DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: New Hampshire Department of Health
and Human Services
Docket Nos. 88-25 88-26 DFO
Control No. 7-8702
Decision No. 969
DATE: July 20, 1988
DECISION
The New Hampshire Department of Health and Human Services (New
Hampshire)
appealed two determinations by the Health Care Financing
Administration
(HCFA) disallowing a total of $748,199 in federal
financial participation
(FFP) claimed under Title XIX (Medicaid) of the
Social Security Act
(Act). New Hampshire objected only to the part of
the disallowance
representing the federal share of alleged excess
depreciation payments for
nine facilities providing Medicaid services.
These alleged excess payments
were listed in records maintained by New
Hampshire, which recalculated
allowable depreciation costs used in
setting reimbursement rates for the
facilities based on "depreciation
recapture" provisions in the state Medicaid
plan which apply upon the
sale of depreciable assets.
We uphold the disallowance, except as noted below, because we find:
1)
HCFA acted within its authority under section 1903(d)(2) of the Act
to
adjust federal payments to reflect excess or improper payments;
2)
neither the particular nature of depreciation recapture, nor
the
existence of judicial challenges to it, creates an exception to
HCFA's
authority; 3) the excess payments in this case are not within the
scope
of any statutory exception to section 1903(d)(2) because there is
no
evidence that the disallowed amounts were unrecoverable; and 4)
the
record provides no basis to preclude HCFA from requiring
adjustment
before the resolution of administrative appeals since New
Hampshire
itself could collect the disputed amounts pending the resolution
of
those appeals. If New Hampshire changes its calculation of
depreciation
recapture for Briston Manor, HCFA should review that change and
reduce
the disallowance to the extent that the revised State findings
are
acceptable. We remand, for further review by HCFA, the
amount
attributable to excess payments which New Hampshire identified
as
settled. We direct HCFA to review any information that some of
the
disputed amounts have already been credited to the federal
government,
which New Hampshire provides within 30 days of receipt of this
decision,
or such longer period as HCFA permits, and HCFA should reduce
the
disallowance accordingly.
Discussion
I. Adjustment for the federal share of excess payments generally
Title XIX of the Act authorizes federal grants to aid in financing
state
programs which provide medical assistance and related services to
needy
individuals, in accordance with a state plan. The Secretary of
Health
and Human Services is required to pay a percentage of the "total
amount
expended as medical assistance under the State plan" and
associated
administrative costs. Section 1903(a) of the Act.
"Medical assistance"
is defined in section 1905(a) of the Act generally as
payment for
covered services provided to individuals who meet specified
eligibility
requirements. Other provisions require states to establish
methods and
standards setting reimbursement rates, and to follow those
methods and
standards. See, e.g., sections 1902(a)(13)(A) and (a)(30)
of the Act;
42 C.F.R. 447.252(a)(2) and 447.253(b).
The Secretary is authorized to make quarterly advances of the
federal
share of estimated Medicaid expenditures in amounts:
reduced or increased to the extent of
any overpayment or
underpayment which
the Secretary determines was made under
this
section to such state for any prior
quarter and with respect to
which
adjustment has not already been made under this
subsection.
. . .
Section 1903(d)(2).
In numerous cases involving excess or improper payments by states
to
Medicaid providers, this Board has held that, under section
1903(d)(2),
HCFA may require adjustment of the grant award for the federal
share of
firmly established overpayments, even if a state has not yet
recovered
these amounts from the providers. The Board reasoned that excess
or
improper payments are not "medical assistance" within the meaning
of
sections 1903(a)(1) and 1905(a) of the Act. The Board recognized
that a
state plan may permit a state to pay interim rates (essentially
an
estimate of provider cost) but found that any excess over the
final
rate, determined in accordance with the reimbursement methods set out
in
the state plan, was not "medical assistance" in which the
federal
government had agreed to participate. The Board rejected the
argument,
advanced by appellant states, that section 1903(d)(3) precluded
HCFA
from requiring adjustment of the federal share for overpayments unless
a
state had already recouped the overpayments from a provider. See,
e.g.,
Arkansas Dept. of Human Services, DGAB No. 717 (1986); New York Dept.
of
Social Services, DGAB No. 311 (1982). The Board's analysis of
this
issue has been upheld in three decisions by United States Courts
of
Appeals. Massachusetts v. Secretary, 749 F.2d 89 (1st Cir. 1984),
cert.
denied, 472 U.S. 1017 (1985); Perales v. Heckler, 762 F.2d 226
(2d Cir.
1985); Missouri Department of Social Services v. Bowen, 804 F. 2d
1035
(8th Cir. 1986).
Congress created an exception to HCFA's authority to require
adjustment
for some overpayments identified for quarters beginning on or
after
October 1, 1985. The Consolidated Omnibus Budget Reconciliation
Act of
1985 (COBRA), Pub. L. No. 99-272, section 9512(a)(3), gave states
a
60-day period to recover overpayments after they are discovered,
and
provided that states may retain FFP for overpayments unrecoverable
due
to bankruptcy or otherwise uncollectable. Section 1903(d)(2)(D) of
the
Act.
New Hampshire did not directly dispute the validity of the above
analysis
of the Act, but argued that this case is distinguished because:
a) recapture
of excess depreciation payments should be treated
differently from normal
rate or claims adjustments considered in most of
the Board's other
overpayments cases; b) the disallowance was based on
State findings, some of
which were not final because of appeals by the
providers; c) some of the
disallowed amounts may become uncollectable
and fall within the scope of the
COBRA exception to adjustment
requirements; and d) some of the alleged
overpayments have been settled
or already credited to the federal
government. We consider these
arguments below.
II. Recapture of excess depreciation payments
Under New Hampshire's state plan for the Medicaid program, providers
were
reimbursed, as part of the per diem reimbursement rate, for
probable expenses
of depreciation in facilities used by Medicaid
patients. State Plan,
section 4.19(d), HCFA's Exhibit (Ex.) C. The
state plan,.in pertinent
part during the relevant time period, also
provided that:
If any property is sold at a gain for
which Medicaid
reimbursement for
depreciation has been received, such gain
shall
be subject to recapture. The
extent to which any such
reimbursement
is recaptured is calculated based on HIM-15
Section
132, Gains and Losses on
Disposal of Depreciable Assets
(Excluding Casualty Losses).
Id., p. 12. The HIM-15 is the Provider Reimbursement Manual for
the
medical insurance program under Title XVIII of the Act
(Medicare).
Under the HIM-15, as under the New Hampshire state Medicaid
plan,
providers may claim depreciation costs under standard
formulas. If the
asset is sold for a gain, then some or all of
the otherwise allowable
depreciation costs paid are "recaptured" through a
downward adjustment
in the rate to reflect the fact that the facility did not
depreciate in
value as anticipated. The underlying reason for this is
that the
provider reports depreciation as a cost of providing services for
rate
calculation purposes, but the premise on which this is based (i.e.
that
the facility's value is depreciating) is no longer valid when
the
facility is sold at a gain. In that case, some or all of the
payments
for depreciation would be in excess of costs and may be
considered
excess payments to the provider. See Virginia Dept. of
Medical
Assistance, DGAB No. 723 (1986). 1/
Since the state Medicaid plan incorporated section 132 by
reference,
depreciation recapture became part of New Hampshire's
reimbursement
system. Although there is no federal requirement for
depreciation
recapture in the Medicaid program similar to section 132 of the
HIM-15,
states have been given the flexibility to design reimbursement
systems
as long as the state finds, and "makes assurances satisfactory to
the
Secretary" that the rates are "reasonable and adequate to meet the
costs
which must be incurred by efficiently and economically
operated
facilities. . . ." Section 1902(a)(13).
The Board has directly considered depreciation recapture issues in
only
one prior case. In Virginia Dept. of Medical Assistance, DGAB No.
723
(1986), Virginia argued that FFP in recapturable depreciation under
its
state Medicaid plan should not be credited to the federal
government
until actually collected, because the depreciation payments were
proper
when made. The Board found no basis to distinguish
depreciation
recapture from other excess payments computed retrospectively
under the
Virginia state Medicaid plan. New Hampshire relied on other
grounds to
distinguish depreciation recapture in this case; and we have no
basis to
conclude that depreciation recapture, under the New Hampshire
state
plan, was different from other retrospective rate adjustments, such
as
those considered in prior Board cases.
New Hampshire argued that depreciation recapture is distinguished
from
ordinary overpayments because the legal basis for depreciation
recapture
is still unsettled. New Hampshire pointed out that two
providers,
Hoodkroft Convalescent Center and Golden View Health Center, had
filed
court actions challenging New Hampshire's authority to
recapture
depreciation.
New Hampshire argued that it is "caught in the middle" in
defending
against the disallowance. New Hampshire explained that the
providers
had asserted that its depreciation recapture system was
inconsistent
with the federal statutory requirement at section 1902(a)(13)(A)
that
the state plan must provide for rates which are "reasonable and
adequate
to meet the costs which must be incurred by efficiently and
economically
operated facilities. . ." to provide services under the
program.
State's Brief, p. 22. New Hampshire alleged that the
providers had
argued that the recapture provisions deprived them of
reimbursement for
costs under 1902(a)(13)(A) because gains on the sale of a
facility may
result from inflationary increases in market value or from
investment
gain based on increased demand, not from any miscalculation
of
depreciation. See Mercy Community Hospital v. Heckler, 781
F.2d 1552
(11th Cir. 1986). 2/ New Hampshire said that, while it
is opposing
these arguments in court, it was compelled to raise the arguments
"in
order to protect itself against the possibility" that the
providers
prevail in court and the amounts in question are determined not to
be
overpayments. State's Brief, p. 22.
We see no reason why retaining FFP would "protect" New Hampshire in
this
circumstance; in fact, retaining FFP would undercut New Hampshire's
own
position in litigation and discourage it from aggressively seeking
to
collect funds due from providers. As we discuss below, the
record
indicates no legal impediment to New Hampshire seeking to collect
the
disputed funds pending resolution of the court actions. While a
court
may determine that some of the disputed payments were not
overpayments,
that is mere speculation at this time. If such a
determination were to
be made, at that time New Hampshire could request a
consequent
adjustment in its claims (see the discussion below of HCFA's
apparent
willingness to make adjustments which result from a change
in
collectability; in the past, HCFA has also accepted claims based
on
changes in judicial interpretation of a state plan). This
would
adequately protect New Hampshire from the effect of an adverse
ruling.
This Board recognized, in California Dept. of Social Services, DGAB
No.
159 (1981), that a state's involvement in litigation with a provider
may
limit its ability to defend against a disallowance issued by HCFA.
The
Board found that the fact that a state was litigating an issue with
a
provider would not, alone, provide a basis for overturning
a
disallowance, although the Board would consider this as a factor
in
determining the burden on the state in contesting the
federal
disallowance. A state has the burden, ordinarily, to document
the
allowability of claimed costs. When HCFA is relying on a
state
overpayment determination, the Board has found that the state must
have
an opportunity to show that such reliance is unreasonable and that
the
Board would analyze the record as a whole to determine whether
the
disallowance was factually and legally supportable. See, e.g.,
Ohio
Dept. of Public Welfare, DGAB No. 637 (1985). In California, the
Board
found that there was insufficient evidence in the record of the
factual
and legal basis needed to sustain a federal disallowance because of
the
lack of specificity in HCFA's findings and uncertainty as to whether
the
disputed payments violated federal or state requirements.
In this case, the disputed payments represent an excess over the
provider
reimbursement rates determined in accordance with the methods
and standards
set out in the New Hampshire state plan, the federally
drafted HIM-15
provision incorporated into the state plan, and New
Hampshire's official
interpretation of these provisions set out in its
implementing regulations
and communicated to HCFA. State's Ex. E, p.
11; HCFA's Ex. I. The
court litigation, as described by New Hampshire,
does not question whether
this interpretation is in accordance with the
state plan but, rather,
considers whether the state plan, as interpreted
by the State, is
inconsistent with section 1902(a)(13)(A) of the Act.
Since New Hampshire is required to follow the methods and standards
set
out in its state plan in claiming FFP, and since New Hampshire's
own
interpretation of the state plan is clear, we find that HCFA
may
reasonably rely on the State findings here despite the
pending
litigation described by New Hampshire.
III. The effect of the COBRA exceptions to the adjustment requirement
New Hampshire argued that the depreciation recapture amounts related
to
the Monadnock Nursing Home, Hoodkroft Convalescent Center, and
Briston
Manor facilities were "identified" by final audit after October 1,
1985,
the effective date of COBRA section 9512(b), codified at
section
1903(d)(2)(D) of the Act. New Hampshire asserted that, under
this
provision, these amounts "should be eligible for discharge from
FFP
should they be determined in the future to be uncollectable because
the
provider has gone out of business." 3/ State's Brief, p.
5. New
Hampshire argued that, since the COBRA provision was
remedial
legislation, it should be broadly construed. Id., p. 12.
Although the State contended that the provision would apply to
all
overpayments identified by final audit after October 1, 1985,
the
statutory language of section 1903(d)(2)(D) applies, by its terms,
only
to "overpayments identified for quarters beginning on or after
October
1, 1985." (emphasis added). Contrary to New Hampshire's
reading, the
plain language does not necessarily apply to overpayments
identified in
quarters after that date, but may apply only to overpayments
for
quarters after that date. Thus, it would appear that HCFA
could
reasonably interpret the provision as not effective at least
with
respect to the Hoodkroft and Monadnock facilities, which were sold
prior
to October 1, 1985.
In any event, we must conclude that the entire issue is
hypothetical,
since New Hampshire presented no evidence either that any of
the
facilities were bankrupt or that the overpayments were
otherwise
uncollectable. In fact, the record indicates that New
Hampshire
considered the overpayments to be worth pursuing in
administrative
appeals and judicial proceedings. In this circumstance,
we see no
reason to pursue this issue further.
Should the providers file for bankruptcy or the payments become
otherwise
uncollectable, New Hampshire is not precluded from raising
this issue at some
future time. We note that, in the preamble to a
recent notice of
proposed rulemaking to implement section 1903(d)(2)(D),
HCFA indicated a
willingness to accept claims for FFP for excess
payments which qualify for
the exception even after states have returned
the FFP to the federal
government:
If the 60-day recovery period ends
before the provider files the
bankruptcy
petition or is certifiably out of business, the
State
would be required to credit HCFA
with the Federal share of the
overpayment on the next Form HCFA-64 submission. The State
would
be permitted to reclaim FFP for
any unrecovered amount, citing
section
1903(d)(2)(D) of the Act as authority, if, at a
later
date, the provider files for
bankruptcy or goes out of business
and
the State has not been able to make complete recovery.
52 Fed. Reg. 48290, 48293-94 (December 21, 1987). 4/
Thus, we conclude that the excess payments in this case do not fall
within
the section 1903(d)(2)(D) exception to HCFA's general authority
to require
adjustment in claims for FFP at this time. To the extent that
this section
may be applicable at some future time with respect to some
of the excess
payments disputed here, HCFA has indicated that it will
permit states to
reclaim FFP. Thus, we conclude that the mere
possibility that the section
might be applicable at some future time
does not provide a basis to reverse
the disallowance.
IV. Overpayments for which an administrative appeal is pending
New Hampshire identified two providers, Hoodkroft and Briston Manor,
with
pending administrative appeals. New Hampshire argued that, until
the
administrative appeal process was complete, New Hampshire's
findings
identifying the overpayments were not final. New Hampshire relied on
the
Board's reasoning in Pennsylvania Dept. of Public Welfare, DGAB No.
765
(1986). 5/
In Pennsylvania, the Board affirmed prior holdings that the mere
existence
of a provider appeal did not make a state determination
unreliable as the
basis for a disallowance. See, e.g., California Dept.
of Health
Services--Accounts Receivable, DGAB No. 334 (1982). But the
Board
reversed the disallowance because HCFA could not reasonably rely
on the state
audit findings in light of the fact that Pennsylvania
itself did not use them
as a basis for collection prior to the end of
the appeal process, and in
light of the unclear federal policy on
appealed nursing home audit
findings. Pennsylvania, p. 12-15.
The Pennsylvania decision was limited to the particular facts
considered
in that case. In Pennsylvania, there was evidence that
Pennsylvania was
precluded by state law from collecting disallowed funds from
providers
pending appeal, during the time periods at issue, and that this
policy
was adopted in reliance on prior federal policies. The Board
gave
particular weight to the fact that Pennsylvania did not have
sufficient
notice that federal policies (under action transmittal
AT-77-85),
permitting states to retain FFP pending appeals by nursing
home
providers, had changed. Consequently, Pennsylvania may have relied
on
those federal policies in establishing state laws which precluded
it
from collecting disputed funds pending appeals. Id., pp. 12-15.
In contrast, New Hampshire cited no state law which precluded it
from
collecting disputed funds pending appeal. New Hampshire merely
provided
evidence that, in practice, it did not seek to collect funds until
the
end of the administrative appeal process. Affidavit of Philip
Soule,
State's Ex. D. As HCFA pointed out, however, New Hampshire's
own
appeals procedure contemplates collection of disputed amounts pending
an
appeal, with a retroactive adjustment should the provider
prevail.
State's Ex. E, p. 23. In fact, the letters notifying
providers of the
overpayments requested immediate repayment, and one of the
letters
stated that collection activities would be deferred only through
the
initial meeting at the Bureau level. HCFA's Exs. D, F. Both
the
appeals here are at more advanced levels. See State's
Supplemental
Letter, dated June 6, 1988. Thus, New Hampshire was not
precluded from
collecting from these providers.
Since New Hampshire was not precluded by state law from
collecting
disputed funds pending an appeal, key elements of the Board's
reasoning
in Pennsylvania are inapplicable. New Hampshire apparently
considered
its findings sufficiently final that it could, under state law,
use
those findings as a basis for collection. Nor was New Hampshire
limited
by a mistaken adherence to the policy in AT-77-85. 6/
In general, the State relied on the mere existence of provider appeals
and
provided no evidence which would raise substantial doubt about the
factual
findings about the amounts due from providers. However, New
Hampshire's
final submission states that it may accept a revised
calculation of the
depreciation recapture due from Briston Manor, based
on an independent
appraisal obtained by the provider. State's letter,
dated June 6, 1988.
New Hampshire submitted a copy of a letter to the
provider in which it agreed
to reduce State findings of recapturable
depreciation by approximately
$114,000, subject to documentation of the
appraisal figures in a June
meeting. Should New Hampshire determine to
change its findings as a
result of information obtained during the
provider's appeal, HCFA should
review the change and reduce the
disallowance to the extent that the revised
State findings are
acceptable.
In sum, we conclude that the fact that two providers have pending
appeals
does not provide a basis to reverse this disallowance. 7/ To
the
extent, however, that New Hampshire agrees, as a result of
information
received during the provider's appeal, to change its
findings, HCFA should
review the change and reduce the disallowance to
the extent that the revised
State findings are acceptable.
IV. Overpayments settled or already credited to the
federal
government
New Hampshire alleged that it has settled litigation against the
Willows
Convalescent Center, receiving $1200 in settlement of a total
requested
depreciation recapture amount of $5933 ($3626 in FFP).
Although HCFA
did not address this facility in its brief, in the past HCFA
has agreed
to accept a remand of settled cases to review the propriety of
the
settlement, and to review whether the federal government has
been
appropriately credited with funds collected pursuant to the
settlement
agreement. See Pennsylvania, p. 4. Thus, we remand the
amount of the
disallowance involved in the settlement for further review by
HCFA.
New Hampshire also alleged that it has received periodic payments
pursuant
to an agreement of repayment from the provider who operated the
Claremont and
Woodlawn Nursing Homes. New Hampshire alleged that the
federal share of
these payments had been sent to the Regional Office
when received. HCFA
did not deny this allegation. Thus, we find that
the HCFA should review
any information indicating that these repayments
have already been made which
New Hampshire provides within 30 days of
receipt of this decision, or such
longer period as HCFA permits, and
reduce the disallowance accordingly.
Conclusion
For the reasons discussed above, we uphold the disallowance
in
principle. If New Hampshire changes its calculation of
depreciation
recapture for Briston Manor, HCFA should review that change and
reduce
the disallowance to the extent that the revised State findings
are
acceptable. We remand, for further review, the amount attributable
to
excess payments which New Hampshire identified as settled ($3,626).
We
direct HCFA to review any information indicating that some of
the
disputed amounts have already been credited to the federal
government,
which New Hampshire provides within 30 days or such longer period
as
HCFA permits, and HCFA should reduce the disallowance accordingly.
________________________________ Donald
F.
Garrett
________________________________
Alexander
G. Teitz
________________________________ Judith
A.
Ballard Presiding Board Member
1. A summary of these HIM-15 provisions was codified
in 42 C.F.R.
405.415(f), which was amended in 1979 to clarify calculation
issues, 44
Fed. Reg. 3980, 3982 (January 19, 1979), and transferred to 42
C.F.R.
413.134 in 1986. 51 Fed. Reg. 34793 (September 30,
1986).
Additionally, in 1984, Congress amended the Medicare statute to
require
that the Secretary continue to provide for recapture of depreciation
in
the manner provided for under the regulations in effect on June 1,
1984.
Deficit Reduction Act of 1984 (DEFRA), Pub. L. 98-369, section
2314.
2. We do not here reanalyze this case, as HCFA urged
in its brief,
but we note that it is neither directly binding on New
Hampshire nor is
it binding precedent in the First Circuit Court of
Appeals. We also
note that the court considered only the regulations at
42 C.F.R.
405.415(f), and not the HIM-15 provisions incorporated in the
New
Hampshire state plan. Furthermore, there is substantial
authority
supporting depreciation recapture in other circuits. See,
e.g.,
Professional Medical Care Home, Inc. v. Harris, 644 F.2d 589 (7th
Cir.
1980); Stewards Foundation v. United States, 654 F.2d 28 (Ct.Cl.
1981).
Finally, we note that none of these cases addressed
depreciation
recapture in light of Medicaid purposes and provisions, which
differ
from those relevant to Medicare.
3. The State did not rely on the part of this
provision which
granted states a 60-day period from discovery of an
overpayment before
adjustment would be required.
4. HCFA also stated, in the notice of proposed rulemaking, that
"the
normal 2-year filing limit for retroactive claims would not apply
to
these adjustments, as downward adjustments to overpayment amounts
are
not retroactive claims but merely reflect the reclaiming of
costs
previously claimed." 52 Fed. Reg. 48293.
5. HCFA argued that it did not rely on New
Hampshire's findings with
respect to the Hoodkroft facility, but made an
independent
determination. HCFA's Brief, p. 13, HCFA's Ex. K. While the
Board noted
in Pennsylvania that its decision did not limit HCFA's ability to
issue
a disallowance based on an independent audit of State or
provider
accounts, the determination here was not based on a HCFA audit,
but
relied on state findings regarding the amounts of depreciation
subject
to recapture. See Pennsylvania, p. 11. Although HCFA
alleged that the
determination was based only on uncontested facts, New
Hampshire stated
that these facts, related to the calculation of the
recapture, were
contested and would be addressed in later stages of its
appeal process.
State's Supplemental Letter, dated June 6, 1988.
6. In Pennsylvania, the Board noted that, in any
event, states are
responsible for processing appeals in a timely
fashion. Pennsylvania,
p. 16. The record indicates that the
Hoodkroft appeal has been stayed
indefinitely, pending resolution of the
court challenge. HCFA
specifically alleged that the two- year period
taken thus far to process
this appeal is excessive, and noted that the policy
in AT-77-85,
considered in Pennsylvania, allowed states to retain FFP only
pending
administrative appeals, not court actions. In the Briston Manor
case,
the hearing has been repeatedly delayed. It is already well
beyond the
schedule set forth in New Hampshire's appeal procedures.
While we do
not find it necessary to rely on these delays to reach our
conclusion in
this case, we affirm the principle that the delays are a proper
subject
of scrutiny.
7. HCFA also argued that the Board should find that
the appeals
raised issues beyond the authority of the hearing officer to
resolve or
were unlikely to reduce the determination of the amount of
excess
depreciation. It is not necessary here for the Board to
consider
whether it would be appropriate to make