DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: Kansas Department of Social DATE: March 14, 1989 and
Rehabilitation Services Docket No. 88-124 Decision No.
1026
DECISION
The Kansas Department of Social and Rehabilitation Services (State)
appealed a determination by the Health Care Financing Administration
(HCFA) disallowing $4,059,112 in federal financial participation (FFP)
claimed for Medicaid services provided in four State-owned intermediate
care facilities for the mentally retarded (ICFs/MR). The claims cited
by HCFA were for payments made for the period October 1, 1985 through
February 28, 1987. The State Medicaid plan for this period provided
generally for reimbursement to such facilities on a prospective basis,
based on cost data from the prior State fiscal year. The present
dispute arose because of an amendment to the State plan which allowed
for reimbursement based on actual, rather than projected, costs when a
State or federal survey required additional expenditures by ICFs/MR in
excess of $200,000. HCFA found that the State had reimbursed the
facilities for such survey-related costs even though the facilities had
not filed "projected cost reports" estimating what the expenditures
would be.
It is not disputed here that the State paid the ICFs/MR for covered
services provided to Medicaid recipients, nor that, in providing those
services, the facilities incurred survey-related costs. The sole issue
is whether the State plan amendment precluded reimbursement for these
costs because the facilities had not filed projected cost reports.
As explained below, we conclude that the State reasonably interpreted
its State plan amendment to permit Medicaid reimbursement for actual
survey-related costs, even for facilities which did not seek interim
reimbursement for such costs by filing projected cost reports. If the
State had applied HCFA's interpretation of the plan amendment, the State
facilities ultimately would have been entitled to precisely the same
level of reimbursement as under the State's interpretation. HCFA's
position focused entirely on the process used by the State and the
facilities for providing interim reimbursement for survey-related costs
during the rate year based on estimates from "projected cost reports."
The State's interpretation that the plan amendment did not preclude
reimbursement of actual costs after the end of the rate year, even where
a facility chose to forego reimbursement for these costs on an interim
basis, is consistent with the wording of the plan amendment, the State's
evidence of the intent of the provision, and the flexibility afforded
the State under the applicable statutory and regulatory provisions. We
therefore reverse the disallowance.
Factual Background
A "series of state and federal surveys" of State-owned ICFs/MR was
conducted between April and September 1985, which recommended certain
steps for improving quality of care at the facilities, including an
increase in staffing. State's opening brief, p. 5; State's Ex. A
(affidavit of Director of State Adult Care Home Program), p. 3. To
implement the survey recommendations for the State-owned ICFs/MR, the
State legislature appropriated additional funding, including several
million dollars for additional staffing at the four ICFs/MR at issue in
this case. State's opening brief, pp. 5-6; State's Ex. A, p. 3; State's
Ex. 11.
Because the rate reimbursement system under the existing State plan
calculated ICF/MR rates generally on a prospective basis, the State
realized that it would be unable to receive FFP for the additional
staffing costs for the initial period in which the expenditures were
undertaken. The reason for this was that the prospective rates were
calculated by considering the costs of the preceding State fiscal year,
as adjusted for inflation, and were generally not subject to adjustment
for actual expenditures which exceeded those which were "anticipated"
by
the prospective rates. State's opening brief, p. 7. The additional
staffing costs here would therefore not have been reimbursed for the
initial year in which they were incurred, unless some change were made
in the prospective rate-setting system. (The initial year's costs
would, of course, result in reimbursement for future years, since these
costs would be reflected in an increase in the prospective rates for
those years.)
The State therefore proposed a State plan amendment to allow
retrospective reimbursement based on actual survey-related costs in
situations where a facility anticipated significant increases in costs
in response to State or federal survey recommendations. The State also
wished to provide a mechanism whereby the prospectively set rate paid
during the rate year would reflect the estimated survey-related costs.
Thus, the plan amendment as finally approved by HCFA provided that
ICFs/MR "shall be allowed to file a projected cost report" if they
are
required to incur additional costs to meet certification requirements
which exceed a threshold amount ($200,000 for State facilities and
lesser amounts for private facilities depending on the number of beds).
State's Ex. 6, Att. The plan amendment further stated:
(3) ICF's-MR shall be allowed to project only those costs related
to the findings of the State or Federal survey. . . . A cost
report submitted under this provision would show the historical
costs on those costs not related to the State or Federal survey and
the projected costs would pertain to the findings of the State and
Federal survey. . . . These projected cost reports would be
processed in accordance with Kansas Administrative Regulations
30-10-17(f).
State's Ex. 6, Att.
Although the plan amendment was initially submitted to HCFA on December
27, 1985, the State was required to resubmit the amendment in response
to HCFA's request for clarification, and the amendment was not finally
approved until April 25, 1986. State's Ex. 8. The amendment was
approved on a retroactive basis, effective on October 1, 1985 (which was
the first day of the calendar quarter in which the amendment was
submitted). Id.
The State alleged, and HCFA did not deny, that the primary purpose of
the plan amendment was to reimburse the actual costs of expenditures
recommended by State and federal surveys. However, the funding
mechanism allowed the providers to file periodic "projected cost
reports," and for the State to pay interim amounts based on these
projections to the facilities on an ongoing basis. These interim
payments would then have to be adjusted by a final cost settlement at
the end of the fiscal year, to reflect any shortfall or overpayment that
had been made. State's opening brief, p. 9; State's Ex. A, p. 6.
The State said that the seven-month gap between the effective date of
the plan amendment and the date of its approval by HCFA created a
problem in implementing the "interim reimbursement" feature of the
amendment. First, for quarters in FY 1986 beginning prior to the plan
amendment's approval on April 25, 1986, the State decided not to
implement the plan amendment, given the uncertainty of whether the
amendment would actually be approved. Second, as to the July-September
1986 quarter, the State alleged that the filing of new cost reports for
this one period would have required an inordinate amount of work, in
part because of the need for training of staff at the facilities and at
State offices.
The facilities had previously filed cost reports showing the historical
costs for State fiscal year 1984, which had been used to set the rates
for the period in question. The State and facilities agreed that the FY
1986 rates being paid based on these reports would be considered
"projected rates" to be adjusted through a cost settlement process
based
on actual survey-related costs incurred in the rate period. State's Ex.
9, Att. 6. The State argued that, in effect, it had determined to treat
projected survey-related costs as zero, for purposes of interim
reimbursement during the 1986 rate year.
HCFA's disallowance
HCFA disallowed FFP for payments for the additional staffing
expenditures for the 1986 rate period because the State facilities had
not filed "projected cost reports" for that period. HCFA determined
that the plan amendment in question required the filing of "projected
cost reports" as the way in which facilities could receive reimbursement
for additional expenditures that were recommended by federal or State
surveys. HCFA disallowed the funds because the State here did not
follow this procedure for the period in question and instead made one
"lump-sum" payment to the facilities based on the year-end cost
settlement. HCFA thus concluded that the "State deliberately chose to
apply a different methodology than contained in the State Plan for
reimbursing these ICF/MRs." June 6, 1988 disallowance letter, p. 2.
Analysis
Below, we first discuss what the federal rate-setting requirements are
and how the Board has applied them. We next explain why we find the
State's interpretation here to be a reasonable one, to which we should
defer. We then state why we reject HCFA's major arguments and why we
consider this case to be distinguishable from past Board decisions on
which HCFA relied. Finally, we address certain allegations which HCFA
made for the first time in a submission made after the State submitted
its reply brief, stating why we do not think those allegations support
HCFA's position.
A. Federal rate-setting requirements
In order to qualify for FFP, a state's claim for the costs of medical
services must be in accordance with the approved Medicaid state plan.
Section 1903(a) of the Act. The plan must fulfill certain statutory and
regulatory requirements, and be approved by the Secretary. Prior to
1980, states were required under section 1902(a)(13) of the Act to
reimburse ICF services (including those in an ICF/MR) at rates
determined on a "reasonable cost-related" basis, using methods and
standards approved by the Secretary. Section 962 of Public Law 96-499,
the Omnibus Reconciliation Act of 1980, amended section 1902(a)(13)(A)
of the Act to require that state plans provide for payment of such
services --
through the use of rates (determined in accordance with methods and
standards developed by the State . . .) which the State finds, and
makes assurances satisfactory to the Secretary, are reasonable and
adequate to meet the costs which must be incurred by efficiently and
economically operated facilities in order to provide care and
services in conformity with applicable State and Federal laws,
regulations, and quality and safety standards . . . .
This provision, known as the "Boren Amendment," was intended to provide
the states greater flexibility in developing methods of provider
reimbursement. HCFA has said that the legislative history indicates
that Congress intended to keep requirements on states to the minimum
level necessary to assure accountability, and not to burden states with
unnecessary paperwork requirements. 48 Fed. Reg. 56047 (December 19,
1983), citing S.REP. No. 96-471.
Regulations implementing the Boren Amendment provide that HCFA will
approve a state's rate-setting method, so long as the State provides
required satisfactory assurances. The state plan must, however, specify
comprehensively the methods and standards used by the state to set
payment rates, and the State must pay for services using rates
determined in accordance with those methods and standards. 42 C.F.R.
447.252; 447.253(g).
As part of the Boren Amendment, states were required to make
satisfactory assurances for the filing of uniform cost reports and for
periodic audit of those reports. In implementing this requirement, HCFA
stated: "In general, we believe each state is best equipped to develop
its own standards and procedures for cost reporting." 46 Fed. Reg.
47970 (September 30, 1981). Thus, HCFA's regulations simply require the
state plan to provide for filing of uniform cost reports by each
participating provider. 42 C.F.R. 447.260.
In considering whether a state has followed its approved state plan, the
Board first examines the plan language itself. If the provision is
ambiguous, the Board will consider whether the state's proposed
interpretation gives effect to the language of the plan as a whole. The
Board also considers the intent of the provision, which may be evidenced
by administrative practice. The Board will defer to a state's
interpretation of its own plan if it is reasonable in light of the
purpose of the provisions and the program requirements. In the specific
context of rate-setting, the Board has stated that the Boren Amendment
requires that greater weight be given to what the state intended since
HCFA will approve a state's proposed methods so long as the state gives
the requisite assurances. South Dakota Dept. of Social Services, DAB
No. 934 (1988).
On the other hand, the Board has said that it will subject rates set for
state-owned facilities to greater scrutiny to determine whether the
state, in fact, has a consistently applied interpretation or is simply
giving preferential treatment to state-owned facilities. See
Massachusetts Dept. of Public Welfare, DAB No. 867 (1987) and DAB No.
730 (1986). The Board has also narrowly construed plan provisions which
permit retroactive adjustments in a prospective rate-setting system,
reasoning that otherwise the purpose of setting rates prospectively (to
give the providers an incentive to keep costs low) would be defeated.
Massachusetts, DAB No. 730.
B. Why we defer to the State's interpretation here
Here, the State plan does not specifically address the question of
whether the submission of a projected cost report is a necessary
prerequisite to receipt of any reimbursement for survey-related costs.
The language of the plan amendment provision itself supports the State's
interpretation here, however. The plan amendment states that providers
"shall be allowed to file a projected cost report." State's Ex. 6.
The
plan amendment does not state that providers must file such reports in
order to obtain increased reimbursement, only that they shall be
"allowed" to do so. In contrast, State regulations establishing
procedures for the other limited situations in which retrospective
reimbursement was allowed under the State plan provide that rates "shall
be based on a projected cost report" filed within a certain time period
(KAR 30-10-18(c)) or that a "provider shall file a projected cost
report." KAR 30-10-18(d)(1)(a), State's Ex. 4 (emphasis added).
Essentially, the State interpreted its plan language to permit the State
to treat the facilities as though the cost reports which had been
submitted had included not only historical costs, but had projected
survey-related costs which would then be adjusted to actual costs
incurred in the rate year. We find this approach to be an entirely
reasonable one since the overriding purpose of the plan amendment -- to
compensate the facilities for substantial survey-related costs not
otherwise reflected in the prospective rate -- was maintained by the
year-end cost settlement to the ICFs/MR. The only effect of the
facilities not filing amended cost reports estimating survey-related
costs was merely for the facilities to forego the receipt of interim
reimbursement over the course of FY 1986; the result did not affect the
amount of FFP ultimately claimed for the services the facilities
provided. Indeed, as the State argued, HCFA may even have received a
benefit from the State's interpretation: HCFA retained control of the
funds in question until the final accounting was made.
HCFA did not present any policy rationale for its position, nor do we
know of any federal interest in interpreting the plan as HCFA did. See
Louisiana v. Bowen, C.A. No. 87-1330 (D.D.C.), slip op. at 15, State's
Ex. 18.
HCFA's interpretation that the State could not reimburse facilities for
the additional expenditures without the filing of new cost reports would
effectively frustrate the plan amendment's basic purpose in compensating
for actual FY 1986 survey-related costs. HCFA's approach would deny to
the State facilities any reimbursement for the additional expenditures
for the first fiscal year the amendment was effective. We agree with
the State that this would be contrary to HCFA's own view that a
reasonable and adequate rate should reimburse expenses necessary to meet
certification standards. See 48 Fed. Reg. 56046, 56049 (December 19,
1983), State's Ex. 3.
We also consider the State's action to be within the flexibility
afforded the State under the Boren Amendment and the implementing
regulations, and, particularly, HCFA's stated intention to allow a state
to develop its own standards and procedures for cost reporting.
Although HCFA challenged whether it would have been as impractical and
costly as the State alleged for the State facilities to have submitted
projected cost reports after the plan amendment was approved, it is
clear that the State and facilities would have incurred some additional
administrative costs if this process had been followed. Moreover, HCFA
did not take the position that projected cost reports had to have been
filed prior to the start of the rate year in which a projected rate is
paid. The regulations implementing the plan allow the State to extend
the time for filing cost reports and to accept amended cost reports
where there has been a material omission. State's Ex. 4. Thus, even
under HCFA's interpretation, it would appear that the State could permit
the facilities to amend their cost reports now to include projected
survey-related costs; this would, however, be a useless exercise and we
do not think it is required.
We next address some specific concerns raised by HCFA in its initial
brief.
HCFA's Primary Arguments
HCFA argued that the State could have submitted the plan amendment
"early in the summer of 1985," rather than on December 27, 1985, or
that
the State could have implemented "the amendment simultaneously with
submitting it for approval." HCFA's brief, p. 19.
The State disputed strenuously the allegation that the plan amendment
could have been filed as early as the summer of 1985. State's reply
brief, p. 10. Without our making a factual finding on this question, we
agree with the State that an earlier filing of the proposed plan
amendment would not have cured the State's eventual implementation
problems. Given the seven-month period it took to approve the amendment
that was submitted in December 1985, an amendment filed in the summer of
1985 would not have obviated the need for a "retroactive" approval
date
of October 1, 1985.
As to HCFA's complaint that the State could have filed the projected
cost reports during HCFA's review of the plan amendment, we agree with
the State that it acted reasonably in waiting. HCFA was certainly
unable to ensure that the plan amendment would ultimately be approved,
and, if approval were denied, the State would have been subject to a
disallowance for any rate increases it authorized. What HCFA's
arguments here show is that it was not impossible for the State to have
required the providers to have projected costs during the period in
question. However, the issue of whether this was possible is not
ultimately relevant here, since the State reasonably determined that it
would be difficult under the circumstances.
HCFA also argued that the State's position in this appeal concerning the
filing of projected cost reports was inconsistent with internal State
memoranda which discussed the plan amendment in question. HCFA's brief,
p. 19, citing memoranda attached to State's Ex. 9. These memoranda
describe in general terms the State's plan amendment which "allowed"
the
filing of projected cost reports for survey-related costs. While the
memoranda show that the State at one time contemplated that the
facilities would be able to file the projected cost reports, none of the
memoranda even attempt to address the specific issue here of whether the
filing of such reports was a prerequisite to reimbursement of actual
costs. Moreover, the last of these memoranda evidences that the State
actually determined to treat the existing rates as "projected rates";
thus, the interpretation the State advanced here was adopted prior to
the disallowance and is not simply an after-the-fact attempt to justify
ignoring its plan.
Another argument by HCFA concerned whether any prior administrative
practice supported the State's interpretation of its plan amendment, a
factor which the Board has considered in previous cases. See, e.g.,
Texas Dept. of Human Services, DAB No. 981 (1988), p. 8. HCFA argued
that the State had failed to point to any "previous instance in which an
exception to the rule of prospective reimbursement was permitted or
contemplated without the filing of projected cost reports." HCFA's
brief, p. 23. While a showing of a consistent administrative practice
may support a state's position that it has a consistently applied
interpretation of an ambiguous state plan provision, such a showing is
not always required. Here, there would not have been any prior practice
with regard to the specific plan amendment at issue. As to the other
limited circumstances in which actual cost reimbursement was allowed
under the State plan (such as for a change of ownership), HCFA did not
allege that there were analogous factual situations in such cases which
made impractical the filing of projected cost reports as would usually
be contemplated, and, in any event, the wording of the regulatory
provisions for these cost reports is mandatory.
We also find that HCFA's reliance on Board decisions rejecting proposed
state plan interpretations is misplaced. The key difference between
this case and those cases is that the states' interpretations there
affected calculation of the amount of reimbursement the State-owned
providers would receive. Here, if the State had applied HCFA's
interpretation, the final, allowable reimbursement would have been the
same as under the State's interpretation. Also, the earlier Board cases
generally involved retroactive increases to prospective rates where the
State plan was silent on whether such increases were permitted (see
Texas Dept. of Human Services, DAB No. 981 (1988)) or where prior
interpretations of the plan limited such increases to circumstances not
present there (see Massachusetts Dept. of Public Welfare, DAB No. 867
(1987), DAB No. 853 (1987), and DAB No. 730 (1986)).
HCFA also argued that a federal court of appeals decision supported its
position that prior federal approval would have been required for Kansas
to have foregone the filing of projected cost reports. In Washington
State Health Facilities Association et al. v. Washington Dept. of Social
and Health Services and Thompson, Medicare and Medicaid Guide (CCH)
Para. 32,418 (9th Cir. November 9, 1982) (per curiam), the court
enjoined the State of Washington from enforcing a state regulation that
provided for a nursing home reimbursement method in conflict with the
provisions of the Washington state plan. The court found that the plan
would need to be amended before Washington could enforce the state
regulation in question. Here, however, HCFA did not point to any State
regulation which conflicts with the State plan, as interpreted by the
State, and we find that the reimbursement method the State used was
consistent with the State plan.
HCFA's "Supplemental" Arguments
After the close of the Board's usual briefing process, HCFA in a
"supplemental brief" raised for the first time a series of allegations
based on a meeting between HCFA and State officials (without State
counsel present) and documents obtained at that meeting. The State
moved to exclude these allegations from consideration as untimely,
offering alternatively to provide rebuttal evidence (which it said would
take a substantial time to gather). In a telephone conference with the
parties, the Board accepted HCFA's submission, but sought clarification
from HCFA about the relevance of these allegations. The Board indicated
that, based on its preliminary analysis that HCFA's new allegations
would not materially affect the Board's decisionmaking, the Board would
not require the State to respond (which would substantially delay the
case), but would permit a further response if fairness required.
January 23, 1989 Confirmation of Telephone Conference Call. The State
did choose to submit a brief response to one of the new allegations,
regarding the Winfield State Hospital, which we discuss further below.
We address below each of HCFA's points and explain why we conclude that
they do not affect our determination here.
HCFA alleged that the State provided retroactive reimbursement of ICF/MR
facilities for all costs during the relevant period (apparently meaning
the full difference between payments made under the prospective
reimbursement system and total actual costs incurred in the rate year),
rather than adjusting for only survey-related costs, for both public and
private facilities. HCFA's supplemental brief, pp. 5-6; HCFA Appendix
(affidavit of a HCFA official), para. 4. HCFA said that this showed a
pattern of the State ignoring the provisions of its State plan. HCFA
also alleged that the State reimbursed the Norton State Hospital for
survey-related costs, even though the facility did not document that it
had survey-related costs of $200,000 or more as required by the State
plan. HCFA's supplemental brief, p. 6, citing HCFA's Ex. 12. According
to HCFA, this supports its view that the State was ignoring its plan.
We find above that the State did not ignore its plan provision at issue
here, but reasonably interpreted it as not requiring filing of projected
cost reports under circumstances such as those existing here. Even if
we considered a "pattern" of ignoring plan provisions to be relevant
here, however, we would find that the record does not support HCFA's
allegations that the State exhibited such a pattern. The documentation
HCFA submitted with its supplemental brief shows that the State had
reached an interim cost settlement with the providers (apparently based
on the assumption that all costs in excess of those reimbursed through
the prospective rate were survey-related costs), but informed the
providers that this amount would be adjusted, based on an audit of the
cost report, to the amount actually incurred for survey-related costs.
HCFA's Ex. 10. (HCFA did not allege that the plan prohibited an interim
settlement, and the State regulations contemplate an interim settlement
based on a desk review of a cost report. State's Ex. 4.) The fact that
the State was acting to adjust the cost settlements to reimburse only
actual audited survey-related costs indicates that, contrary to what
HCFA argued, the State was not ignoring its plan. Similarly, the
documentation HCFA submitted with respect to Norton State Hospital shows
that the State was acting to recover reimbursement from that facility
for survey-related costs, having itself determined that the $200,000
threshold was not met. HCFA's Ex. 12.
HCFA also alleged in its supplemental response that private ICF/MR
facilities did file projected cost reports during the relevant period.
HCFA's supplemental brief, p. 6; HCFA's Appendix, para. 5. HCFA argued
during the telephone conference that this demonstrated that the State
accorded public facilities "special treatment" in implementing the
plan
amendment in question. Tape of January 13, 1989 telephone conference.
The mere allegation that the facilities filed projected cost reports,
however, does not show disparate treatment of public and private
facilities. HCFA did not allege that it had any affirmative evidence
that the State required the private facilities to file these reports but
apparently wished us to infer that the facilities did so because it was
required. We do not think that such an inference is warranted. The
private facilities had an incentive to file the reports (otherwise they
would not receive interim reimbursement for survey-related costs) and
may have had a more pressing need for the funds than the State-owned
facilities.
One purpose of HCFA's allegation was to rebut the State's allegation
that it was impractical for the five public ICF/MR facilities to file
the projected cost reports. As we noted above, the State at no time
maintained that filing the reports would have been impossible; the State
instead argued only that it was impractical to do so, given the
difficulty involved with projecting the costs and the uncertainty of
HCFA's approving the proposed plan amendment. In maintaining that
private ICF/MR facilities were able to file projected cost reports, HCFA
presented no evidence about the relative difficulties for the filing of
projected cost reports by the private facilities, compared to the public
facilities, and we cannot infer that they would be the same, given that
public facilities are generally larger and the survey findings would
have been different.
In response to the State's assertion that "it could not have received
any adjustment for the period from the beginning of the projected period
to the date of a projected cost report," HCFA alleged that the State in
"actual practice" did make such "mass adjustments," and
that the State
had a form it used routinely for this purpose. HCFA's supplemental
brief, pp. 6-7; HCFA's Ex. 14. It is not necessary to our decision to
find that the State facilities could not have received a retroactive
"mass adjustment" to reflect a rate increase based on projected
survey-related costs since this was only one factor which the State said
it considered in deciding that the facilities would not submit new cost
reports. We note, also, that the documentation HCFA submitted relates
to "mass adjustments" made for rate years after the end of those rate
years, not during the rate years, and therefore does not directly rebut
the point made by the State. HCFA's Ex. 15.
Finally, HCFA pointed out that the State had allowed Winfield State
Hospital to file a projected cost report on December 2, 1987, for the
cost period of January 1, 1987 through December 31, 1987, in order to
obtain reimbursement for actual survey related costs for this cost
period. HCFA's supplemental brief, p. 7; HCFA's Appendix, para. 7. The
State did not dispute the truth of this, but explained that the reason
for the filing of the projected cost report by Winfield in December 1987
was that HCFA in August of 1987 issued the report which served as the
basis for the present disallowance, and which rejected the State's view
that projected cost reports need not be filed in order to obtain
reimbursement for actual survey-related costs. While the State did not
abandon its interpretation of the State plan amendment, the State
reasonably decided not to risk any further disallowances and to obtain
the projected cost reports as HCFA suggested. We thus agree with the
State that the choice in filing a projected cost report for a later
period should not be construed as an admission concerning its
interpretation of the plan amendment.
Conclusion
For the foregoing reasons, we reverse HCFA's disallowance of $4,059,112
FFP. We find, under the particular circumstances here, that the State
reasonably interpreted its State plan to allow reimbursement for
survey-related expenditures without a separate filing of "projected cost
reports."
________________________________ Norval D. (John) Settle
________________________________ Alexander G. Teitz
________________________________ Judith A. Ballard Presiding
Board