DAB Decision 89
March 24, 1980 Foundation Community Health Plan, (California Sate
Department of Health); Docket No. 78-49-CA-HC; Decision No. 89 Kelly,
Bernard E.; Putnam, George Dell'Acqua, Frank
SUMMARY
(The following summary is prepared on the responsibility of the
Executive Secretary of the Board as convenience to the interested
public. It is not an official part of the decision and has not been
reviewed by the Panel. Similar official summaries of earlier cases
appear in 45 CFR Part 16, Appendix.)
The State appealed from the decision of the Administrator of the Health
Care Financing Administration, upholding an earlier determination by the
Regional Commissioner of the Social and Rehabilitation Service,
disallowing Federal financial participation claimed in payments made by
the State to Foundation Community Health Plan (FCHP), a prepaid Health
plan, for Medicaid recipients enrolled in the plan. The Administrator
found that payments to FCHP exceeded payments made by the State for
Medicaid recipients who remained in the fee-for-service system, and
concluded that this violated a Federal regulation which both parties
agreed prohibits a state from making payments to a prepaid health plan
exceeding the amount it could have cost to provide health care services
to the individuals involved on a fee-for-service basis.
The Board granted the appeal in part based on studies conducted by the
State which showed that certain categories of Medicaid recipients who
enrolled in FCHP required both more care and more costly types of care
than did persons in the same categories who remained in the
fee-for-service system.
Elisabeth C. Brandt, Deputy Attorney General, for the California State
Department of Health. Robert P. Jaye, Deputy Assistant General Counsel,
HEW office of the General Counsel, Health Care Financing and Human
Development Services Division, for the Health Care Financing
Administration.
DECISION
This case involves a determination by the Regional Commissioner of the
Social and Rehabilitation Service (SRS), Region IX, dated June 19, 1975,
to disallow funds claimed by the California State Department of Health
under Title XIX of the Social Security Act. The State Department of
Health requested reconsideration of the Regional Commissioner's
determination by the Administrator of SRS pursuant to 45 CFR 201.14 by
letter dated July 17, 1975. On May 30, 1978, the Administrator of the
Health Care Financing Administration (HCFA) affirmed the Regional
Commissioner's determination. By letter dated June 29, 1978, the State
Attorney General's office notified the Board on behalf of the State
Department of Health of its election to proceed with review under 45 CFR
Part 16, as permitted by the regulations transferring the
reconsideration function to the Departmental Grant Appeals Board (43 FR
9264, March 6, 1978).
This decision is based on the reconsideration record made pursuant to 45
CFR 201.14 and on written submissions to the Board by the parties. We
note here that the State requested that either a hearing or an informal
conference be held in this case. The Panel has determined pursuant to
45 CFR 168(i) that there exists no dispute as to a material fact the
resolution of which would be materially assisted by oral testimony, and
accordingly denies the request for a hearing. Further, in the Panel's
judgment, a decision can be made based on the parties' written briefing,
which has been extensive, and would not be assisted by a discussion of
the case at an informal conference.
The State receives reimbursement under Title XIX for a percentage of
payments made for medical services provided to persons eligible for
"Medi-Cal," the State's Medicaid program. Persons eligible for Medi-Cal
may obtain services from providers on a "fee-for-service" (FFS) basis,
in which case the State pays the providers for actual services rendered,
or they may enroll in a "prepaid health plan" (PHP), in which
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case the State pays the plan a fixed monthly amount for each person
enrolled, regardless of actual services provided. In the instant case,
the amount disallowed represents the Federal share of the amount by
which payments to Foundation Community Health Plan (FCHP)), a PHP, in
calendar year 1974 exceeded FFS costs for Medi-Cal recipients who were
not enrolled in the plan but resided in the same area served by FCHP.
The disallowance is based on a Federal regulation, 45 CFR 250.30(b) (4),
which both parties agree prohibits the State from making payments to a
PHP exceeding the amount it would have cost to provide health care
services to the individuals involved on a FFS basis. (Two State
statutory provisions having the same effect were also cited in support
of the disallowance.) 45 CFR 250.30(b) (4) provides that
The upper limit ?or payment for services provided on a prepaid
capitation basis shall be established by ascertaining what other
third parties are paying for comparable services under comparable
circumstances. The cost for providing a given scope of services
to a given number of individuals under a capitation arrangement
shall not exceed the cost of providing the same services while
paying for then under the requirements imposed for specific
provider services.
The State appealed on the ground that certain categories of Medi-Cal
recipients who enrolled in FCHP required both more care and more costly
types of care than did persons in the same categories who remained under
the FFS system. Therefore, the State argued, the fact that the payments
to FCHP were in excess of those made for Medi-Cal recipients not
enrolled in the plan did not mean that the payments to FCHP exceeded the
amount that it would have cost to provide the services to the
individuals enrolled in FCHP on a FFS basis. The Agency, however, did
not accept the State's "adverse selection" argument, its position
being
that the State has not shown that the individuals enrolled in FCHP would
have made the same use of health care services had they remained under
the FFS system.
The Regional Commissioner's disallowance was based on a report issued by
the State Auditor General in April 1975 which concluded, based on a
study conducted by the Rates and Fees Section of the State Department of
Health, that net excess payments of $1,604,775 for 1974 had been made to
FCHP. The report specifically stated that it was beyond the scope of
the audit to determine whether adverse selection existed as asserted by
the State. The amount identified by the Auditor General as an
overpayment included a setoff of $661,500 to account for the estimated
administrative costs which the State Department of Health would have
incurred for processing of claims if the services provided by FCHP had
been provided on a FFS basis. The Regional Commissioner's disallowance
determination requested the refund of the Federal share
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(50 percent) of $2,266,275 ($1,604,775 plus $661,500), stating that the
amount to be refunded could be reduced by the amount of administrative
expenditures which would have been incurred had the services been
provided on a FFS basis, but that the Auditor General's estimate of
$661,500 appeared to be high.
While reconsideration proceedings were pending before the Administrator
of SRS, the State applied for and received a grant from HEW under
Section 222 of Pub. L. 92-603 (as amended by Section 107 of Pub. L.
94-182), a specific objective of which was to determine if FCHP had in
fact suffered adverse selection. SRS consented to delay reconsideration
proceedings pending the results of the "Prepaid Health Research,
Evaluation and Demonstration" (PHRED) project funded by the grant) which
it agreed would have a bearing on the reconsideration decision. The
PHRED report concluded that there was some adverse selection with
respect to two of the four categories of Medi-Cal recipients enrolled in
FCHP and that, talking into account the State Auditor General's estimate
of savings to the State in claims processing costs for FCHP enrollees,
there was no net overpayment to FCHP.
The basic methodology used by the PHRED project was to determine the
actual FFS per capita cost for each of two major categories of Medi-Cal
recipients (those receiving Aid to Families with Dependent Children, and
those receiving Aid to the Totally Disabled) and to then adjust it to
match the FCHP "utilization pattern," that is, the quantities and
types
of health care services actually used. According to the PHRED report,
this yielded the cost that would have been incurred under the FFS system
to provide the same services as were actually provided to the FCHP
enrollees. To the extent that this figure was higher than the cost of
services provided to persons remaining under the FFS system, the PHRED
report concluded that FCHP had suffered adverse selection. The crucial
assumption on which this conclusion rested was that "for both FCHP and
FFS the relationship between need' and 'utilization'" was approximately
the same. (PHRED project report, Tab 18, reconsideration record, p. 6.)
Another approach which the PHRED project took to determine whether there
was adverse selection was suggested by the fact that all of the FCHP
enrollees returned to the FFS system when FCHP cancelled its contract
with the State in 1976. The PHRED project found that there was a change
in the FFS utilization pattern after that time which reflected the
utilization pattern experienced by FCHP.
The HCFA Administrator nevertheless affirmed the Regional Commissioner's
disallowance, allowing, however, the $661,500 setoff for administrative
costs suggested by the State Auditor General. This new determination
relied on an evaluation of the PHRED report by the General Accounting
Office (GAO) which challenged the PHRED report's assumption that
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utilization reflected the need for medical services on the ground that
"differences in utilization can be due to very subtle differences in
utilization control and reimbursement methods for health practitioners
(rather than to differences in need)." (Tab 20, reconsideration record.)
GAOS evaluation did not, however, specify in what respects the
utilization controls or reimbursement methods were different for FCHP
and the FFS system.
An Order to Develop Record was issued in this case by the Board Chairman
on October 2, 1979. The Order sought development of the record in three
areas. One area was whether the disallowance was based in part on the
State's failure to have a proper rate-setting methodology in effect when
the per capita rates for FCHP were set. Although the State had sought
reconsideration on the ground that, regardless of the methods used to
set the rates, there was in fact no overpayment to FCHP, the HCFA
Administrator's determination seemed to imply that the lack of proper
methods was one of the grounds for the disallowance. In response to the
Order, however, the Agency stated that this was not a basis for the
disallowance.
The second area of inquiry was the extent to which, if any, the grant
award or the grant application for the PHRED project described the
methodology to be used to determine whether FCHP had suffered adverse
selection. If those documents indicated that the PHRED study would
assume that utilization reflected need, it would seem arguable that
there was some element of unfairness in HEW' s challenging that
assumption only after the PHRED report was completed. In response to
this portion of the Order, the State submitted documents which clearly
indicate the intent of the project to evaluate the State's adverse
selection argument. Rather than identify the specific methodology to be
used in such an evaluation, however, the documents give as one of the
goals of the project "(t)o develop a methodology for the detection and
measurement of biased enrollment selection (either adverse or
favorable). . . ." (Revised Project Narrative, p. 10.)
The third area of inquiry was GAO's specific objections to the PHRED
report which caused it to reject the report's conclusion that FCHP had
in fact suffered some adverse selection and that there was thus no
overpayment to FCHP. In response to the Order, the Agency forwarded a
copy of a letter from GAO to HCFA dated November 19, 1979 which
identified the use of "Medi labels" in the FFS system as a form of
utilization control not present in FCHP which could have accounted for
the difference in their respective utilization rates. According to GAO,
during the time period in question in this case, Medi-Cal recipients who
used the FFS system were given each month by the State two "Medi labels"
which had to be affixed by providers of outpatient services to claim
forms in order to obtain payment for services rendered. After a
recipient
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used the two labels, a provider had to obtain a treatment authorization
from a State Medi-Cal consultant before a service was provided in order
to receive payment. A similar system applied to the dispensing of
drugs. GAO noted that the data included in the PHRED report showed that
almost all of the difference in utilization between FCHP and the FFS
system was for services which were covered by the "Medi label" or
"drug
label" limit. Based on this fact, it argued that the label restrictions
rather than differences in need were responsible for the differences in
utilization, thus calling into question the PHRED report's analysis.
The GAO letter did not discuss the differences in the reimbursement
methods for providers which were referred to in GAO's earlier criticism
of the PHRED report.
The State in its reply to the Agency 's response to the Order
acknowledged that the Medi label system should have been discussed in
the PHRED report. It denied, however, that this factor changed the
report's conclusion that there had been no overpayment to FCHP. The
State relied on a study done by the State Department or Health's Center
for Health Statistics in August 1977 on the effect of the removal in
July 1975 of most of the label restrictions.
That study found that from October 1, 1975 to April 30, 1977, there was
in the area of physician outpatient visits a 617 percent increase (from
1.5 to 1.6) in the ratio of visits per user. The study stated that the
removal of the Medi label restrictions "may have been responsible for
this increase since the visits per user ratio had remained practically
unchanged from 1974 until the removal of label restrictions in July of
1975. The State argued that since the study did not find that the Medi
label requirement "clearly had an inhibiting effect upon utilization,"
it should be concluded that Medi labels were not a form of utilization
control. The State contended, moreover, that even if one assumed that
Medi labels did inhibit utilization of physician's services by 6.7
percent and the figures in the PHRED report were revised accordingly,
the cost of providing medical services to Medi-Cal recipients enrolled
in FCHPP would have been only 1.84 percent more than if they had been
served under the FFS system, resulting in an overpayment of only
$297,000 instead of the $802,388 disallowed by the HCFA Administrator.
The State further contended, relying on a statement by the former
director of the PHRED project, that since this amount ($297,000)
represented less than 2 percent of the total amount paid to FCHP during
1974, it was statistically insignificant and the reasonable conclusion
would be that there was no overpayment to FCHP. The project director
did not indicate the basis for attributing this degree of measurement
error to the PHRED study, however.
The one issue remaining in dispute is thus whether the use of labels for
outpatient physician services and drug prescriptions in the FFS system
had a significant effect upon utilization and renders invalid
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the PHRED report's comparison of utilization data for FCHP and the FFS
system. It is unlikely that conclusive evidence can be produced on this
issue, just as the broader question posed in this case, whether the
payments to FCHP exceeded the amount that it would have cost to provide
services to the individuals enrolled in FCHP on a FFS basis, is
essentially a hypothetical one. The study by the State Department of
Health's Center for Health Statistics introduced by the State, however,
involved a careful examination of the effect of Medi labels on
utilization, undertaken without any view to its use in this proceeding,
which we think may justifiably be relied upon in reaching a final
determination in this matter. Although the study concluded only that
the removal of the Medi label restrictions "may have been responsible"
for the subsequent increase in utilization, that statement is no more
speculative than any of the findings of the PHRED report on which the
State relies. The State's own computations then show that a revision of
the PHRED report to take into account the effect of Medi labels on
utilization posited by the Center for Health Statistics study would
result in an overpayment to FCHP of $297,000. The State asserts that
this amount is statistically insignificant, but provides no support for
this assertion.
DECISION
We therefore conclude that the payments to FCHP exceeded the amount it
would have cost to provide health care services to the FCHP enrollees on
a FFS basis by $297,000 rather than $802,388 as determined by the
Administrator of HCFA, and, accordingly, reverse in part his
disallowance. This is the final administrative decision in this matter.
(45 CFR 16.91(b)). D11 May 21, 1992