GAB Decision 622
February 7, 1985
Ohio Department of Public Welfare;
Ballard, Judith A.; Ford, Cecilia Sparks Garrett, Donald F.
Docket No. 83-191
The Ohio Department of Public Welfare (State) appealed a
determination by the Health Care Financing Administration (Agency)
disallowing $423,456 claimed by the State under the Medicaid program
established by title XIX of the Social Security Act (Act). The
disallowed claims were based on costs for depreciation of capital assets
in nine State-owned mental hospitals covering the period July 1, 1975
through December 31, 1980. The claims appeared as an increasing
adjustment on the State's quarterly expenditure reports (QERs) for the
quarters ending June 30, 1982 and December 31, 1982. /1/ The Agency
disallowed the claims on the ground that certain time limits for the
filing of claims were not met. The Agency did not allege that the
claims were otherwise unallowable if the time limits had been met. For
the reasons set forth below, we find that the State had complied with
the applicable time limits and reverse the disallowance.
Applicable Time Limits
The Agency asserted that the claims were barred by several different
provisions. Section 306(c) of Pub. L. 96-272 provides that claims for
expenditures made on or after October 1, 1979 must be filed within two
years after the calendar quarter in which the expenditure was made.
Section 306(b)(3) of Pub. L. 96-272 provides that claims for
expenditures made before October 1, 1979 must be filed by January 1,
1981. Pursuant to authority in section (2) 306(b)(4), this deadline was
later extended by the Secretary to May 15, 1981. (46 Fed. Reg. 3527,
3528 (February 15, 1981)) The Agency took the position, however, that
the time limit in section 306(b)(3) was superseded in part by a one-year
time limit applicable to expenditures made before October 1, 1978 which
was subsequently enacted. (Provisions cited by the Agency containing
this one-year filing deadline were section 101 of Pub. L. 97-92,
section 136 of Pub. L. 97-276, Pub. L. 96-86, Pub. L. 96-369, Pub. L.
96-536, Pub. L. 97-12, and Pub. L. 97-161.) The Agency thus argued that
the State failed to comply with different time limits applicable to
expenditures made in each of three distinct periods: on or after
October 1, 1979; from October 1, 1978 to October 1, 1979; and before
October 1, 1978. (Agency's brief dated January 11, 1984, pp. 3-6)
In a recent decision, however, the Board held that the filing limits
established by section 306 of Pub. L. 96-272 were not amended by
subsequently enacted statutes so as to permanently bar reimbursement of
any claims for pre-fiscal year 1979 expenditures which were not claimed
within one year after the fiscal year in which the expenditure occurred.
(Joint Consideration--Timely Filing of Claims, Decision No. 576,
October 5, 1984) Accordingly, the question presented in the instant case
is whether the State's claims were timely filed pursuant to the
provisions of section 306 of Pub. L. 96-272. The claims in question
were not submitted until August 17, 1982 and April 19, 1983 (for the
quarters ended June 30, 1982 and December 31, 1982, respectively).
Thus, unless one of the exceptions in section 306 applies, the
expenditures must have been incurred in a calendar quarter ending no
more than two years before the dates the claims were filed in order for
the claims to have been timely. To the extent that the expenditures
were incurred at an earlier date, the State's claims would be untimely
under section 306(c) and section 306(b)(3).
When Were the Expenditures Made?
The State took the position that the claims were timely filed since
the expenditures were not made until the quarter ended June 30, 1982.
If this were the case, then the claims were filed well within the
two-year period provided by section 306(c) for filing claims for
expenditures made on or after October 1, 1979, since the two years would
not have ended until June 30, 1984. More specifically, the State argued
that the expenditures were not made until after the Ohio Department of
Mental Health (ODMH), the State agency which operated the hospitals,
submitted its claims reflecting the (3) depreciation expenses to the
Ohio Department of Public Welfare on April 28, 1982 and June 28, 1982.
The State cited as authority for its position 45 CER 95.13(b) (1981),
which provides as follows:
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 State argued that ODMH was "the service provider" within the
meaning of this regulation since it operated the hospitals, and that
payments were made by the Ohio Department of Public Welfare, the "State
agency," to ODMH only after ODMH submitted the claims in April and June
of 1982. (State's brief dated November 14, 1983, p. 5) According to the
State, as claims were submitted by ODMH, the Department of Public
Welfare drew federal funds based on its Medicaid Letter of Credit and
deposited these funds in an ODMH account. (State's submission dated May
29, 1984, p. 2) In the State's view, the expenditures were made when
federal funds were deposited in the ODMH account.
The Agency took the position, however, that the applicable provision
for purposes of determining when the expenditure was made was 45 CFR
95.13(d) rather than 95.13(b). It argued that section 95.13(b) applied
by its own terms only to a "state agency's expenditures for services,"
and that an expenditure for depreciation is not an expenditure for
services. It relying on section 95.13(d), the Agency placed no weight
on the first sentence, which explains when an expenditure is made for
administration or training. The Agency emphasized the second sentence,
which provides as follows:
We consider a state agency's expenditure under these titles
(including title XIX) for non-cash expenditures such as depreciation to
have been made in the quarter the expenditure was recorded in the
accounting records of any state agency in accordance with generally
accepted accounting principles.
Although the depreciation covered periods beginning July 1, 1975, it
was not recorded as a cost until 1982, when, according to the State,
"ODMH contracted with . . . an accounting consultant, who capitalized
these assets in order to develop an updated depreciation schedule for
each provider hospital." (State's brief dated November 14, 1983, Exhibit
A, p. 2) The Agency asserted that, in waiting several years to
depreciate the assets in question, the (4) State did not comply with
generally accepted accounting principles, which require that
depreciation be recorded on a periodic basis such as monthly or
annually. The Agency argued in effect that the depreciation expense
should be deemed to have been incurred at the time when it should have
been recorded under generally accepted accounting principles rather than
at the time it was actually recorded. The Agency asserted that, under
this analysis, none of the claims for depreciation were timely.
(Agency's brief dated January 11, 1984, pp. 7-9)
The State pointed out, however, that the claims were in fact for
"services" and were identified on its QERs as claims for "services"
as
opposed to claims for "administration and training," these being the
two
categories of expenditures specified on the form. (State's reply brief
dated January 27, 1984, p. 2) Indeed, it is undisputed that the
depreciation at issue was a cost ingredient of the per diem rate for
"services" provided by the State-owned facilities to Medicaid
recipients. The State argued that since the Agency had not objected to
this classification of the costs at the time the claims were submitted,
it could not now argue that claims related to depreciation costs did not
constitute "expenditures for services" within the meaning of section
95.13(b). The State noted that its classification of the costs in the
claims for federal financial participation was significant since
different rates of federal financial participation applied to the two
categories of expenditures. The State argued in addition that
depreciation was "commonly included by a Medicaid service provider on
its cost reports" and is just one of approximately seventy categories of
costs making up the reports. (State's reply brief dated January 27,
1984, pp. 1-2)
We agree with the State that section 95.13(b) is the applicable
provision and that its claim for depreciation was timely filed under
that and other provisions in Part 95. The claims at issue here stem
from an increase in the State's interim rate for services in State
hospitals. Thus, the claim is indisputably one for services. Further,
the type of amendment that occurred here was authorized under the
Medicaid reimbursement methodology for "services" which is incorporated
in the State plan and approved by the Agency.
The regulation on which the Agency has depended for this disallowance
is the rule for non-cash expenditures in section 95.13(d). While the
particular sentence in question is not expressly limited in scope to
"administration or training" expenditures, we believe this limitation
is
clearly intended when the sentence is read alongside the other
provisions in section 95.13, including the preceding (5) sentence in
paragraph (d). Section 95.13 as a whole identifies when an expenditure
is "made" for purposes of timely claims under a wide variety of Social
Security Act programs. Each paragraph addresses a different type of
expenditure: Paragraph (a)--assistance; (b)-- services; (c)--Title XX
expenditures; (d)--administration or training. The second sentence in
(d) addresses non-cash expenditures. The most reasonable assumption is
that the second sentence qualifies the preceding sentence on
"administration or training" in paragraph (d). The sentence even refers
back to the Social Security Act programs cited in the preceding sentence
and thus by means of the cross-reference appears to be a related or
subsidiary rule.
Moreover, if the non-cash expenditure rule had been intended as an
exception to rules in any or all of the other paragraphs of 95.13, the
rule would presumably have been placed in a separate paragraph or the
other paragraphs would at least have contained a cross-reference to
paragraph (d). The rule concerning services in paragraph (b) appears to
be complete on its face, and there is nothing contained in that
paragraph to advise the reader otherwise. While the Agency in its brief
insisted that paragraph (d) applied, it never addressed why its position
would not conflict with the rule for services in paragraph (b). /2/
Further, the Agency here presented no compelling policy justification
for treating depreciation reflected in the State's claim for services in
the same manner as depreciation for administration or training, and we
agree with the State that there are valid reasons in the record here for
treating the two types of depreciation differently. A state's claim for
service expenditures is in the form of a per diem rate reflecting a
large number of cost categories including depreciation. The State has
no right to reimbursement of those costs other than as they are
reflected in the rate. Further, a state's initial claim for an interim
per diem rate is based on the provider institution's historical costs,
not the actual costs in (6) providing the service. Thereafter, cost
reports are filed and an interim settlement takes place. The interim
settlement process involves adjustments in the rate as necessary based
on the cost reports and amended reports.The last step is the final
settlement process which is preceded by a field audit. (See the State's
Answers to Questions Raised by the Board, Questions 6-10c and Telephone
Conference Transcript, pp. 11-18) This process is not constrained by any
internal time limits for arriving at a final rate based on verified,
actual costs. In fact, the State here alleged that its reimbursement
methodology was derived from the Medicare program and that adjustments
for depreciation based on the same assets had been accepted under that
program.
The Agency's position here would require that one category of costs
used to calculate the rates, non-cash expenditures, be separated out and
claimed under different time constraints and processes from the
remaining categories of costs. Even assuming the regulations were
susceptible to conflicting interpretations (including the Agency's), the
Agency did not give the State notice of that interpretation so that the
State would know how to protect its claim for this particular category
of costs used in calculating the rate. The Manual instructions
discussing the requirements were issued well after the deadline the
Agency would here impose and indeed were issued after the State had in
fact filed its claim. Further, the instructions to not even address the
specific issue raised and contain additional ambiguities of their own
concerning the issue.
Finally, even if the Agency's position concerning section 95.13(d)
were supportable, the regulations elsewhere (45 CFR 95.4 and 95.19)
provide that applicable time limits do not apply for adjustments to
prior year costs under an interim rate process. This exception involves
adjustments to interim rates "subsequently . . . determined to be higher
or lower than originally claimed" during the state's interim and final
cost settlement process. (Preamble to final rule, 46 Fed. Reg. 3528,
January 15, 1981; see, also, section 2560.4(A)(2) of State Medicaid
Manual as revised May, 1983) An adjustment is permitted for any
expenditure "provided that the interim rate is claimed within 2 years
after the quarter in which the expenditure was made." (Section
2560.4(A)(2) of State Medicaid Manual as revised May, 1983)
Thus, as long as the State here claimed the interim rate for services
in the facilities at issue within the applicable time limits, the
exception permitted it to make subsequent adjustments to those rates
stemming from its cost settlement process, including adjustments
recognizing depreciation for (7) State-owned assets. /3/ Accordingly,
it appears that the claims here were not barred even if the Agency's
position on section 95.13(d) prevailed. Moreover, the exception for
prior year costs reinforces the conclusion we reached earlier concerning
the rule for services in section 95.13(b) since this exception permits
adjustments during the state's final cost settlement process reflecting
any of the categories of costs used to calculate a per diem rate.
Conclusion
For the foregoing reasons, we find that these claims were not barred
by applicable time limits for filing and reverse the disallowance of
$423,456. /1/ The State identified the assets as follows: land
improvements (streets, sidewalks, outside utilities); building shall;
building systems (furnaces and plumbing); and major movables. (State's
submission dated May 29, 1984, p. 1) /2/ In addition, our
analysis is supported by rules of statutory construction. "Generally an
exception is considered as a limitation only upon the matter which
directly precedes it, but if a contrary intent or meaning is clearly
indicated it will operate as a general limitation on all provisions of
the act. It has been held that exceptions are not to be implied."
(Sutherland Stat Const Sec.47.11 (4th Ed); see, also, Sec. 46.05
"'Whole statute' interpretation" and Sec. 47.33 "Referential
and
qualifying words") /3/ Although the Agency argued in response to
a question posed by the Board that the exception applied only to
adjustments to specific cost items if that cost item had been reflected
in the interim rate claimed within the applicable time limits (Agency's
Answers to Questions Raised by the Board, Questions 14-15), that
position is simply not supported by the interpretations in the
regulation preamble and the Agency Manual quoted above. (The Agency in
effect viewed "a particular cost item" in the regulation definition
to
be the smallest divisable item accumulated on the provider's cost report
rather than the item the State actually "claims" under the program,
the
per diem rate for a given service.) Moreover, as with the Agency's
interpretation on when an expenditure is "made," this position would
have required critical modifications in a state's interim rate process
to insure compliance at a time when the State lacked any specific
guidance. It would also have been difficult to implement in view of
potentially numerous small dollar items involved and possible
complications in identifying items without an audit. (Telephone
Conference Transcript, p. 18)
MARCH 19, 1985