DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: California Dept. of DATE: March 22, 1989 Health
Services Docket No. 88-12 Decision No. 1028
DECISION
The California Department of Health Services (State) appealed a
determination by the Health Care Financing Administration (HFCA, Agency)
disallowing $17,676,645 claimed under title XIX (Medicaid) of the Social
Security Act (Act). This amount was claimed by the State for certain
overhead costs omitted from per diem rates for State-owned skilled
nursing facilities (SNFs) and intermediate care facilities for the
developmentally disabled (ICF/DDs) for State fiscal years 1983-84 and
1984-85. The State appealed only the part of the disallowance
pertaining to the ICF/DDs for the period beginning April 1, 1984. The
Agency found that the State's claim was not calculated in accordance
with the State's approved title XIX plan. In accordance with 42 C.F.R.
447.253(g) (1983), a state may claim federal funding only for rates
determined in accordance with methods and standards specified in this
plan. For the reasons set forth below, we conclude that the State's
claim, even if recalculated as the State proposed during the course of
this proceeding, was not made pursuant to the State plan; accordingly,
we sustain the disallowance. Background
The Department of Health Services (DHS) is the single state agency for
administration of California's Medicaid program, known as Medi-Cal.
Pursuant to the State's approved title XIX plan, DHS sets annual per
diem rates to reimburse participating providers for services to eligible
individuals. Included among these providers are eight State-owned
ICF/DDs operated by the Department of Developmental Services (DDS).
These ICF/DDs are in a separate rate class since they are the only
providers of ICF/DD services having 300 or more beds. Rates are set for
each facility prospectively on the basis of costs reported for the
fiscal year two years prior to the rate year, adjusted for inflation.
Each facility is then paid the lower of its individual rate or the
median rate for the class.
In accordance with its plan, the State may include in the per diem rate
calculation State agency overhead costs, (e.g., costs of the Department
of Finance, State Controller, and State Personnel Board), which are
allocated to DDS pursuant to a Statewide Cost Allocation Plan (SWCAP),
and DDS central office costs. DDS calculated a daily per client rate
for SWCAP and DDS central office costs which was included in the cost
report for each facility for FY 1981-82 and FY 1982-83. However, DHS
inadvertently failed to include these costs in calculating per diem
rates for the facilities for FY 1983-84 and FY 1984-85. After this
omission was pointed out by HCFA auditors in a preliminary report issued
in July 1985, the State made a retroactive claim for the actual SWCAP
and DDS central office costs which it had allocated to these facilities
for FY 1983-84 and FY 1984-85. The claim was calculated by multiplying
the actual daily per client rate for each of these fiscal years by the
total number of service days provided to Medi-Cal eligible clients in
the ICF/DDs in the year in question.
Basis for Disallowance
HCFA took the position that the claim was unallowable because the
methodology used to calculate the claim did not follow Medicare
reimbursement principles, as required by the State's title XIX plan.
HCFA noted specifically that the State failed to comply with the
requirement in these principles (at 42 C.F.R. 405.453, now redesignated
as 42 C.F.R. 413.24(d)(1) (1986)) that costs be allocated to both
reimbursable and non-reimbursable cost centers in a facility using the
"step-down" method of cost finding. HCFA asserted that the State lacked
adequate data to use the step-down method because it had not audited any
of the ICF/DDs. The State plan required an annual audit of a minimum of
15% of all long-term care facilities selected at random. It also
required that an "audit adjustment factor," reflecting the amount
by
which reported costs were found by the audit to be overstated, be
applied to the costs used to calculate Medicaid rates. However, the
State had deliberately chosen not to audit the facilities in question
here since 1972. Although HCFA did not specifically cite the failure to
apply an audit adjustment factor as a basis for the disallowance, it
contended that the claim was an unallowable estimate because it was not
supported by data derived from contemporaneous audits. HCFA later
stated that the State also failed to comply with the State plan in that
it used the daily SWCAP plus DDS central office daily per client rate
for the rate year rather than the base year in calculating the claim.
State's Modified Claim
Following the submission of briefs to the Board in this appeal, the
State proposed to modify its claim using base year rather than rate year
costs. The State also offered to apply an audit adjustment factor to
the daily rate reported for the base year. The State asserted that this
factor, which used base year audits of facilities other than the
State-owned ICF/DDs, was most likely higher than warranted, since recent
audits of the State-owned ICF/DDs (for FY 1985-86) indicated that their
costs were closer to reported costs than was the case for the other
facilities. Tape recording of 2/7/89 telephone conference, side 1.
Recalculation of the claim in this manner resulted in a daily per client
rate of $4.41 for FY 1983-84 and $6.64 for FY 1984-85. State's appeal
file, Ex. 20, pp. 2-3. The State also stated that it would be willing
to further reduce these rates by 1.33%, a factor which it asserted
reflected the amount attributable to non-reimbursable cost centers.
Tape recording of 2/7/89 telephone conference call, side 2. According
to the State, application of this factor "would very closely approximate
the reduction that would be calculated through a full-scale audit using
a step-down process." State's appeal file, Ex. 12, p. 6. The State
contended, and the Agency did not dispute, that once the daily rate was
calculated as just explained, no further computations were necessary to
determine the amount omitted from the Medicaid rate because the daily
rate would have been "passed through," or reflected in the Medicaid
rate
dollar for dollar.
The Agency stated that the proposed recalculation did not alter its view
that the claim was unallowable. It pointed out that the State had not
explained the methodology used to compute the 1.33% factor. The State
did not offer to explain the methodology, although it had an opportunity
to do so during the telephone conference at which the Agency's comment
was made. The Agency also noted that it had not accepted the FY 1985-86
audits, so that there was no basis for the State's assumption that the
audit adjustment factor which it applied in the recalculation was
adequate.
Discussion
We conclude that the State did not properly claim the omitted SWCAP and
DDS central office costs through the daily per client rates even as the
State proposed to recalculate them. Although the recalculated claim
complies with the State plan requirement for use of base year costs,
there is no evidence that the State used the step-down methodology
specifically required by the Medicare reimbursement principles (which
were made applicable by the State plan). Step-down is one method
provided by the Medicare principles for determining what costs of a
facility are allowable for purposes of calculating a per diem rate.
(The State did not allege that any of the other cost-finding methods
described in the Medicare cost principles were available to it.) Under
this method, costs are allocated to all cost centers, with those costs
allocated to non-reimbursable cost centers not being allowable. The
first costs to be allocated must be those of the nonrevenue producing
center serving the greatest number of other centers, while receiving
benefits from the least number of centers. After each center's costs
are allocated, the center is "closed", so that no more costs are
allocated to it even if it may have received a benefit from costs which
are allocated later.
As noted previously, the State offered to apply a factor of 1.33% to the
base year daily per client rate, after making an audit adjustment (based
on its audits of other facilities) and adjusting for inflation. The
State asserted that this yielded substantially the same result as if it
had stepped down the omitted costs in calculating the Medicaid rate.
However, the State did not provide any explanation of how it arrived at
the 1.33% figure or justify its conclusion that the same result would be
reached.
This deviation from the requirements of the Medicare principles (and
thus the State plan) is unacceptable. The step-down method is clearly a
necessary predicate for calculation of a rate and, as such, properly
considered a part of the methods and standards of the State plan. The
State did not argue that use of the 1.33% factor brought it into
compliance with these methods and standards. As noted previously,
federal funding is available only for rates calculated in accordance
with the methods and standards in a state plan. The Board discussed the
rationale for this requirement in a recent decision upholding a
disallowance (on another basis) of ICF/DD costs claimed by the State for
FY 1984 and FY 1985, stating:
While the State is given considerable discretion in proposing the
terms of its rate setting methodology in its plan, once that plan
has been approved by the Agency, the Agency may reasonably expect,
consistent with the statute and regulations, that the State's
claims will be consistent with the plan. . . . Thus, the Agency
should not have to be placed in the position of making new
substantive judgments about the appropriateness of a State's rate
every time a State decides for reasons of its own that it would be
better to depart from the prescribed terms of its plan for whatever
reason the State may choose. The chosen vehicle for departures
from the plan methodology under both the statute and the
regulations would be a change in the State's plan. This generally
gives the Agency the opportunity to consider the change on a
prospective basis and in a considered and careful way. To allow a
state unilaterally to engage in ad hoc revision of the rate setting
methodology set forth in its own Medicaid plan "would seriously
undermine the desired Federal supervisory role regarding [Federal
funding]." Massachusetts Department of Public Welfare, DAB No. 853
(1987) at p. 7, quoting State of Arkansas v. United States, No.
150-85C (Ct. Cl., February 20, 1986).
California Department of Health Services, DAB No. 1007 (1989), p. 6.
The recalculation here was not made in accordance with the methods and
standards in the State plan; moreover, the State failed to show that the
amount of the claim for the omitted costs was the same as it would have
been if the State had followed its plan. Accordingly, we conclude that
the Agency reasonably rejected the claim. Conclusion
For the reasons discussed above, we sustain the disallowance in full.
Donald F. Garrett
Alexander G. Teitz
Cecilia Sparks Ford
Presiding Board