DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: Washington State DATE: March 22, 1989 Department of
Social and Health Services Docket No. 88-158 Decision
No. 1029
DECISION
The Washington State Department of Social and Health Services (State)
appealed the disallowance by the Health Care Financing Administration
(HCFA, Agency) of $1,608,337 in federal financial participation (FFP)
claimed under Title XIX (Medicaid) of the Social Security Act (Act).
HCFA disallowed the FFP because it determined that the State was making
payments for inpatient hospital services that were in excess of the
customary charges for such services. The payment of such excess charges
is prohibited by statute and regulation.
The primary issue before us is whether the statutory provision
prohibiting FFP for excess customary charges allows for a computation of
excess charges on an aggregate basis for all hospitals providing
Medicaid services, as argued by the State, or requires computation on an
institution-by-institution basis. For the reasons described below, we
find that the Act and the regulations provide that excess customary
charges are to be determined on an individual hospital basis.
Accordingly, we affirm the disallowance.
Statutory Background
In order to qualify for FFP, a state's claim for the cost of medical
services must be in accordance with an approved state Medicaid plan.
Section 1903(a) of the Act. This plan must fulfill certain statutory
and regulatory requirements. Section 1903(i)(3) of the Act provides
that payment of FFP shall not be made "with respect to any amount
expended for inpatient hospital services furnished under the plan to the
extent that such amount exceeds the hospital's customary charges with
respect to such services . . . " The regulation at 42 C.F.R. 447.271(a)
(1982) implements the provisions of section 1903(i)(3):
[T]he agency may not pay a provider more for inpatient hospital
services under Medicaid than the provider's customary charges to
the general public for the services.
Also relevant to this appeal, according to the State, is section
1902(a)(13) of the Act (1980). Prior to 1981, inpatient hospital
services were to be reimbursed on a reasonable cost basis. Section
1902(a)(13)(D) of the Act (1980). In the Omnibus Reconciliation Act of
1980, Public Law 96-499, Congress replaced the reasonable cost-related
standard for payments to nursing facilities with a rate-setting standard
which gave greater flexibility to the states. Section 962 (popularly
known as the Boren Amendment). In the Omnibus Budget Reconciliation Act
of 1981, Public Law 97-35, Congress, at section 2173, extended the Boren
Amendment standard to include hospital services. Section 1902(a)(13)(A)
of the Act now accordingly requires that a state Medicaid Plan provide
for the payment of hospital and nursing facility 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. . . .
Factual Background
HCFA performed a review of Medicaid payments for inpatient hospital
services provided in calendar years 1985 and 1986 in the State of
Washington. The review focused on determining whether the State's
payment methodology properly addressed Medicaid statutory and regulatory
provisions which require that such payments not exceed customary
charges.
HCFA initially reviewed only 24 hospitals, based on a random sample.
Six hospitals were determined to have received payments in excess of
customary charges. The State then provided data for all 124 hospitals
in the State of Washington that received Medicaid payments for inpatient
hospital services provided during 1985 and 1986. Only payments for
inpatient hospital services subject to FFP were included in HCFA's
review, with the State providing all the necessary data to compute the
payments. HCFA's auditors ultimately determined that in 1985, 20
hospitals had individually received payments in excess of customary
charges; the total FFP in these individual payments was $505,094. For
1986, the auditors examined each of the hospitals separately and
determined that 13 hospitals had received payments for services in
excess of customary charges; the total for these 13 hospitals was
$1,103,243 in FFP.
HCFA adopted the auditors' findings and disallowed a combined amount of
$1,608,337 FFP for 1985 and 1986.
The State's Arguments
The State contended that HCFA had incorrectly interpreted the customary
charge limitation of section 1903(i)(3) and 42 C.F.R. 447.271 by
examining the payments on an individual hospital basis. The State
contended that the hospitals in the State of Washington providing
Medicaid services were not paid in the aggregate in excess of their
customary charges to the public. The State declared that under its
inpatient hospital prospective rate system hospitals received payments,
in the aggregate, at 85.99% of allowed charges in 1985 and 83.4% of
allowed charges in 1986. State brief, p. 3. HCFA did not dispute these
computations. Thus, if the State's interpretation were accepted, there
would be no excess charges to be disallowed.
The State argued that HCFA's decision to apply the customary charge
limitation of section 1903(i)(3) on an individual hospital basis here is
inconsistent with the provisions of the Boren Amendment, which gave the
states flexibility in deciding methods to reimburse the providers of
Medicaid services. The State insisted that its payment methodology
complied with the only applicable limit, that of the Medicare principles
of reimbursement. In this regard, the State argued that the State
Medicaid Manual guidelines HCFA had issued concerning restrictions on
how much providers could be paid were inconsistent with HCFA's
interpretation of section 1903(i)(3) here and supported the State's
position instead. The State also contended that HCFA had approved the
State's Medicaid plan which included a provision for the aggregate
measurement of the customary charge limitation. Therefore, the State
reasoned, HCFA should now be estopped from applying the limitation on an
individual hospital basis.
Analysis
I. The meaning of section 1903(i)(3) and its relation to the Boren
Amendment
Section 1903(i)(3), added to the Act in the Social Security Amendments
Act of 1972, Public Law 92-603, refers to a "hospital's customary
charges," i.e., the singular form is used. There is no use of the
plural or any mention of an aggregate basis to measure customary
charges. See also 42 C.F.R. 447.250(c). HCFA argued that the plain
meaning of the language of section 1903(i)(3) is clearly that Congress
intended the section to apply to an individual provider of Medicaid
services. According to HCFA, the Secretary followed this Congressional
intent in promulgating 42 C.F.R. 447.271(a), which also employs the
singular.
While not disputing the plain language of section 1903(i)(3), the State
advanced the position that the passage of the Boren Amendment in 1981
meant that section 1903(i)(3) can be interpreted only as basing the
customary charge limitation on an aggregate basis as the State has done.
The State argued that the purpose of the Boren Amendment was to give
states flexibility in paying Medicaid providers. The State argued that
applying the customary charge limit on a hospital-specific basis is
inconsistent with the State's rate-setting system, which was adopted
under the Boren Amendment and which is modeled after the Medicare
prospective payment system. According to the State, section 1814(j) of
the Act expressly eliminated the customary charge limit from application
to the Medicare prospective payment system for inpatient hospital
services under Title XVIII of the Act. The State argued that this
showed "congressional recognition that reimbursement rates could not be
subject to a customary charge limitation test on an entity or
claim-specific basis." State's brief, p. 5. The State conceded that
section 1903(i) was not modified when the Boren Amendment was passed,
but argued that the failure to delete section 1903(i) was "oversight"
or, alternatively, the section should be read as applying only where
consistent with the system a state adopts under the Boren Amendment.
State's brief, p. 9. In support of this position, the State cited a
number of cases on how to construe conflicting statutory provisions.
The State's reliance on treatment of the customary charge limit under
Medicare is misplaced. Section 1814(j) of the Act does not
automatically exempt from a customary charge limit the prospective
payment system implemented for inpatient hospital services in Medicare
in 1983. Rather, it authorizes the Secretary to exempt services
provided by a class of provider from certain lesser-of-cost-or-charges
provisions if the Secretary "determines and certifies to Congress that
the failure of such provisions to apply . . . will not result in any
increase in the amount of payments made for those services . . . ."
Section 1814(j)(1). It appears that the Secretary made such a
determination for those inpatient hospital services paid through the
Medicare prospective payment system, which reimburses hospitals at a DRG
(diagnosis related group) rate on the discharge of a patient and for
certain additional costs. See 42 C.F.R. 405.401(b). The mere fact that
Congress authorized an exemption from the customary charge limit under
Medicare, and HCFA applied that exemption to the DRG system, does not,
however, require that HCFA apply the exemption to the State's system
here. First, under Medicare, HCFA itself administers the DRG system and
can ensure that that system does not result in excessive payments or, if
it does, reinstate the customary charge limit after notifying Congress.
Second, HCFA reasonably read the statute as continuing the customary
charge limit at section 1903(i) in effect, even for states adopting
prospective systems of reimbursement under the Boren Amendment.
As the State argued, the Boren Amendment was intended to provide states
greater flexibility in developing methods of provider reimbursement.
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.
But, contrary to the State's assertions, there is nothing in the
legislative history of the Boren Amendment to indicate that Congress
intended to eliminate section 1903(i)(3) or restrict its application to
states with retrospective reimbursement systems. Rather than imagining
that Congress inadvertently failed to eliminate section 1903(i)(3), we
consider it more reasonable to infer that Congress, having had the
opportunity to specifically repeal the customary charge limitation when
it enacted the Boren Amendment, chose not to do so. A general rule of
statutory construction is that the provisions introduced by an amendment
should be read together with the provisions of the original act that
were reenacted or left unchanged, as if they had been originally enacted
as one act, with effect given to each part and to be interpreted so that
they do not conflict. IA Sutherland, Statutory Construction, section
22.34 (1985). We see no incompatibility between the Boren Amendment and
section 1903(i)(3), and therefore no reason to infer that Congress no
longer intended states to be bound by the provisions of section
1903(i)(3). HCFA made it clear in the preamble to the regulations
implementing the Boren Amendment that it deemed section 1903(i) of the
Act still in effect and that "FFP for payments is not allowable to the
extent those payments exceed the hospital's customary charges for the
services . . ." 46 Fed. Reg. 47964, 47970 (September 30, 1981)
(emphasis added).
Giving states more flexibility in designing their payment systems does
not amount to a decision relieving the states of their other
responsibilities, such as section 1903(i)(3), imposed by the Act.
Flexibility in payment systems should not entail the Medicaid program
paying a hospital more than the going rate for its services. As HCFA
pointed out, applying the plain language of the provision results in
greater economies for the limited dollars in the Medicaid program, thus
allowing more benefits for less money and more people to receive
benefits as Congress desired. Moreover, the mere fact that the Boren
Amendment standard allows a state to determine a class rate on a
prospective basis does not exempt a state from comparing that rate, once
determined, to a provider's customary charges.
Furthermore, the Agency's application of section 1903(i)(3) conforms
with other sections of the Act. For example, section 1902(a)(30) calls
for a state Medicaid plan "to assure that payments are consistent with
efficiency, economy, and quality of care." Under the State's
interpretation of section 1903(i)(3), an individual hospital would be
permitted to charge Medicaid greater costs than it would to a person
paying his or her own hospital bill. Such an outcome would frustrate
the Act's goals of efficiency and economy. An individual hospital would
be able to charge Medicaid clearly excessive costs, thus receiving a
windfall, as long as other hospitals' costs in the State of Washington
were, in the aggregate, lower than their customary charges. We consider
it reasonable to conclude that Congress did not intend the Medicaid
program to subsidize such a hospital.
The State's reliance on language in the preamble to the regulations
implementing the Boren Amendment, 46 Fed. Reg. 47964, 47968 (September
30, 1981), to support its interpretation is misplaced. That preamble,
in detailing the intent of the Boren Amendment to give states greater
flexibility in setting payment rates, discusses how the upper limit
requirement of 42 C.F.R. 447.315 (which was not required by any statute)
had been deleted in favor of an aggregate upper limit based on Medicare
payments for long-term care facility services. The preamble did not
change the customary charge limitation, i.e., 42 C.F.R. 447.271,
relating to payments for hospital services, the issue currently before
us.
II. The upper limit requirements
With the passage of the Boren Amendment and the State's subsequent
adoption of a prospective payment system based on the Medicare DRG
reimbursement system, the State apparently assumed that the proper
standard for measuring inpatient hospital costs is set forth in 42
C.F.R. 447.253. That regulation provides that a state Medicaid agency
must make various assurances and findings to HCFA whenever the state
agency makes a significant change in its methods and standards. Among
these findings is one required by section 447.253(b)(2):
Upper limits. The Medicaid agency's estimated average proposed
payment rate is reasonably expected to pay no more in the aggregate
for inpatient hospital services or long-term care facility services
than the amount that the agency reasonably estimates would be paid
for the services under the Medicare principles of reimbursement.
The State insisted that the State Medicaid Manual, issued by HCFA to the
states to assist in the operation of their state Medicaid programs,
contains guidelines which indicate that an aggregate application of the
upper limits test is acceptable. One of the cited guidelines, section
6005.1(B), reads:
A State does not need to consider and document the impact of the
limits for all facilities in the state to support its findings of
compliance with the requirement. That is, States could use a random
sample of facilities for this purpose. Also, States with
alternative systems are not precluded from making payments to
individual facilities in excess of the limits. In this case,
however, the State would have to show savings elsewhere in its
payment system to ensure that the aggregate pay out to all
facilities did not exceed the limits. (emphasis added).
The State reasoned that, based on this guideline, it would be
inequitable for HCFA to enforce an upper limits test on a
hospital-specific basis.
While this guideline, at first glance, would appear to support the
State's view that it was not precluded from paying individual providers
in excess of any applicable limit, a careful analysis shows that the
provision cannot reasonably be read that broadly. The limits being
discussed in this guideline are those about which the states are
required to make findings, as part of their assurances under 42 C.F.R.
447.253, and specifically, 447.253(b)(2), and not section 447.271(a) as
argued by the State. Section 447.253 concerns the development of a
system for setting rates that will assure HCFA that a state's rates are
not excessive compared with Medicare principles of reimbursement. Once
that rate-setting system is established, however, other statutory and
regulatory requirements, such as the customary charge limitation, come
into play.
Moreover, in the State Medicaid Manual section discussing the upper
payment limit requirements, immediately preceding the paragraph above
cited by the State, the Manual reads:
The regulations at 42 C.F.R. 447.271, based on section 1903(i)(3) of
the Social Security Act mandate additional cost limits on inpatient
hospital services. Specifically, the regulation requires that the
State agency not pay a provider more for inpatient hospital services
under Medicaid than the provider's customary charges to the general
public for services. . . .
Section 6005 (emphasis added).
It may well be true that under the State's DRG system for inpatient
hospital services, it is more difficult to determine whether a
particular hospital is exceeding its customary charges than under a
retrospective system. It is not impossible, however. It is evident
from the record that HCFA's auditors were able to arrive at that
determination from information supplied by the State. The auditors'
report indicates that excessive charges were determined by comparing
amounts billed with amounts paid for the services (taking into account
amounts paid by recipients or liable third parties, as well as the
State). State Appeal File, Ex. 5, p. 7
Thus, while the State may have satisfied the requirement that it provide
assurances that its DRG system would not result in payment for inpatient
hospital services exceeding Medicare reimbursement principles, the
additional requirement of section 447.271(a) mandates that each
hospital's payments be compared with its customary charges.
III. HCFA's approval of the State's Medicaid plan
Nor do we find any merit in the State's argument that HCFA, in approving
the State's Medicaid plan, had ratified an aggregate basis for the
customary charge limitation so that HCFA should now be estopped from
issuing a disallowance. The provision of its Medicaid plan, which the
State cited as addressing the customary charge limit, reads:
Payment rates computed in accordance with this system do not exceed
customary charges to the general public for similar services, except
that the Division of Medical Assistance may pay a public provider
that provides services free or at a nominal charge at the same rate
that would be used if the provider's charges were equal to or
greater than its costs.
P. 4, Section I of Attachment 4.19-A of Washington State plan.
We fail to see anything in this language that would have notified HCFA
that the State intended to use a hospital aggregate methodology to
compute the customary charge limitation. First, approval of this
language simply means that the State has given adequate assurances that
its rate-setting methodology is satisfactory; approval cannot be read as
extending to particular payments under the methodology. Second, there
is no mention in this plan language of any aggregate test for hospitals.
At best this section can be construed as being ambiguous, allowing for
either an individual hospital or aggregate basis for computing the
customary charge limitation. We note, however, that the exception in
the cited section pertaining to public providers refers, as do section
1903(i)(3) and 42 C.F.R. 447.271(a), to a provider, singular case.
Given the language of the cited section of the plan, we do not believe
that a further examination of whether estoppel is applicable to the
facts of this case is warranted here.
Conclusion
For the reasons stated above, we affirm the disallowance of $1,608,337
in FFP.
________________________________ Cecilia Sparks Ford
________________________________ Norval D. (John) Settle
________________________________ Judith A. Ballard Presiding
Board