required for Medicaid
reimbursement. Furthermore, the report acknowledged that such
techniques may create problems for some states because of state law.
/8/ The State alleged that its method of accruing and claiming vacation
costs as part of the per diem rates is a "conservative one that will
likely have the effect of postponing the receipt of FFP to which the
State is entitled." Affidavit of I. Semeiks, p. 4, para. 5. If the
State means that it would not be claiming FFP in advance of State
disbursement for the rates, then it may not receive a benefit at all.
/9/ As an example of this, the State posited the area of prospective
reimbursement, which involves setting a rate for the future based on a
previous cost period, and adjusting the rates to include inflation and
certain other factors. The rate, once set, is not adjusted further to
reflect actual costs incurred by the providers during the period to
which the rate applies. Thus, under prospective reimbursement, a
provider does not always incur costs equal to the prospective rate
determined, but may incur more or less costs. If a lesser amount of
cost is incurred by a public facility than the rate paid, expenditures
would not necessarily be recorded in the State's accounting records, as
it currently operates. Thus, the State argued, the Agency's definition
of "expenditure" would not permit the use of prospective reimbursement
for public facilities in the State. /10/ Furthermore, the State
argued that the Board has previously recognized that the term
"expenditure" is broad enough to include a payment which a State does
not make or record on its books. Michigan Department of Social
Services, Decision No. 352, September 30, 1982. Michigan concerned a
situation where the Department of Health, Education, and Welfare (now
Health and Human Services) designated the University of Alabama as a
management training institution for 27 states. The University agreed to
finance 25% of the costs billed to the states. The Agency disallowed
that amount when claimed by Michigan, saying that the 25% absorbed by
the University was not an "expenditure" by Michigan because Michigan
did
not pay that 25% to the University. The Board concluded that that
portion of the costs was an "in-kind" contribution, and could be claimed
as an "expenditure." Although the Board did conclude that the State
need
not record or pay these costs to claim them as its share of FFP as an
"expenditure" under section 403(a)(3), we think the facts of that
appeal
make Decision No. 352 otherwise inapposite to the appeal before us now.
/11/ "(Outlays) or expenditures" under a grant program are defined
at 45
CFR 74.71 and in OMB Circular A-102, H.2.f. (1981). For financial
reports prepared on an accrual basis, the expenditures are "the net
increase (or decrease) in the amounts owed by the grantee for . . .
services performed by employees, and other amounts becoming owed under
programs for which no current services or performance are required such
as annuities, insurance claims, and other benefit payments."
"(Benefits)" is defined in OMB Circular A-87, Attachment B, B.13.a.
to
include compensation for periods of authorized absence, such as annual
leave.
NOVEMBER 14, 1984