SUBJECT: Kansas Department of Social and
Rehabilitation Services

DECISION

The Kansas Department of Social and Rehabilitation Services (Kansas) appeals a determination of the Centers for Medicare and Medicaid Services (CMS) to disallow $13,595,455 in federal financial participation (FFP) claimed under title XIX of the Social Security Act (Act). The disallowed FFP represents the federal share of payments Kansas made to State psychiatric hospitals to reimburse them for the cost of providing educational services to Medicaid-eligible individuals as part of their active treatment during fiscal years 1994-99. Kansas claimed the FFP at issue on the expenditure report for the quarter ended June 30, 2002. CMS disallowed the claim on the ground that it was barred by the two-year time limit for filing claims established by section 1132(a) of the Act, 42 U.S.C. � 1320b-2(a), and did not qualify for the exception for adjustments to prior year costs found in section 1132(a)(2), 42 U.S.C. � 1320b-2(a)(2).

On appeal Kansas's principal argument is that its claim falls within the exception for adjustments to prior year costs. Alternatively, Kansas argues that the expenditures for educational costs on which the claim is based were new expenditures made to resolve pending rate appeals that triggered a new two-year time limit.

For the reasons stated below, we conclude that Kansas's claim for FFP for the inpatient psychiatric services at issue here is untimely since it was filed more than two years after Kansas made the expenditures for those services and does not qualify for the exception for adjustments to prior year costs. Kansas made the expenditures at issue here when it first paid or recorded amounts due to the hospitals for days of service provided to particular Medicaid-eligible individuals, at the interim per diem reimbursement rates then applicable, not at the time it paid the [Page 2] hospitals for the costs of educational activities. Kansas did not show that the claims here were for adjustments to the amount of the cost for those particular days of service previously claimed, made according to its State plan methods for adjusting from interim to final rates. ⁽¹⁾ The exception for adjustments to prior year costs is intended to cover unforeseen and unavoidable adjustments to account for differences between a final rate determined using actual allowable costs incurred in providing the services and the interim rates estimated based on the hospitals' reported costs from an earlier year trended forward. The adjustments here, however, are of a different type and were neither unforeseen nor unavoidable. The record shows that Kansas consciously excluded the educational costs when calculating both the interim rates used to reimburse the hospitals during the years in question and when it first issued cost settlements for those years which it labeled "final." Kansas did so despite having at least constructive notice in 1992 (and actual notice in 1994) that costs of educational activities were allowable underlying costs of providing inpatient psychiatric services to individuals under age 21 when part of an "active treatment" plan. The fact that Kansas had a retrospective reimbursement system for the hospitals was thus incidental. The need for the adjustments was not an integral facet or a necessary result of having a retrospective reimbursement system that makes rate adjustments beyond the two-year period unforeseen and unavoidable. ⁽²⁾

We also reject Kansas's alternative argument that the payments it made to the State hospitals in 2001 for the inpatient psychiatric services at issue here were "new" expenditures made to resolve "rate appeals" that triggered a new two-year time limit. [Page 3] Contrary to what Kansas asserts, there is no "implicit principle" that the two-year limit does not apply when a state Medicaid agency adjusts a State provider's cost reimbursement as a result of a successful rate appeal. Neither can Kansas's adjustments of the hospitals' interim rates, or its payments to the hospitals pursuant to that adjustment, fairly be characterized as the result of successful rate appeals.

We reject Kansas's attempt to depict the delay in filing its claims as due to lack of guidance from CMS. It was Kansas's responsibility to develop a methodology to reimburse the allowable costs of the services and a matter within its control.

Accordingly, we uphold the disallowance.

Legal Background

Under section 1903 of the Act, a state that administers a Medicaid program pursuant to an approved plan is entitled to federal matching funds, known as "federal financial participation" ⁽³⁾ (FFP), for a percentage of the expenditures it makes in operating the program. FFP is available in expenditures for "medical assistance," as defined in section 1905(a) of the Act, including expenditures for inpatient psychiatric services for individuals under age 21 who are Medicaid-eligible.

Section 1132(a) of the Act, which applies to several programs (including Medicaid), provides a two-year window for filing claims for FFP, with certain exceptions. This provision states in relevant part:

Notwithstanding any other provision of this Act ... any claim by a State for payment with respect to an expenditure made during any calendar quarter by the State --

(1) in carrying out a State plan approved under title I, IV, X, XIV, XVI, XIX, or XX of this Act,

. . .

shall be filed (in such form and manner as the Secretary shall by regulations [Page 4] prescribe) within the two-year period which begins on the first day of the calendar quarter immediately following such calendar quarter; and payment shall not be made under this Act on account of any such expenditure if claim therefor is not made within such two-year period; except that this subsection shall not be applied so as to deny payment with respect to any expenditure involving court-ordered retroactive payments or audit exceptions, or adjustments to prior year costs.

42 U.S.C. � 1320b-2(a). As the text of this provision indicates, there are certain exceptions to the two-year rule, including the exception for "adjustments to prior year costs" that Kansas asserts applies here.

The Secretary's regulations in 45 C.F.R. Part 95, subpart A implement the two-year filing requirement established by section 1132(a). Section 95.7 states that CMS "will pay a State for a State agency expenditure made after September 30, 1979, only if the State files a claim with us for that expenditure within 2 years after the calendar quarter in which the State agency made the expenditure". A "claim" is defined as a "request for Federal financial participation in the manner and format required by our program regulations, and instructions or directives issued thereunder." 45 C.F.R. � 95.4. The statutory exceptions to the two-year limit are restated in 45 C.F.R. � 95.19, which provides, in relevant part, that the two-year limit does not apply to "[a]ny claim for an adjustment to prior year costs." 45 C.F.R. � 95.19(a). The regulations define "adjustment to prior year costs" as "an adjustment in the amount of a particular cost item that was previously claimed under an interim rate concept and for which it is later determined that the cost is greater or less than that originally claimed." 45 C.F.R. � 95.4.

Case Background

The disallowed FFP at issue is for inpatient psychiatric services for individuals under age 21, specifically for educational services provided to Medicaid-eligible patients under age 21 as part of their active treatment in four State psychiatric hospitals during fiscal years 1994-99. Each of the four hospitals at issue here provides services to Medicaid-eligible residents under a provider agreement with Kansas. Kansas Br. at 2. The hospitals contract with third-party vendors to provide [Page 5] the educational services. Kansas Ex. 1, � 6. Under its approved Medicaid State plan, Kansas reimburses the hospitals the lower of their costs or charges for these inpatient psychiatric services. Id., � 3. In practice, this means that Kansas reimburses the hospitals based on a retrospective reasonable-cost basis, i.e., paying them for all costs allowable under Medicare reasonable-cost principles that are allocable to covered services provided to Medicaid-eligible individuals under age 21 or over age 64. Id.

Kansas pays each State hospital an interim per diem rate that is a percentage of the hospital's historical allowable costs for routine, ancillary and professional services. Kansas Ex. 1, � 3. After the hospitals submit their annual Medicare cost reports (HCFA form 2552), Kansas cost settlement staff perform a preliminary settlement, reconciling the cost reports and available Medicaid paid-claims data and making preliminary payment adjustments. Id., � 4. The Medicare fiscal intermediary (FI) audits the hospitals' cost reports and sends copies of the audited reports to Kansas cost settlement staff. Id.

After receiving the audited cost reports from the FI, cost settlement staff revise the preliminary Medicaid settlements, as appropriate, utilizing what by then are more complete Medicaid logs and paid claims data and resolving Medicaid-specific issues. Kansas Ex. 1, � 4. Following these revisions, Kansas settles with the hospitals by making additional payments up to the Medicaid share of allowable costs or recovering any Medicaid payments in excess of allowable costs. Id.

CMS asserts that the settlement Kansas makes after it receives a hospital's audited cost report from the FI is the final settlement, after which the cost reporting period is closed. CMS Br. at 2. Frank Webb is Medicaid Reimbursement Manager for Kansas and from 1994 through 2000 supervised the work of Vandana Agarwal, the Kansas auditor responsible for reviewing and performing the hospital cost settlements at issue in this case. Kansas Ex. 1 (Webb Declaration), �� 1, 2. Mr. Webb asserts that although Kansas refers to the settlement made after Kansas receives a hospital's audited cost report from the FI as a "final" settlement, Kansas "typically issue[s] several 'final' settlements (sometimes as many as four or five, as additional data and information become available) for a hospital cost reporting period before the settlement for the period is truly final." Id., � 4. Mr. Webb also asserts that Kansas "typically" receives audited cost reports from the FI two or more years after the end of the fiscal year for which the cost report was filed and, because of this, "typically" cannot begin the Medicaid cost [Page 6] settlement process until more than two years after the beginning of the cost reporting period. Id., � 5.

Mr. Webb states that for many years, including those prior to the 1994-99 period at issue here, the State psychiatric hospitals have included the cost of educational services to their patients under age 21 on Line 25 of their Medicare cost reports, "Adult and Pediatric Routine Costs." Kansas Ex. 1, � 6. However, he also states that for years prior to 1994, Kansas routinely excluded these costs from the HCFA-2552 Medicaid worksheet, because at that time such costs were not allowable under Medicaid. Id.

On November 20, 1992, CMS issued a final rule amending 42 C.F.R. � 441.13(b) effective December 21, 1992. ⁽⁴⁾ CMS Br. at 2; Kansas Br. at 4. The rule, published at 57 Fed. Reg. 54,705 (1992), made FFP available for educational and vocational services rendered as part of active treatment, as defined in the regulations, to individuals under age 21 receiving inpatient psychiatric services. CMS Br. at 2-3; Kansas Br. at 4-5. Previously, such services were not eligible for FFP under the Medicaid program.

On August 13, 1993, the Acting Director of the [CMS] Medicaid Bureau sent a memorandum to the Associate Regional Commissioner, Division of Medicaid, Denver, Colorado (Region VIII), responding to questions regarding the availability of FFP for educational services provided in an inpatient psychiatric facility as a part of active treatment. Kansas Ex. 2. Citing the final rule amending 42 C.F.R. � 441.13(b), the memorandum stated that FFP was now available for educational and vocational services to individuals under 21 in psychiatric hospitals when such services were provided as part of active treatment. Id. The memorandum further clarified that CMS considered all educational services listed in an individual's plan of care to be active treatment. Id. Copies of the same memorandum were sent to the Associate Regional Administrators in Regions I-VII, IX and X. Id.

On October 26, 1993, the CMS Associate Regional Administrator, Division of Medicaid, Region II, sent Medicaid State Operations Letter #93-73 (MSOL #93-73) to State agencies administering the Medicaid program. Kansas Ex. 3. MSOL #93-73 informed the State agencies of the final rule amending 42 C.F.R. � 441.13(b) and stated that effective December 21, 1992, FFP was available for [Page 7] educational services rendered in connection with active treatment, as defined in regulations at 42 C.F.R. � 441.154, for individuals under age 21 receiving inpatient psychiatric services. Id. MSOL #93-73 further advised that educational services included in an individual's plan of care are considered to be active treatment. Id.

In September 1994, Mental Health and Retardation Services, the division of Kansas that administers the State psychiatric hospitals, asked Kansas to review the hospitals' interim and final rates and include educational services costs incurred as part of "active treatment" for Medicaid eligible individuals under age 21 as a reimbursable Medicaid expense. Kansas Ex. 1, � 7. Frank Webb states that in response to this request, Kansas embarked on an informal review process, "as authorized by state law." Id. According to Mr. Webb, his staff received a copy of MSOL #93-73 from a consultant for one of the State psychiatric hospitals. Id., � 8. Mr. Webb states that after reviewing that document, "we thought it was likely that at least some portion of the State Hospitals' educational costs was now reimbursable under Medicaid." Id. Between September 1 and 6, 1994, auditor Agarwal received a copy of the amended CMS regulations and met with the hospital consultant to discuss how to report the educational services costs "[s]ince Medicaid must pay these costs now." Kansas Exs. 5, 6. According to Mr. Webb, Kansas and the State hospitals "agreed to postpone the resolution of the educational costs issue until after all other work on the State hospital and cost settlements had been completed." Kansas Ex. 1, � 12.

By the Spring of 1999 (nearly four years after Kansas became aware of the amended regulation), the cost settlement calculations for fiscal years 1994-96 were complete, except for calculations pertaining to the educational services costs. Kansas Ex. 1, � 13. Mr. Webb asserts that Ms. Agarwal "confirmed with the [h]ospitals that she would resolve the educational costs issue before finalizing the settlements." Id. However, an April 13, 1999 email from Ms. Agarwal to Jaymee Metzenthin states that Ms. Agarwal had already completed the final settlements for FY 1994-96 for Osawatomie State Hospital in December 1998 and that another auditor would start working on final settlements for the other three hospitals for those fiscal years as soon as Ms. Agarwal received the final logs for those years. Kansas Ex. 11.

Mr. Webb states that in April 1999, Ms. Agarwal contacted the CMS regional office "to ask for guidance and clarification." Kansas Ex. 1, � 14; Kansas Ex. 12. Kansas Commissioner Ann Koci then sent CMS a letter "requesting 'clarification on applicability & criteria' for claiming education costs and 'assurance that SRS [Page 8] would receive FFP for educational services.'" Kansas Ex. 1, � 14. In a May 25, 1999 letter, Mary Jean Duckett of CMS acknowledged the inquiry and stated that a response would follow after staff looked into the issues raised. Kansas Ex. 16. In September 1999, Kansas received a follow-up letter from Ms. Duckett confirming that educational services deemed necessary as part of an individual's active treatment and provided on an inpatient basis by psychiatric facilities to Medicaid eligible patients under age 21 are covered by Medicaid and eligible for FFP. Kansas Ex. 1, � 15; Kansas Ex. 19. However, the letter advised that claims for FFP for such services were subject to the two-year time limit for filing claims for FFP. Kansas Ex. 19.

Mr. Webb states that after receiving Ms. Duckett's September 1999 letter, Kansas notified the hospitals, "who had been pressing us to finalize the settlements," that they would be reimbursed for the costs of providing covered educational services in fiscal years 1994-99, and that Kansas auditors had begun working on a methodology for extracting, reporting and documenting those costs. Kansas Ex. 1, � 16.

In February 2001, Kansas processed final Medicaid cost settlements for the four State psychiatric hospitals for fiscal years 1994 through 1999 and made additional payments to them in the amount of $10,918,596. Kansas Ex. 1, � 16; Kansas Ex. 24. In May 2001, Kansas filed a claim for FFP in the same amount. Kansas Ex. 23. In June 2001, CMS deferred the $10,918,596 claim on the ground that it was not timely filed. Id. Kansas withdrew its claim in February 2002 after CMS determined that it was based on estimates and advised Kansas informally that it would be disallowed. Kansas Ex. 24, at 2.

In March 2002, Kansas revised the February 2001 cost settlements using annual data for each hospital for the same fiscal years. CMS Ex. 3. The revised settlements resulted in additional payments to the hospitals in the amount of $11,129,045, and in August 2002, Kansas submitted a revised claim for FFP in that amount for the quarter ended June 30, 2002. Kansas Ex. 1, � 16; Kansas Exs. 24, 26. On November 21, 2002, CMS notified Kansas that it was deferring its revised claim and requested additional documentation. ⁽⁵⁾ Kansas Ex. 24. On January 28, 2004, CMS [Page 9] notified Kansas that it was disallowing $13,595,455 in FFP for costs related to Medicaid educational services. ⁽⁶⁾ Kansas Ex. 26.

Discussion

1. Kansas's claim is untimely and does not qualify as an adjustment to prior year costs.

Kansas's claim for the FFP at issue was filed in August 2002 for educational services provided to Medicaid patients in State psychiatric hospitals during State fiscal years 1994-99. Kansas argues that its claim qualifies for FFP under the exception to the two-year time limit for adjustments to prior year costs. This argument assumes, without Kansas's actually so stating, that the claim was not filed within two years after the calendar quarter in which the expenditures for the inpatient psychiatric services were made. ⁽⁷⁾ An expenditure for Medicaid services is [Page 10] "made in the quarter in which any State agency made a payment to the service provider." 45 C.F.R. � 95.13(b). "State agency" for purposes of title XIX means "any agency of the State, including the State Medicaid agency ... , its fiscal agents, a State health agency, or any other State or local organization which incurs matchable expenses; ..." 45 C.F.R. � 95.4. For public providers, such as the hospitals here, "the expenditure is made when it is paid or recorded, whichever is earlier, by any state agency." State Medicaid Manual, � 2560.4G.1; see generally New York State Dept. of Health, DAB No. 1867 (2003) (discussing the background of the timely claims provisions of the regulations and State Medicaid Manual as they relate to expenditures for Medicaid services provided by public providers).

Kansas does not deny that expenditures for the Medicaid educational services provided by the hospitals were either recorded or paid by some agency of the state during its fiscal years 1994 through 1999, and has not presented any argument or evidence to the contrary in this proceeding. ⁽⁸⁾ Accordingly, we [Page 11] find that the expenditures were made more than two years prior to the calendar quarter in which Kansas claimed FFP and that the claim, therefore, is untimely. See DAB No. 1867 (finding claim untimely where New York did not establish that the claims were made within two years after it first recorded amounts for the particular items of services that constituted the "medical assistance" to which the claims related).

Kansas asserts that its claim is nevertheless allowable because it "is squarely covered by the exception for adjustments to prior-year costs." Kansas Br. at 20. We disagree. The regulations define an adjustment to prior year costs as "an adjustment in the amount of a particular cost item that was previously claimed under an interim rate concept and for which it is later determined that the cost is greater or less than that originally claimed." 45 C.F.R. � 95.19(a). In South Carolina State Health and Human Services Finance Commission, DAB No. 943 (1988), aff'd, S.C. Health & Human Servs. Fin. Com'n v. Sullivan, No. 88-1313-16 (D.S.C. July 17, 1989), aff'd, 915 F.2d 129 (4^th Cir. 1990), the Board held that South Carolina's proposal to revise its final, closed cost reports to include costs a public hospital had deliberately omitted and which South Carolina chose not to include when calculating the interim rates did not qualify for the exception. The Board said that the exception is "intended to give a state a reasonable opportunity to adjust its interim rate, consistent with the methods and procedures of its established rate-setting methodology." DAB No. 943 at 7. [Page 12] However, the Board then concluded that "[t]he revision to the cost reports ... proposed by the State is not, in our opinion the type of change reasonably contemplated by section 1132 of the Act as an adjustment to prior year costs, so that the exception to the timely filing requirement would not apply." Id. at 8. The District Court and Fourth Circuit agreed, with the Fourth Circuit explaining that the exception for adjustments to prior year costs was designed to accommodate costs that were unknown to the agency at the time it calculated the interim rate:

To qualify as an adjustment to prior year costs, an adjustment must be "related to the interim rate process." Tennessee Dep't of Health and Env't, DGA Decision No. 921, slip op. at 5 (Dec. 2, 1987). Since a retrospective rate system uses historical cost as a proxy for the actual cost of providing services, the interim billing rate most likely will not be for the exact amount of the actual current costs. As a result, a retrospective rate system permits state agencies to file adjustments for costs which were unknown to the agency earlier and therefore not included in the provider's historical cost estimate. This is the type of adjustment which the DGAB considers as an adjustment to prior year costs, and is related to the interim rate process because in such a process unknown costs are bound to arise for which state agencies should be compensated.

915 F.2d at 131 (emphasis added).

We see no material distinction between the situation in South Carolina and that here. Both cases deal with rate increases that resulted from the fact that a state deliberately did not include underlying costs of which it was aware either in its calculations of the interim rates for state hospitals or in cost settlements of those rates that it referred to as "final." ⁽⁹⁾ Kansas, like [Page 13] South Carolina, adjusted its interim rate not to include costs that it could not have included at the time it calculated that rate because it did not know they existed - as is typical under a normal retrospective reimbursement system relying on historical data - but because of a subsequent policy decision to include costs that the State knew about but chose not to include. As we concluded with respect to South Carolina, under these circumstances, the fact that Kansas had a retrospective reimbursement system for the hospitals was merely incidental. The need for the adjustments was not an integral facet or a necessary result of having a retrospective reimbursement system that makes rate adjustments beyond the two-year period unforeseen and unavoidable.

Kansas argues that it did not exclude from its rate calculations a whole category of costs analogous to the ancillary costs excluded by South Carolina but only the costs of particular items, educational costs, within the cost center for routine [Page 14] costs (adults and pediatrics) that it reported on line 25 of its Medicare cost reports. See Kansas Br. at 20-21. Kansas, thus, analogizes its situation to those in two Board cases decided prior to South Carolina - Pennsylvania Dept. of Public Welfare, DAB No. 703 (1985) and Ohio Dept. of Public Welfare, DAB No. 622 (1987). In Pennsylvania, the Board held that the State's failure to include the costs of rentals and general obligation bond charges when calculating its interim rates or final cost settlements (a lapse Pennsylvania attributed to a lack of communication between its State agencies) did not preclude its subsequently including those costs and claiming FFP under the exception for prior year adjustments. In Ohio, the Board upheld the State's recalculation of its per diem rate for institutional services to include amounts for depreciation that had not been included when the State computed its interim rate for institutional services.

However, in South Carolina, we distinguished our Pennsylvania and Ohio decisions and expressly limited our holdings in them to the facts of those cases, that is, where the States mistakenly omitted certain cost items and then made adjustments permitted by their retrospective rate-setting systems.

[T]he principle of these cases should not be extended any further than their particular facts. Where an interim per diem rate was claimed within two years, and then a state later realized that it had mistakenly not included costs of particular items in computing the final rate, the state can properly recompute its final rate to include the omitted costs only if the state's retrospective rate-setting process permits it to re-open a final rate and the adjustment itself is one reasonably encompassed by the state's retrospective system. Without this proviso, the rationale underlying the timely claiming requirements would be undercut so that any rate recalculation would be proper so long as a state had a retrospective system.

DAB No. 943, at 6-7 (emphasis added).

The record here does not support a finding that Kansas "mistakenly" failed to include the educational services costs in [Page 15] its interim rate calculations. Indeed, it is clear from the record that Kansas knew the costs existed and that it could claim them under Medicaid but chose not to do so pending development of an allocation methodology. Kansas acknowledges that its "auditors did not include the costs in their preliminary and initial post-Medicare-audit settlements," but asserts that "they did so with the express intention and understanding that education costs would be added 'when the required documentation is available.'" Kansas Br. at 21, citing Kansas Ex. 10. By stating its intent to include the costs at some future date, after development of a method for adequately documenting the costs, Kansas admits that it consciously excluded the costs at the time of the preliminary and initial post-Medicare-audit settlement calculations. Mr. Webb's declaration also is replete with discussion about why Kansas did not include these costs when calculating these rates, which is evidence that Kansas was conscious of not including them. See Kansas Ex. 1, �� 8-15.

As the Board concluded in South Carolina, "[i]t is merely coincidental that this case arose in the context of a retrospective system." Id.; cf. Tennessee Dept. of Health and Environment, DAB No. 921, at 5 (1987)(allowing State to retroactively claim educational costs that it purposely did not claim based on its interpretation that they were not allowed under the statute, regulations and Medicaid policy "turns the interim rate exception on its head by suggesting that if an interim rate is used, then a retroactive claim can be made at any time in the future even if that adjustment is not related to the interim rate process").

Allowing Kansas to amend its claims for FFP indefinitely on the theory that those amendments are pursuant to a normal retrospective rate-setting system that effectively permits indefinite reopening of multiple "final" settlements would undercut the whole purpose of the two-year filing limitation. ⁽¹⁰⁾ [Page 16] See New Jersey Dept. of Human Services, DAB No. 1773, at 6 (2001)(rejecting as "unquestionably ... not the intent of Congress," New Jersey's argument that there is no time limit for submitting a claim based on the exception for adjustments to prior year costs). As we stated in New York State Dept. of Social Services, DAB No. 521 (1984), Congress's intent in legislating the two-year limitation in section 1132(a) of the Act was "to prevent the states from coming in many years after expenditures were made and claiming FFP ... Such delayed claiming made it difficult for the Department of Health and Human Services to plan its budget." DAB No. 521, at 8, citing Connecticut v. Schweiker, 684 F.2d 979, 982 (D.C. Cir. 1982), cert. denied, 103 S.Ct. 1197 (1983). To that end, the Board has held that the statutory exceptions to the two-year limit "were intended to cover only extreme situations ... where it would be patently unfair to a state to outlaw its claim merely because of the passage of time." DAB No. 521, at 8. This is not such a situation.

Historically, the cost of providing educational services to residents of State psychiatric hospitals under age 21 was not unknown to Kansas. Kansas admits including such costs in its Medicare cost reports for many years before it became possible to claim FFP for these costs under Medicaid, as of December 21, 1992, by way of the amendment to 42 C.F.R. � 441.13(b). Kansas Ex. 1, � 6. Kansas had at least constructive notice of the change through publication of the amendment. Kansas also admits that its audit staff learned of the amendment and the potential for claiming these costs under Medicaid as early as 1994 when [Page 17] they received a copy of MSOL #93-73, which discussed the amendment, as well as a copy of the amended regulations. Kansas Ex. 1, � 8; Kansas Exs. 5, 6. Yet, the claims at issue were not submitted until 2002 although they are for services rendered during fiscal years 1994-99.

Kansas blames the delay on waiting for CMS to issue further guidance that Kansas contends would have helped it to determine what portion of the educational services costs were reimbursable under Medicaid as active treatment. Kansas Br. at 14-16. Kansas claims that CMS's amended policy caused "continuing confusion" on the issue of what educational services would qualify under the active treatment limitation in the amendment. Id. at 5-10. However, MSOL #93-73, which Kansas admits it received in 1994, instructed states that "FFP [is] available for active treatment as defined in regulations at 42 C.F.R. � 441.154 ..." and "when educational services are provided as part of the active treatment plan ... even if they are formal education services." Kansas Ex. 2 (emphasis added). We see nothing confusing about this instruction. Furthermore, the instructions went on to state unequivocally, "Education services included in an individual's plan of care are considered to be active treatment." Id.

We are not wholly unsympathetic to Kansas's assertion that the technical aspects of identifying the Medicaid share of the educational services costs were "complicated". Kansas Br. at 13. However, we reject Kansas's attempt to blame CMS for its delay in developing a method to identify and claim those costs. Developing methodologies for allocating and apportioning costs to Medicaid patients that are acceptable to CMS is the State's responsibility, not CMS's. Furthermore, to the extent that Kansas was confused about CMS's instructions in connection with the regulatory amendment, it could have sought clarification from CMS sooner, instead of waiting until 1999. Kansas has not explained why it waited five years to seek clarification that Kansas alleges delayed its ability to make final payments to the hospitals. ⁽¹¹⁾ The Board noted in New Jersey Dept. of Human [Page 18] Services that the adjustment to prior year costs exception was meant to apply to adjustments of a type that are "unforeseen and unavoidable." DAB No. 1773, at 3-4, 6, citing 46 Fed. Reg. 3527, 3528 (1981)(the preamble to 45 C.F.R. � 95.7). The rate adjustments here were not unforeseen or unavoidable but, rather, were due to Kansas's own inaction.

2. We find no merit to Kansas's alternative argument that the two-year time limit is not implicated because the additional payments it made to State hospitals were new expenditures made to resolve pending rate appeals that triggered a new two-year limit.

Kansas argues in the alternative that the two-year time limit in section 1132(a) of the Act is not implicated at all because, Kansas contends, the additional payments made to the State hospitals were new expenditures, made to resolve pending rate appeals, that triggered a new two-year limit. Kansas Br. at 26-29. For this argument, Kansas relies principally on Oklahoma Dept. of Human Services, DAB No. 1575 (1996). See Kansas Br. at 27 (stating that this case is "squarely controlled by" Oklahoma). In Kansas's view, the Board's decision in Oklahoma "implicitly stands for the principle that when a state Medicaid agency adjusts a State provider's cost reimbursement as a result of a provider's successful request for administrative review of its rates, the particular two-year limit applicable to payments made to the provider under an interim rate methodology is not implicated." Id. Kansas then asserts that the additional payments it made to the State-operated psychiatric hospitals following the rate adjustment were the result of successful administrative rate appeals. We find no merit in any part of this argument.

Oklahoma does not stand for the "implicit principle" Kansas posits. Kansas infers the alleged "implicit principle" from the fact that in Oklahoma the Board did not discuss or rely on section 1132(a)(2) when it reversed CMS's disallowance of the federal share of additional payments made by Oklahoma in 1994 to a State-run ICF/MR for services provided in fiscal years 1989-93. The fact is correct, but the implication is not. The Board did not discuss the two-year time limit in section 1132(a) for the simple reason that the case did not involve an alleged failure to file claims for FFP within that time limit. Oklahoma involved [Page 19] a totally different time limit, the 180-day time limit in the Medicare regulations for seeking exceptions to routine cost limits that otherwise would apply in calculating an institution's Medicaid reimbursement rates. See 42 C.F.R. � 413.30(c). The issue in Oklahoma was whether the State had adopted and complied with the 180-day Medicare time limit in 42 C.F.R. � 413.30(c), which limited the time for seeking exceptions to routine cost limits applicable to calculating Medicare reimbursement rates, not the time for claiming FFP. ⁽¹²⁾ There is simply nothing about Oklahoma that applies here. Thus, contrary to what Kansas's argument suggests, Oklahoma does not recognize an additional exception to two-year filing limit beyond those set out in the statute and regulations.

But even if Oklahoma stood for the "implicit principle" alleged, we find no support in the record or our cases for Kansas's characterization of its payments as "new payments made to resolve pending rate appeals." Kansas states that it adjusted its interim rate as a result of State hospital "requests ... for review of their rates to include payments for educational costs." It then terms the requests for review "rate appeals" which, Kansas says, "Medicaid cost settlement staff and Hospital representatives resolved ... though the informal process described in state statute and regulation." Kansas Br. at 27.

It is undisputed that Kansas initiated the review and adjustment of the hospitals' Medicaid interim rates after the hospitals and their cost report consultant shared with Kansas's Medicaid audit staff CMS's amended regulations and MSOL #93-73 and asked them to review the interim rates to include the educational services costs now permitted by the regulations. Kansas Ex. 1, �� 7, 8; Kansas Exs. 5, 6. However, neither the State laws relied on by Kansas, nor common sense, supports characterizing the hospitals' requests as rate appeals or Kansas's ultimate adjustment of the interim rate as the result of a successful rate appeal.

Kansas asserts that the Department of Social and Rehabilitation Services affords providers an opportunity for administrative review of their rates "pursuant to K.S.A. � 75-3306, which provides for a 'fair hearing for any person ... who appeals from [Page 20] the decision or final action of any agent or employee of the secretary' of SRS, and [Kan. Admin. Regs. �] 30-7-68(a), which requires fair hearing requests to be submitted 'within 30 days from the date of the order or notice of action.'" Kansas Br. at 10-11. Kansas also cites Kan. Stat. Ann. � 75-37,121, which creates a hearing process for the Department of Social and Rehabilitation Services in accordance with the Kansas Administrative Procedure Act (APA). Kansas Br. at 11. We note at the outset that Kan. Stat. Ann. � 75-3306, more fully quoted, does not provide hearing rights for "any person" but for "any person who is an applicant, client, inmate, other interested person or taxpayer ... ." Thus, to actually have hearing rights under the statute, a provider would have to fall within one of those categories of "person[s]." Kansas has not explained which category applies to providers, and whether it would apply to State-operated as well as private providers.

Kansas has not shown that in asking for review of their interim rates, the hospitals were invoking, or were accorded, the rights and processes in the cited statutes and administrative regulations. For example, Kansas did not identify a "decision or final action" subject to appeal under Kan. Stat. Ann. � 75-3306. Even if one were to assume that issuance of the interim rates for which the hospitals sought review constituted an appealable "decision or final action," Kansas did not show when those rates were issued or that the hospitals' 1994 request for review of those rates was timely submitted within 30 days of that issuance. Neither did Kansas show that the hospitals submitted their request for review in the form required by Kansas's fair hearing procedures or that their request was treated as an appeal of the rates under those procedures. ⁽¹³⁾ Thus, this is not the type of situation where final resolution of a cost report depends on action by an independent decision-maker outside the direct control of the State Medicaid agency.

Kansas also cites Kan. Stat. Ann. � 77-505, which provides, "Nothing in [the Kansas APA] shall preclude informal settlement of matters that may make unnecessary more elaborate proceedings under this act," and Kan. Admin. Regs. � 30-7-69, which encourages the use of an informal pre-appeal process to resolve and narrow disputes. See Kansas Br. at 11, 27. This statute and regulation do not describe an informal rate appeal process as [Page 21] Kansas alleges but merely state that the existence of the formal hearing process in the Kansas APA (which Kansas has not made clear applies to rate appeals by State-operated providers) does not preclude informal settlement.

Even if the laws cited by Kansas did describe an informal rate appeal process, the fact remains that there was no genuine dispute to be resolved. Kansas's Medicaid audit staff agreed with the hospitals that "it was likely that at least some portion of the State Hospitals' educational costs was now reimbursable under Medicaid." Kansas Ex. 1, � 8. As CMS observes, "the educational costs at issue were less a matter of a dispute to be resolved between the State and its hospitals and more a question of presenting the claim to CMS." CMS Br. at 14, n.4. Indeed, Kansas acknowledges that far from being on opposite sides of a dispute, Kansas audit staff "began working with the State Hospitals to devise a methodology for extracting, reporting, and documenting these costs." Kansas Ex. 1, � 16.

For its alternative argument, Kansas also relies on Missouri Dept. of Health & Human Services, DAB No. 1515 (1995). ⁽¹⁴⁾ In Missouri, a private provider contended it was eligible for an increased Medicaid reimbursement rate due to its status as a disproportionate share hospital (DSH). After the provider won in a state administrative hearing, Missouri appealed to the state courts. While the case was pending in the Missouri appeals [Page 22] court, Missouri settled with the provider, paid it pursuant to an increased rate for the years in question, and sought FFP for the additional payments. CMS denied Missouri's claim for FFP on the ground that the claim was untimely, but the Board disagreed. Based on the regulations (as interpreted in the State Medicaid Manual), the Board found that payment of the settlement amount was "not an adjustment or re-classification of a prior expenditure ... but an entirely new expenditure" that triggered its own two-year time limit for claiming FFP. DAB No. 1515, at 9.

Missouri is distinguishable on several grounds, the most obvious of which is that the new payments in Missouri were made to a private provider, and the State Medicaid Manual treats cash payments to private providers as current expenditures. The Board distinguished Missouri from South Carolina on the ground that in Missouri the payment was made by writing a check to a private provider whereas in South Carolina, the "facility involved was a state-owned provider, and the disputed 'payment' was an interdepartmental transfer of funds from the Medicaid agency to the state's department of mental health." DAB No. 1515, at 8. Furthermore, the Board was careful to distinguish the situation in Missouri, where the State failed to include DSH costs in the interim rate because it erroneously interpreted its State plan, from that in South Carolina, where the State made "a conscious decision to exclude permissible costs from the initial per diem calculation." Id. As previously discussed, Kansas made a conscious decision to exclude the educational services costs at the time it calculated its interim rates, and the providers involved were State-operated hospitals, not private providers. Kansas's situation clearly is analogous to South Carolina's, not Missouri's. Thus, we do not find Kansas's additional payments to the hospitals following the adjustment of its per diem rate to be new or different expenditures triggering a new two-year time limit for claiming FFP.

Conclusion

For the reasons above, we conclude that Kansas's claim for FFP, on the expenditure report for the quarter ended June 30, 2002, for increased payments for inpatient psychiatric services rendered to Medicaid-eligible individuals under age 21 in state-operated hospitals to recognize the costs of education provided as part of their active treatment during fiscal years 1994-99 is untimely and does not qualify as an adjustment to prior year costs. We further conclude that Kansas's additional payments to the hospitals for which it claimed the disallowed FFP were not [Page 23] new expenditures that triggered a new two-year limit. Accordingly, we uphold the disallowance in full.

Judith A. Ballard

Donald F. Garrett

Sheila Ann Hegy
Presiding Board Member

1. We cannot imagine that an interim rate methodology in an approved State plan would expressly allow a state to deliberately withhold a known cost that impacted its rate for several years while the state first determined its interim and then its final rate. In any event, Kansas did not argue that its deliberate withholding of the education costs here during the computation of first the interim and then the final rate was expressly authorized by the interim rate methodology described in its approved State plan.

2. Kansas also did not show that it was consistent with its rate-setting system to disregard these underlying costs when setting the interim rates for fiscal years 1994 through 1999, as it did. A Medicaid interim rate generally should reflect the provider's allowable underlying costs of providing services that qualify as reimbursable "medical assistance."

3. The term "federal financial participation" means the "Federal government's share of an expenditure made by a State agency" under various Social Security Act programs. 45 C.F.R. � 95.4.

4. At that time, CMS was known as the Health Care Financing Administration. See 66 Fed. Reg. 35,437 (July 5, 2001).

5. In footnote 8 of its brief, Kansas states that CMS did not resolve the deferral issues within 90 days and, thus, under 42 C.F.R. � 430.40(c)(6) was required to pay the State's claim subject to a later determination of allowability. Kansas then argues that "[u]pon reversing the disallowance, the Board should require CMS to pay [Kansas's] claim with interest at the rate specified in 42 C.F.R. � 433.38(d)(2)." Since we are not reversing the disallowance, we need not address this issue. However, we note that the interest regulation cited gives CMS the authority to charge states interest when they retain disallowed amounts during unsuccessful appeals. It does not authorize an assessment of interest against CMS.

6. The amount of the disallowance exceeded the amount of the deferral because CMS had not accounted for adjustments to routine costs unrelated to educational services in settlements between the State and the hospitals when it deferred the claim. Kansas Ex. 26, at 3. The statement about "costs unrelated to educational services" caused the Board some confusion as to whether the full amount of the disallowance being appealed here - $13,595,455 - relates to educational services. In response to the Board's April 26, 2005 Order to Clarify Scope of Appeal, the parties clarified that it does.

7. Presumably, if Kansas intended to argue that its claim was filed within two years of the expenditures, it would have presented that argument before arguing an exception to the two-year rule. Kansas apparently did dispute that its claim was untimely in its August 16, 2001 response to ACF's deferral of its initial claim for FFP (filed in May 2001), arguing that because the hospitals are state providers, the expenditures did not occur until February 2001 when Kansas claimed to have recorded the settlement payment for these services. See CMS Ex. 2, at 3-4, citing State Medicaid Manual, � 2560.4(G.1); Kansas Ex. 24, at 1. However, Kansas withdrew that initial claim for FFP and filed a revised claim (the one at issue here) that CMS deferred and then denied. Kansas Ex. 24, at 2-3; CMS Br. at 4. In responding to CMS's letter deferring its revised claim, Kansas did not assert that its claim was timely filed, only that it should be excepted from the timely filing requirement as an adjustment to prior period costs. See Kansas Ex. 26, at 2.

8. Kansas notes, "SRS not only delayed filing a claim for FFP in educational services until FY 2001, but also refrained from making any expenditures for those services before that time." Reply Br. at 12, n.3. However, the particular State agency that administers Kansas's State hospitals is the Mental Health and Retardation Services (MHRS). Kansas Ex. 1, � 7. Kansas does not say that MHRS made no expenditure for the services before 2001. (Although MHRS is a division of SRS, we see no reason why it would not qualify as "any State agency" for purposes of 45 C.F.R. � 95.13(b).) Further, an "expenditure" that triggers the two-year time limit is "an amount for a particular item of service provided by a public facility (such as a day of inpatient hospital service provided to a specific patient) ...." DAB No. 1867, at 20. Educational services do not, by themselves, qualify as "medical assistance" under section 1905(a) of the Act. The "particular item of service" that qualifies as "medical assistance" is a day of inpatient psychiatric services provided to an eligible individual. The State Medicaid Manual makes clear that in order for the exception for an adjustment to prior year costs to apply, the state must have timely claimed the expenditure for the particular item of service at the interim rate. Further, for public providers, payments are not new "expenditures" if a state agency earlier recorded an amount for the particular services. Id. at 21 and n.14. "[T]he relevant date triggering the two-year claiming deadline for each service reimbursable at the adjusted rate is determined by when [the State mental health agency] first made a bookkeeping entry of some sort recording an amount that included an amount for that particular item of service, or made a payment to the hospital for that service, whichever was earlier." Id. at 21. Neither does what is recorded necessarily have to be a payment. Id.

9. Frank Webb, Kansas's Medicaid Reimbursement Manager, admits that Kansas's "Medicaid auditors refer to the post-Medicare-audit settlements as 'final'," but then says that "it is not uncommon for Kansas auditors to prepare 3, 4 or even 5 final settlements for a provider over a period of many years." Kansas Ex. 1, � 17 (Webb Declaration). However, CMS's disallowance letter states that under Kansas's normal retrospective rate-setting process, the Medicaid agency makes a final settlement with the hospitals and closes the cost reporting period after receiving audited cost reports from the facilities' Medicare fiscal intermediaries (FI) and would not make additional settlements unless it received amended cost reports from the FI. Kansas Ex. 26. Thus, in this case, unlike South Carolina, there is a dispute as to whether the State had actually closed the cost reports and then reopened them to adjust for the deliberately excluded costs. However, this difference is not material. Kansas has the burden to show that what it did was consistent with the methods and procedures of its State plan retrospective reimbursement system and did not involve fundamental changes in the assumptions underlying the rate as part of a normal adjustment process. It did not do this. Kansas did not relate its purported practice of allowing what amounts to an indefinite number of "final" settlements to any wording in its State plan or implementing regulations or guidance or provide any explanations of when, under its retrospective rate setting system, further adjustments to final rates are specifically permitted. Indeed, Kansas's failure to submit any documentary evidence or legal citations directly relating to its retrospective reimbursement system leads us to infer that what it did with respect to the issue of educational activities was outside the scope of its retrospective reimbursement system.

10. For that and other reasons, this case is distinguishable from Washington Dept. of Social and Health Services, DAB No. 1397 (1993), which Kansas also cites. See Kansas Br. at 22-24. The Board overturned the disallowance there on the ground that Washington's claim for increased FFP based on an adjusted per diem rate qualified for reimbursement under the exception for adjustments to prior year costs. The Board found that the adjustment was permitted because under Washington's Medicaid plan the interim rates had not become final.

However, the decision in Washington does not stand for the proposition that a state may delay finalizing its cost reports indefinitely. In Washington, the Board noted that the State made the adjustments to its interim rate "within a short period after the corrected cost information was received and within the reasonable [and finite] period established in the approved State plan." DAB No. 1397, at 1. The Board also emphasized that our decision might have been different had CMS shown that permitting the adjustments made by Washington "would encourage tardiness, or that Washington was attempting to avoid the timely filing requirement by expanding its retrospective system to cover costs not properly considered as adjustments to interim rates." Id. It is also important to note that in Washington, unlike here and in South Carolina, there was no dispute that the State adjusted its preliminary reimbursement rate to reflect costs that were mistakenly under-reported due to human error.

11. Kansas acknowledges that the preamble to the final regulations stated that CMS did not consider further clarification necessary. However, Kansas notes that the preamble also stated that CMS planned to issue instructions relating to the regulation. Kansas Br. at 7, citing 57 Fed. Reg. at 54,709. CMS did issue instructions, including MSOL #93-73. Kansas asserts that CMS's regional office in Kansas City did not disseminate MSOL #93-73 to states in the region. We do not know whether this is true, but it is irrelevant since Kansas admits that it actually received a copy of this issuance in 1994.

12. It is also worth noting that the retroactive rate adjustment at issue in Oklahoma, unlike the rate adjustment here, resulted from a court order. In addition to not being at issue in Oklahoma, the two-year time limit does not apply "with respect to any expenditure involving court-ordered retroactive payments ... ." 42 U.S.C. � 1320b-2(a); 45 C.F.R. � 95.19(c).

13. Those procedures at the time apparently called for a hearing before a "hearing officer" but the Kansas APA was amended in 1997 to provide for administrative law judges to conduct the hearings.

14. Kansas also cites Virginia Dept. of Medical Assistance Services, DAB No. 1838 (2002). However, the case is inapposite to both Missouri and the instant case. Virginia, unlike Missouri, did not involve additional payments based on a successful rate appeal. Virginia made enhanced DSH payments to state-operated hospitals to supplement basic quarterly DSH payments for prior fiscal years. In finding that the supplemental DSH payments constituted new expenditures, the Board emphasized that those payments were expressly contemplated by the Medicaid program, expressly provided for in the regulations and "have a finite limit under the state DSH allotment." DAB No. 1838, at 12. Thus, the Board concluded that treating Virginia's supplemental DSH payments as new expenditures did not raise the specter of "possible open-ended claims by states for FFP arising under the Act" that the two-year time limit was designed to prevent. Id. Kansas's payments to the hospitals in this case share none of the characteristics that the Board found permitted treating Virginia's supplemental DSH payments as new expenditures and, as previously discussed, clearly raise the spectre of possible open-ended claims.