DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: Wisconsin Department
DATE: December 18, 1989 of Health and Social Services Docket No. 88-202
Audit Control No. A-05-86-62100
Decision No. 1121
DECISION
The Wisconsin Department of Health and Social Services (Wisconsin/State)
appealed a determination by the Health Care Financing Administration
(HCFA/Agency) disallowing $1,367,278 in federal financial participation
(FFP) claimed by the State under Title XIX - Medicaid of the Social
Security Act (Act) for fiscal years (FYs) 1980-1982. The disallowance
was based on an audit of the allocation by the State of the costs of
surveying long-term care facilities for State licensure and federal
certification.
The costs of surveying facilities to see if they meet state licensing
requirements are not eligible for federal reimbursement, but the costs
of surveying to see if the facilities meet federal certification
requirements are eligible. In Wisconsin the State licensing and federal
certification requirements during the period in question were virtually
identical. HCFA determined that Wisconsin had allocated to Medicaid a
disproportionate amount of the time spent in surveys of the facilities.
The amount disallowed represented the difference between the time
actually charged to federally reimbursable activities by the State and
the Agency's calculation of the amount of time which Wisconsin should
have allocated to federal activities. The record in this case consists
of the parties' briefs and exhibits as well as the transcript of an
evidentiary hearing. Based on this record, we sustain the disallowance
in its entirety. We find that the State has failed to justify its
allocation of time to federally reimbursable activities. Further, in
view of the State'slack of adequate documentation to support its claim
for FFP, we find that the formula applied by HCFA to calculate the
disallowance was reasonable.
Applicable Requirements
Section 1902 of the Act sets out state plan requirements for the
administration of a state's Medicaid program. The regulation at 42
C.F.R. 431.610(h)(1) (effective throughout the audit period) provides
that FFP is available for costs incurred by the designated state survey
agency in carrying out its responsibilities under its agreement with the
single state agency to survey and certify Medicaid providers. The
regulation, at 42 C.F.R. 431.610(h)(2), also provides that FFP is not
available in any expenditures that the survey agency makes that are
attributable to a state's overall responsibilities under state law and
regulations for establishing and maintaining standards.
The State Operations Manual provides the states with HCFA's
interpretation of the federal regulations and the methods to be used in
implementing the regulations. Section 4542.3 of the Manual states in
pertinent part:
The Federal share of the costs of the survey and certification
activities and follow-up visits related to surveys of SNF's
participating in both Title XVIII [Medicare] and XIX will be
divided equally by the two programs . . . Costs of the survey
and certification activities and follow-up visits related to
surveys of ICFs will be chargeable entirely to Title XIX in
accordance with Federal regulations. The costs of activities
performed by this survey staff for the purposes of the State
licensure program or any other State program must be borne
entirely by the State. The survey agency must maintain records
to reflect the costs of these activities . . . . (emphasis
added)
Finally, the federal cost principles, establishing requirements for the
allowability of costs for state government grantees, provide, in
relevant part, that a cost must be allocable to the program incurring
the charge. A cost is allocable to a particular cost objective to the
extent of the benefits received. See Office of Management and Budget
(OMB) Circular A-87, Attachment A, C.1.a. and 2.a. The difficulty
arises where joint federal - state surveys are performed and the state
licensing standards are nearly identical to the federal standards.
Background
In Wisconsin, the Division of Health, Bureau of Quality Compliance
(BQC), is the health agency charged with the survey responsibility of
determining whether facilities are eligible to participate in Medicare.
See section 1864 of the Act. Section 1902(a)(33)(B) of the Act provides
that the state survey agency responsible for determining a facility's
eligibility for Medicare participation will also be responsible for
determining a facility's eligibility to participate in the Medicaid
program.
A long-term care facility, whether an ICF or a SNF, must have a state
license before it can be federally certified for Medicaid participation.
See 42 C.F.R. 442.201 and 442.251. Wisconsin based its licensure
requirements on the requirements for federal certification. The State
requirements were far more detailed than their federal counterparts.
Given this underlying similarity, the BQC was able to conduct a single
survey of a facility in which both the State and federal requirements
were addressed. Hearing Transcript (Tr.), pp. 431, 523.
The Agency engaged a private accounting firm to examine BQC's Medicare
and Medicaid administrative costs for the period October 1, 1980 through
September 30, 1982. In their preliminary discussions with State
personnel, the auditors learned of the material similarity of the State
and federal requirements. Consequently, as they began their
examination, they expected to encounter a time distribution where time
spent surveying facilities which were only State licensed, and not
participating in Medicaid or Medicare, would be charged to State funds,
while time spent in facilities with both State and federal coverage
would be distributed proportionately. HCFA Ex. 1, p. 4; HCFA Ex. 2, p.
3.
The auditors initially obtained selected BQC employee monthly time
sheets for different months within the audit period and then all time
sheets for two months within that period. The auditors also obtained
Division of Health Activity Accounting System (DOHAAS) Reports which are
quarterly computerized summaries of all employee monthly time sheets.
Wisconsin relied on the DOHAAS Reports in submitting Medicaid and
Medicare claims. The auditors' purpose was to check for clerical
accuracy and to get a preliminary idea of how the surveyors allocated
their time among the various programs served by their activities. The
auditors found the DOHAAS Reports to be clerically accurate. Thus,
reviewing those Reports for the audit period would be equivalent to
reviewing each time sheet for that period. However, the auditors'
preliminary review of the time sheets and DOHAAS Reports revealed what
the auditions found to be a disproportionate allocation of surveyors'
time to federally reimbursable activities in light of the similarity of
the State and federal requirements. HCFA Ex. 1, pp. 4-5; HCFA Ex. 2,
pp. 3-5.
Following this preliminary determination, the auditors examined the
DOHAAS Reports for fiscal years 1981 and 1982 to determine if the time
distributions were consistent with their expectations. Based on this
examination, the auditors found an approximate time distribution of 70%
to Medicaid and slightly more than 25% to State licensure. The auditors
presented this information to State officials in an attempt to find why
the allocations did not meet their expectations. The BQC Chief of
Management Development (hereafter the BQC Chief), the section
responsible for budget, expenditures, and personnel records, informed
one of the auditors that BQC employees were instructed to allocate all
of their time to federal programs when the same procedures were
performed for both State and federal programs. HCFA Ex. 1, pp. 5-7;
Wisconsin Att. 11; Tr., pp. 15-16. The auditors noted that this
"instruction" reaffirmed their preliminary conclusion regarding the
disproportionate allocation of time to Medicaid.
In their draft report the auditors concluded that the administrative
costs under review should be reallocated in the following manner:
33-1/3% for Medicaid activities, 33-1/3% for Medicare, and 33-1/3% for
State licensure. The State's response to the draft report disputed the
auditors' expected distribution of survey time. Based on its review of
sample time sheets, the State asserted that it could not find instances
where work jointly benefitting State and federal programs was charged
entirely to federal funds. Further, the State challenged the validity
of the auditors' proposed formula for time distribution.
The auditors responded noting that their projected time distribution was
based on information provided by the State. Further, the auditors
asserted that the State had not responded to their request for
documentation supporting the questioned time distribution. The auditors
noted that their findings were based on 100% review of the available
time sheets for fiscal years 1981 and 1982, not a selected sample.
Wisconsin Att. 1, pp. 7-11.
Analysis
The question of the proper allocation of time expended in joint
licensure and certification reviews where a state's licensure standards
are substantially similar or identical to federal certification
requirements has long posed intricate problems for the Board as well as
the Agency and states. See, e.g., Indiana Dept. of Public Welfare, DAB
No. 958 (1988); Wisconsin Dept. of Health and Social Services, DAB No.
534 (1984) (hereafter Wisconsin I); Nebraska Dept. of Health, DAB No.
373 (1982); Pennsylvania Dept. of Public Welfare, DAB No. 277 (1982).
This case underscores the complexity of those problems.
I. The Time Sheets
Arguing for the validity of the time sheets as accurate evidence of the
surveyors' time allocation, the State cited our statement at page 14 in
Indiana, our most recent case on allocating survey costs, that time
sheets, called coding sheets in Indiana, would as contemporaneous
records "be primary evidence of time spent" on various programs. The
State did not mention the sentence in Indiana just prior to the one
cited, which said:
What had become apparent was that the allocations of time on the
employees' coding sheets may not have been a true record of the
time spent on the various programs.
Id.; see Wisconsin Post-Hearing Br., p. 4.
Here too, the record as a whole, considering the time sheets in relation
to State and federal requirements, and the instructions given to
surveyors, supports HCFA's determination that the time sheets themselves
were not a true record of the time the surveyors spent on State and
federal programs. The uncontradicted testimony and other evidence in the
record was that the State's licensure requirements were based on the
federal certification requirements and that the State requirements were
far more detailed. Hearing Exs. A and B. Tr., pp. 276-77, 430-431,
520-523. In fact, in view of the similarity of the requirements, the
State used a single survey instrument which enabled it to satisfy both
the licensure and certification requirements in one complete facility
survey.
The normal expectation would then be that if surveyors were doing a
joint survey for State licensure and federal certification of an ICF (or
of an SNF participating only in Medicaid) the surveyors would spend at
least one-half of their time on State licensure requirements.
At the hearing the BQC Deputy Director from 1976 until his retirement in
January 1988 agreed with this assumption:
BOARD MEMBER TEITZ: All right. Well, let's say if taking the 90
ICF's, and if you are treating the Federal requirements as the base
for the State, even though they weren't exactly the same, and you
have indicated that if anything the State was more detailed.
Overall, in looking at these activity reports, wouldn't you expect
that on the whole that the time would have been allocated roughly
50 percent Federal, 50 percent State?
THE WITNESS: Yes. Yes, I would say that.
Tr., p. 584.
At the hearing, one of the auditors referred to several time sheets
which showed an overwhelming allocation of survey time to Medicaid as
compared to State licensure, with one showing zero allocation to State
licensure. Tr., pp. 295-99. He testified that, on the whole, the time
sheets showed an allocation to Medicaid of some 70% of time spent, where
the approximate figure which should have been charged to Medicaid was
46%. Tr., p. 304. Based on the anticipated benefits derived by each
program, the auditors computed the proper time allocation to Medicaid
for FY 82 as 43.93%, while for FY 81 the allocation was 44.59%.
Wisconsin Att. 1, p. 8.
The discrepancy between the expected time distribution and that actually
shown on the time sheets was such that the auditors were justified in
not accepting them as proof of the time actually spent by the surveyors
on State licensure and federal certification. The State offered no
satisfactory explanation of the flawed allocation, and so we may
reasonably refuse to accept the time sheets as proof of the actual time
spent by the surveyors.
We turn next to the record to see if (as in Indiana) there were any
instructions to the surveyors which led them to allocate their time so
disproportionately to Medicaid, with a small amount to State licensure.
II. Instructions to Surveyors
A. Written Instructions
The only written instructions to surveyors appear as an attachment
(titled: Instructions Monthly Activity Report Bureau of Quality
Compliance) to an affidavit at Wisconsin Att. 11. The affidavit states
(par. 4) that the instructions were revised January 10, 1980 and were in
effect until revised again on July 1, 1984, so they were in effect for
the entire disallowance period. The statement at the beginning of the
form (referred to in the affidavit) says that the new form has been
designed "to standardize the activity reporting process while
maintaining an accurate accounting of time devoted to the various
programs and activities as they relate to funding." This, standing
alone, is meaningless as far as telling the surveyors how to fill out
the form.
The only specific directions for filling out the time sheets are on page
3 of the Instructions:
All field and office activities are subdivided into four
categories: Licensure, Title XVIII SNF, Title XIX SNF and Title
XIX ICF. These categories are to be treated in the same manner as
they have been in the past for LTC [long-term care] activities.
The State was unable to give any plausible explanation of what these
words meant. In the absence of any other explanation, we are justified
in looking at the way the categories were treated in Wisconsin I, where
the disallowance was upheld because the funding ratios claimed by the
State bore no rational relation to any evidence of time actually spent
on the various survey activities. If the way the categories were
treated in the past for LTC activities was improper, and the surveyors
are told that the categories are "to be treated in the same manner",
then the distorted allocation shown is not unexpected.
B. The Sample Form
If the written instructions to the surveyors were ambiguous, the sample
time sheet form was highly informative. Under the columns headed
"Facility Review," 5 hours were allocated to licensure, 10 hours to
SNF
Title XVIII, 13 hours to SNF Title XIX, and 14 hours to ICF Title XIX;
this would make a total of 5 hours to State licensure, 27 hours to Title
XIX (Medicaid), and 14 hours to Title XVIII (Medicare). See Wisconsin
Att. 11, Ex. A (final unnumbered page).
Equally as striking is the fact that in the entire form, wherever time
was allocated to more than one program, not more than one hour was ever
allocated to State licensure. If the surveyors were not sure what
allotting time in the same manner as in the past meant, the sample form
surely reminded them to charge little time to State licensure.
C. Oral Instructions
The parties devoted much of their time to a statement of the BQC Chief
telling surveyors how to charge their time. We consider this evidence
in the order in which it came before the Board. HCFA's Exhibit 1 is an
affidavit by Roger Sheffield, one of the auditors. In paragraph 11 he
stated that, in May 1984, he met with David Larsen, the BQC Chief (and
another unidentified State employee), and showed him the statistics
compiled from examination of the DOHAAS reports regarding allocation of
costs. In his affidavit, Sheffield stated that Larsen "remarked that
the time allocated to the federal programs exceeded the expected
allocation, given the types of facilities and similarity of the survey
and certification procedures." Id. at 6. The affidavit continued:
Mr. Larson stated that the BQC employees were instructed to
allocate all of their time to the federal program or programs when
the same procedure was performed for both a federal program and
state licensing purposes . . . .
Id. at 6-7.
Attachment 9 to the State's reply brief was an affidavit by Larsen. He
stated that he had reviewed the HCFA brief, including the Sheffield
affidavit. Referring to paragraph 11 of the Sheffield affidavit, Larsen
stated that his comments were based on a March 31, 1982 decision of the
Departmental Grant Appeals Board "involving Pennsylvania, Decision No.
277, which also referred to a California policy on the same matter."
Id. at 2. The statement continued:
Essentially my comments to employees were that if they were
surveying a federal code they should claim federal program
activity; when they were surveyingstrictly a state requirement,
licensure should be charged as the activity.
Id. at 2-3.
The last sentence does not in so many words say that employees should
charge joint survey activity to federal programs. However, the
implication is certainly there when the only reference to charging
licensure is when employees were surveying "strictly" a State
requirement.
If there were any doubt as to what Larsen had said about joint surveys,
it was removed at the beginning of the first day of the hearing, in
Larsen's questioning by the State's attorney:
Q. Mr. Sheffield, in paragraph 11 of his affidavit, says
that you stated that the BQC employees were instructed to
allocated (sic) all of their time to a federal program or
programs when the same procedure was performed for both a
federal program and state licensure. Do you remember
specifically making such a statement?
A. Yes.
Q. You do remember making such a statement?
A. Or a statement similar to that.
Tr., pp. 15-16.
While the examination of Mr. Larsen continued for some time after he
made that statement, neither attorney asked him about his reference to
the Board's Pennsylvania decision, although the Presiding Board member
did. The relevance of Pennsylvania is not to the merits of this case,
since the State did not contend its holding would apply here, but to the
timing of the decision in connection with Larsen's statement.
The State asserted that Larsen's statement to Sheffield in May 1984 did
not relate to the audit period because the Pennsylvania decision was not
issued until March 1982, Larsen did not become aware of it until
December 1982, and did not receive a copy until January 1983. The State
argued that since Larsen's statement "was based on information he did
not receive until after the audit period", any instructions based on
that information "could not have been given during the audit period."
Post-Hearing Br., pp. 10-11.
Such an argument is pure speculation because Larsen made his statement
to Sheffield in connection with the audit period; it would make no sense
otherwise. Larsen was at the entrance conference when the audit began.
See HCFA Ex. 3. Larsen's statement was made when Sheffield told Larsen
that the time allocated to federal programs "exceeded the expected
allocation". Obviously Sheffield was talking about the period being
audited and Larsen's reply (which he admitted making) must have referred
to that period. Larsen's affidavit with the reference to Pennsylvania,
on the other hand, was not made until after HCFA's brief, with
Sheffield's affidavit, had been filed.
The State's argument that Larsen's statement as to instructions to
surveyors could not have referred to the audit period is utterly
implausible if one reads Larsen's testimony. His initial testimony runs
for 50 pages (Tr., pp. 10-60) before there is a mention of Pennsylvania.
In it he admits more than once making the statement Sheffield attributed
to him. Nowhere is there any indication that this statement was not in
reference to the audit period. There is no indication that Larsen meant
his statement to apply only to the period after he learned of
Pennsylvania, and in fact, that case was not mentioned until the
Presiding Board Member conducting the hearing asked about it. See Tr.,
pp. 61-63. Moreover, it is significant to note that while the State
provided several management officials who testified as to their
understanding of how the surveyors were instructed, the State, in spite
of ample opportunity to do so (the final day of the hearing was held in
Madison, Wisconsin), did not call any surveyors to testify as to their
understanding of their instructions for survey time allocation.
The State also asserted that, contrary to HCFA's assertion in the
disallowance, the BQC Chief could not have instructed the surveyors to
allocate "all" their time to Medicaid since the surveyors had allocated
some time to licensure. An Agency witness conceded that the word "all"
should not have been included in the disallowance letter because it
reflected the BQC Chief's statement rather than an accurate
representation of the time allocation. Tr., pp. 372-374.
Taking the record as a whole, we can draw no other conclusion but that
the surveyors were instructed to charge the costs of joint federal-State
surveys primarily to federal programs.
II. HCFA's Time Allocation Formula
A state bears the burden of demonstrating the allowability of the costs
it submits for federal reimbursement. See, e.g., Nebraska and Indiana.
In the face of legitimate challenges raised by the Agency, Wisconsin has
been unable to justify its allocation of time. Nevertheless, the State
has asserted that HCFA's time allocation formula is invalid. We
disagree.
Wisconsin characterized the Agency's methodology for time allocation in
the instant case as incongruous. The State noted that, in Wisconsin I,
this Board had sustained a similar disallowance because Wisconsin had
failed to document the actual time spent in performing licensure and
certification surveys. Rather, the State had allocated time to the
various State and federal functions based on allocation ratios developed
by program supervisors. The State asserted that the time sheets which
HCFA was now challenging were developed as a result of Wisconsin I.
Thus, Wisconsin argued that its use of these time sheets satisfied the
standard set by the Board in Wisconsin I, as well as the requirements
established by OMB Circular A-87. Wisconsin noted that the Agency's
position in disallowing FFP based on the State's failure to satisfy a
formula devised by the auditors was the same stance taken by the State
in Wisconsin I, i.e., HCFA was allocating time based on a formula which
did not comport with reality. Wisconsin Br., pp. 7-9.
In spite of the State's reliance on the rationale of Wisconsin I, the
mere fact that the surveyors used time sheets to record their allocation
of time does not mean that the allocations themselves were accurate.
The auditors' review of the DOHAAS Reports was essentially a review of
all the time sheets. In view of the similarity of the State and federal
requirements, the reports revealed an illogical time distribution. In
spite of the fact that this situation was brought to the State's
attention at an early stage of the audit process, the State has been
unable to set out satisfactory proof that the auditors' conclusions were
not sound. Att. 11, Ex. A.
There is no dispute that the State licensure requirements are based on
the federal certification standards. HCFA Hearing Exs. A and B. They
are, in fact, more detailed. There was testimony from an Agency
witness, a former State employee, that the complexity of the State
requirements would not necessarily translate into a larger time
allocation for State requirements. An example was given regarding beds
in a facility, in which the witness noted that while the beds had to be
a certain size, a surveyor could eyeball the bed and know that it
satisfied the standard rather than having to actually measure it. Tr.,
p. 549. However, the same witness offered a comparison of standards for
washing dishes. Simply put, the federal requirement mandates clean
dishes, while the State requirement contained several steps pertaining
to the manner in which plates were cleaned and specified water
temperatures. It is difficult to see how the State's survey process,
with more steps, would not take longer than the federal. Given the fact
that the base number of federal and State requirements are roughly
similar and the fact that the State's standards are admittedly more
detailed, it defies logic that the time allocated to the federal
requirements should be approximately three times greater than that
allocated to the State.
The State offered the time sheets as proof of how the time was divided,
but that offer merely begs the question. The time sheets do not address
the underlying problem, i.e., how it takes almost three times longer to
administer the federal program with its general requirements, than the
State program which is, in essence, a more detailed version of the
federal program. Although the State vociferously argued that its time
sheets accurately represented the allocation of time between the
programs, the auditors' examination of the available records and DOHAAS
Reports raised legitimate questions about the time allocation. In the
face of the auditors' findings, merely alleging that the hours submitted
for reimbursement were properly allocated is insufficient justification
for federal reimbursement. The State offered no testimony or evidence
capable of refuting the auditors' findings.
Two State management-level witnesses could not explain the slanted time
distribution in favor of the federal program. However, they did concede
that there really was no way of telling from the time sheets how the
surveyors actually spent their time. Tr., pp. 150-162, 233-234, 246.
Further, two other witnesses, both either current or former State
employees (again at the management level), indicated that given the
substantial similarity of the State and federal requirements, it would
be reasonable to expect a more even distribution of time between the
programs. Tr., pp. 131-133, 136, 583-585.
Although the auditors sought additional time distribution information
during the audit process in an effort to recreate (as closely as
possible) the actual time distributions by the surveyors, the State was
unable to produce such information, as that information apparently does
not exist. Wisconsin Att. 11, Ex. D; Tr., pp. 224, 324-325, 347-349.
Indeed, had such information been available, the auditors' job would
have been significantly easier as they would have had a much clearer
understanding of what the State surveyors were doing to produce the time
allocation now in dispute. In attempting to calculate a reasonable time
distribution for fiscal years 1981 and 1982, the auditors were forced to
rely on general data available from the State regarding statistics for
long-term care facilities and their certification or licensure status.
For fiscal 1980 a portion of these general records had been destroyed.
Tr., p. 170. Thus, the auditors were forced to base their estimated
allocation for fiscal 1980 on the statistics available for the
succeeding two years. HCFA Post-Hearing Br., pp. 19-20.
Given the similarity of the State and federal standards, and in view of
the absence of information which would enable the auditors to calculate
the time distribution more precisely, we find the methodology which
they devised was reasonable. The State protested that the ratios which
HCFA sought to apply here were the same type which the Agency rejected
in Wisconsin I. That argument is erroneous. In Wisconsin I, HCFA
rejected the State's use of ratios which purported to be representative
of the time spent by surveyors on federal and State activities. Those
ratios were not supported by adequate time management records. Rather,
they represented estimates, by State supervisory personnel, of the time
surveyors might have spent on various activities. Thus, in Wisconsin I,
the Board did not reject the use of time allocation ratios per se, but
rejected the use of ratios developed without a discernable basis in
reality. Wisconsin I, pp. 5-6.
Here, HCFA was again faced with a lack of quantifiable evidence which
would enable it to have calculated, precisely, the time surveyors spent
on various State and federal programs. The auditors had the general
knowledge that the State standards were based on federal requirements.
When the auditors sought more detailed information from the State, they
received little or no responsive information, except data which showed
that, basically, there were more "State Only" requirements than "Federal
Only" requirements. HCFA Post-Hearing Br., pp. 17-18, n. 10.
In the past we have found that the Agency's implementation of a
reasonable formula, devised due to a state's lack of quantifiable
information regarding time allocation, would serve as an equitable basis
for federal reimbursement. See, e.g., Indiana. In addition to the
general burden of a state to support its claim for FFP, and to show
where audit findings are wrong, we have said that once HCFA has proposed
an allocation of survey costs, the State cannot merely argue that this
is wrong; the State must suggest some other allocation with its
supporting basis. Nebraska, pp. 16-18. Here the State has not done
this. It claims that the allocation based on the surveyors' time sheets
is correct and refuses to suggest any alternative allocation. Since the
State failed to meet its burden of supporting its proposed allocation,
we therefore accept the Agency's allocation of 33-1/3% to State
licensure and 33-1/3% to Medicaid and 33-1/3% to Medicare, which we find
is a reasonable allocation given the factors listed above.
Conclusion
Based on the above analysis, we sustain the disallowance in the revised
amount of $1,285,211.
_____________________________ Judith A. Ballard
_____________________________ Norval D. (John) Settle
_____________________________ Alexander G. Teitz Presiding Board