Alaska Department of Health and Social Services, DAB No. 1154 (1990)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT: Alaska Department of
DATE: May 11, 1990
Health and Social Services Docket No. 88-239
Decision No. 1154

DECISION

The Alaska Department of Health and Social Services (Alaska/State)
appealed a determination by the Health Care Financing Administration
(HCFA) disallowing $2,697,305 in federal financial participation (FFP)
claimed by Alaska under the Medicaid program. Alaska claimed the
portion of its expenditures for long-term care (LTC) services that it
had initially estimated to be in excess of the applicable ceiling for
the period October 1, 1983 through June 30, 1985. HCFA based the
disallowance on its assertion that Alaska did not submit this claim
within the two-year time limit established by section 1132 of the Social
Security Act (Act). HCFA denied the State's request for a waiver of the
timely filing requirements, as well as its request for reconsideration
of the waiver denial. 1/

Based on the following analysis, we find that the State did not file its
claim within the two-year period required by statute. Therefore, we
sustain this disallowance so far as it affects the majority of FFP in
question. We find, however, that part of the claim came within the
exception in the statute "with respect to any expenditure involving . .
. audit exceptions." As explained more fully below in our discussion of
the audit exception (section II.), we reverse the part of the
disallowance which fits within that exception. As to the "good cause"
waiver of the timely claiming requirements requested by Alaska, we
decide that we need not reach the question of whether the Board can
review the waiver denial since, on the facts of this case, HCFA was not
arbitrary in denying the waiver.

Background

Applicable Law

Federal funding for Medicaid is made available to states which have an
approved state plan. Section 1901 of the Act. A Medicaid state plan
details the manner in which a state intends to provide Medicaid funded
services to eligible individuals. See section 1902 of the Act. Section
962 of Public Law 96-499, known generally as the Omnibus Reconciliation
Act of 1980, amended section 1902(a)(13)(A) of the Act to require that
state plans provide for payment of services --

through the use of rates . . . 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 . . . laws, regulations, and
quality and safety standards . . . .

This provision, known as the "Boren Amendment," was intended to provide
states greater flexibility in developing methods of provider
reimbursement. See 48 Fed. Reg. 56047 (December 19, 1983). States are
free to use Medicare cost finding methods in setting rates for payments
to providers in their Medicaid State plans. See North Carolina Dept. of
Human Services, DAB No. 1133 (1990), pp. 5-6.

States report their Medicaid expenditures and make their claims for FFP
on a Form HCFA-64 (more commonly known as a Quarterly Expenditure
Report, hereafter QER). A QER is also used to credit HCFA with FFP
resulting from overpayments by a state. The Consolidated Omnibus Budget
Reconciliation Act of 1985 (COBRA), Pub. L. 99-272 (1986), effective
October 1, 1985, defines an "overpayment" as an amount paid by a state
Medicaid agency to a person or entity in excess of the amount which
would be proper under section 1902 of the Act. See 54 Fed. Reg. 5453
(February 3, 1989).

Under Medicare, the amount payable for long-term care services is
limited by "routine cost limits," known as "upper limits." See 42
C.F.R. 413.30. The regulations require that a state plan for Medicaid
be based on findings, and contain assurances satisfactory to HCFA, that
a state's payment rates for services in hospitals and LTC facilities do
not, in the aggregate, exceed the amount that can reasonably be
estimated would have been paid for those services under Medicare payment
principles. See 42 C.F.R. 447.253 and 447.272. Proper application of
the Medicare upper limits in Alaska is the subject of another appeal by
the State currently before the Board. See Docket No. 88-217.

The regulation at 45 C.F.R 95.4 defines the term "claim" as --

a request for Federal financial participation in the manner and
format required by our program regulations, and instructions or
directives issued thereunder.

Section 1132(a) of the Act requires that --

. . . any claim by a State for payment with respect to an
expenditure made during any calendar quarter by the State --

(1) in carrying out a State plan approved under title . . . XIX
. . . of this Act . . .

* * *

shall be filed (in such form and manner as the Secretary shall
by regulations prescribe) within the two-year period which
begins on the first day of the calendar quarter immediately
following such calendar quarter; and payment shall not be made
under this Act on account of any such expenditure if claim
therefor is not made within such two-year period; except that
this subsection shall not be applied so as to deny payment with
respect to any expenditure involving court- ordered retroactive
payments or audit exceptions, or adjustments to prior year
costs.

Section 1132(b) provides:

The Secretary shall waive the requirement imposed under
subsection (a) with respect to the filing of any claim if he
determines (in accordance with regulations) that there was good
cause for the failure by the State to file such claim within the
period prescribed under subsection (a) . . . A failure to file
a claim within such time period which is attributable to neglect
or administrative inadequacies shall be deemed not to be for
good cause.

The implementing regulation at 45 C.F.R. 95.19 restates the statutory
exceptions to the two-year filing limit and includes among those
exceptions a waiver for good cause. For purposes of the filing limit,
"good cause" is defined at 45 C.F.R. 95.22(a) to mean "lateness due to
circumstances beyond the State's control." Circumstances beyond a
state's control include "acts of God" and "documented action or inaction
of the Federal government." 45 C.F.R. 95.22(b)(2). A written request
for a waiver must be submitted to HCFA with specific explanation and
documentation of the claim. See 45 C.F.R. 95.28 and 95.31.

The Facts

Alaska reimbursed Medicaid providers through a retrospective
reimbursement methodology, using Medicare standards and principles,
prior to 1983. In that year the State sought to change its
reimbursement methodology from a retrospective system based on the
Medicare principles to a prospective per diem rate. 2/ However, the
State argued that it was concerned that the payments under the
prospective system would exceed the Medicare upper limits and thereby
jeopardize the State's entire Medicaid funding. In its discussions with
HCFA prior to amending its State plan, Alaska expressed a willingness to
absorb that portion of its provider payments which exceeded the Medicare
upper limits. Thus, the State's object was to claim FFP only for those
expenditures within the upper limits, but not to claim amounts which
exceeded the limits. See Alaska Brief (Br.), pp. 8-10; Alaska Tab 5,
Ex. C and Tab 6, Ex. B.

Effective October 1, 1983, Alaska amended its State plan to implement a
prospective reimbursement methodology. Thereafter, the State
intentionally paid providers in excess of the Medicare upper limits, but
claimed FFP only for payments it estimated to be within the upper
limits. On the corresponding QERs, Alaska would "net out" expenditures
in excess of the upper limits. That is, each quarterly expenditure
claim would include a footnote indicating the amount by which the
State's expenditures exceeded the published upper limits. 3/

In its QER for the quarter ending June 30, 1987 (filed August 7, 1987)
Alaska reported the total amount of FFP which it had not claimed in the
body of the QERs it had filed for the period October 1, 1983 through
June 30, 1986, but which it had listed in the footnotes on most QERs.
See Alaska Br., p. 14. HCFA disallowed a total of $2,697,305 in FFP for
expenditures from October 1, 1983 through June 30, 1985 because those
claims were not filed within the two-year limit imposed by the statute.
See Alaska Tab 6, Ex. A.

The Parties' Arguments

Alaska's arguments were as follows:

1. The State's claim was an overpayment adjustment not barred by
the two-year filing limit;

2. The State's claim came under the statutory exception for an
audit exception;

3. Fairness required treating the State's claim as timely; and

4. HCFA wrongly denied the State's request for a waiver of the
timely filing requirements, and the Board should hold that HCFA
abused its discretion in denying it.

HCFA argued:

1. Alaska's entire claim was time barred;

2. The claim did not come under any statutory exception;

3. HCFA's denial of the waiver request was not reviewable by the
Board; even if it were, the waiver was properly denied.

We address each of these arguments below.

Analysis

There is no dispute here that the disallowed expenditures were incurred
from October 1, 1983 through June 30, 1985. On its face, Alaska's claim
filed on August 7, 1987 would be barred as having been filed more than
two years after the end of the quarters in which the expenditures were
incurred. The State, however, argued that the August 1987 claim was not
a new claim but a reclaim of amounts previously claimed by footnotes on
the QERs.

The issue before us is whether the claims were filed within the two-year
statutory period or, if not, whether the claims come within any of the
statutory exceptions to the filing requirements. If they were not
timely filed, and did not come within any of the exceptions, then a
further issue concerns the potential waiver of the timely filing
requirements. This case has nothing to do with the merits of the claims
themselves.

I. ALASKA'S CLAIM AS AN OVERPAYMENT ADJUSTMENT

The State contended that its claim was "an overpayment adjustment which
was not barred by the two-year filing limit." Alaska Br., p. 16. The
State said that the filing limit did not apply to claims for FFP which
"represent downward adjustments to amounts credited to HCFA as the
federal share of overpayments." Id.

This argument is based on language in the preamble to the final
regulation amending 42 C.F.R. Part 433 entitled, Medicaid Program;
Refunding of Federal Share of Overpayments Made to Medicaid Providers,
54 Fed. Reg. 5452 (February 3, 1989). See Alaska Tab 1. The pertinent
part of this preamble provides:

On occasion, it may be necessary for States to submit claims for
FFP to adjust the Federal share of overpayment amounts previously
credited to HCFA because of downward adjustment to the original
overpayment amount based on the approved State plan, Federal
Medicaid law and regulations, and the appeals resolution process
specified in State administrative policies and procedures. Under
these regulations, we are requiring States to submit these
retroactive claims for FFP on the Form HCFA-64. The normal 2-year
filing limit for retroactive claims does not apply to these
adjustments, as downward adjustments to overpayment amounts are not
retroactive claims but merely reflect the reclaiming of costs
previously claimed.

Id. at 5455. 4/

The purpose of the provision for reclaiming based on a downward
adjustment may be illustrated by a hypothetical example. Assume a state
discovered that it had claimed FFP in an overpayment to a provider of
$100,000, and its federal share was 50%. It would normally credit HCFA
on the first QER (filed within 60 days of discovery of the overpayment)
with the $50,000 in the federal share of the overpayment and demand
payment of the full $100,000 overpayment from the provider. Assume the
provider established, through some appeal process, that the correct
amount of the overpayment was only $80,000. The state should have to
repay HCFA only $40,000, rather than the $50,000 it has already credited
to HCFA. The difference of $10,000 is the downward adjustment to the
original overpayment amount referred to in the preamble.

Under the language of the preamble, the normal two-year filing limit
presumably would not apply to the retroactive claim of $10,000 because
the state had originally claimed the full $50,000 in federal funds for
the overpayment. The reclaim of the $10,000, or "downward adjustment,"
in the $50,000 originally returned to HCFA merely reflects the "the
reclaiming of costs previously claimed."

The State argued that it both claimed FFP for the overpayments and
credited HCFA with the overpayment amounts on the same QERs. The State
contended that this was done in footnotes on the QERs, where it listed
the amount of the overpayments and the amount of the FFP in each
payment. Thus, according to the State, when it filed its claim in 1987
it was merely making a downward adjustment in the amount it had credited
HCFA in the overpayments; therefore the timely filing requirements did
not apply.

The flaw in this argument is that it was undisputed that Alaska never
previously sought or obtained federal matching funds in the amounts it
paid the providers above the Medicare upper limits. In the preamble on
which the State relies, an overpayment is defined as follows --

the amount which is paid by the State Medicaid agency to a person
or other entity in excess of the amount that is proper under
section 1902 of the Act and which is required to be refunded to
HCFA under section 1903 of the Act.

54 Fed. Reg. 5453 (February 3, 1989).

If the State never received FFP in the amount of the overpayment, then
clearly it was not required to refund any of it to HCFA. Alaska has
admitted that it did not claim FFP in the overpayments until its August
1987 claim. Specifically, Alaska said:

On line 7 . . . of the Form HCFA-64 which DHSS filed on August 7,
1987, the State reported the total amount of FFP that it had
excluded from its net claim of FFP during the seven quarters from
October 1, 1983 to June 30, 1986 . . . .

Alaska Br., p. 14 (emphasis added).

Furthermore, the 1989 preamble refers continually to refunding of the
"Federal" share of an overpayment to a provider. 5/ For example, the
following appears under Definition of Overpayment:

Situations involving excessive provider reimbursement attributable
to rate-setting methods or aggregate payments that are higher than
the Medicare upper payment limit also may be considered
overpayments. However, determining whether an amount paid to an
institutional provider under any rate setting system is considered
an overpayment for which the Federal share must be refunded . . .
depends on the manner in which the State pursues recovery of the
excess amounts . . . . 6/

54 Fed. Reg. 5453 (February 3, 1989).

Since the State never claimed the Federal share originally, there is no
basis for the State having to refund it. Thus, its voluntary failure to
claim cannot be associated with the downward adjustment of an amount
previously credited to HCFA. The State, apparently recognizing the
futility of attempting to argue that it ever intended to claim the
amounts by which it voluntarily reduced its FFP claims, contended in its
reply brief that HCFA had sought to impose an "intent to claim"
standard, without any legal basis. Alaska Reply Br., p. 8. 7/ It is
true that there is no requirement for an intent to claim in regulation
or HCFA guidance. However, in a case such as this, where it appears from
the face of the documents that there was no claim as such for the
amounts in dispute, the State's argument is a red herring, and evidence
that there was no intent to claim merely reinforces the conclusion that
the footnoted amounts were not claims.

An examination of the footnotes gives no indication that there was any
claim, let alone any intent to claim, the footnoted amounts. Thus,
Alaska's Exhibits 8, 9, and 10 simply show a reference in the body of
the claim to a footnote at the bottom of the page which identifies the
amount above as "net of cost rate adjustment." Exhibit 13 has amounts
in the body of the form directed to footnotes which say "Reduced by 17%
RSCL [routine service cost limit, or upper limits]." No one could
reasonably argue that excluding amounts is a claim for them.

Alaska apparently recognized this when it stated:

There is no dispute about the fact that the State did not intend or
expect that, upon receipt of the relevant HCFA-64 reports, HCFA
would adjust the State's grant award to reflect federal
participation in the expenditures which the State had reported in
footnotes.

Alaska Reply Br., p. 9.

Alaska contradicted its own argument that we should not look at intent,
by saying that:

What the State did intend . . . was both to report its actual
expenditures in excess of the published upper limits and to net
those expenditures out of the expenditures reflected on line 11 . .
. .

Alaska Reply Br., pp. 9-10, n. 10.

Alaska then went on to say that it did "claim" the expenditures, and all
that section 1132 prohibited was payments where the claims were not made
within the two- year period. The State concluded this section of its
reply brief by saying that section 1132 "does not bar payment where
efforts to recover FFP were not made within that period." Id. at 10.

Aside from the manifest absurdity of saying that not asking for FFP is a
"claim", the timely filing regulations define a "claim" as, "a request
for Federal financial participation in the manner and format required by
our program regulations . . . ." 45 C.F.R. 95.4. There was admittedly
no request for FFP in the expenditures at issue, so obviously there was
no claim for them within the requirement of the regulation. The
notations by the State on the QERs of the amounts it had paid providers
above the upper limits (and for which it voluntarily did not seek FFP)
did not constitute a claim within any provision of the statute or
regulation.

Alaska also argued that its footnoted "claims" satisfied the policy
concerns underlying the timely claims statute, namely, that the federal
government be able to plan its budget by knowing its maximum possible
obligation for a particular year within a reasonable time after the end
of the year. Alaska Br., pp. 19-20, n. 10.

While part of the original and general purpose behind the statute may
have been to help federal agencies plan their budgets, the statute is
nevertheless a clear bar to federal funding for claims which are not
timely filed. The evidence supports a finding that the expenditures set
out in QER footnotes were not "claims" for federal funding under the
statute. Thus, unless the exception or waiver criteria apply, section
1132(a) of the Act bars federal funding for the State's August 1987
claim for these expenditures.

II. ALASKA'S CLAIM AS AN AUDIT EXCEPTION

On its face, the claim for expenditures between October 1, 1983 and June
30, 1985, filed on August 7, 1987, was untimely. We consider next
whether the claim comes within any of the statutory exceptions.

Section 1132(a) of the Act provides that the two-year filing limit does
not apply to "expenditures involving court-ordered retroactive payments
or audit exceptions, or adjustments to prior year costs."

There is no issue of court-ordered retroactive payments, nor has the
State asserted before the Board that its claim constituted an adjustment
to prior year costs. The State did contend that its claim came within
the "audit exception" provision.

The statute does not define an "audit exception." The regulation
defines "audit exception" as a "proposed adjustment by the responsible
Federal agency to any expenditure claimed by a State by virtue of an
audit." 45 C.F.R. 95.4.

Alaska argued that its August 1987 claim resulted from a proposed
adjustment by the responsible Federal Agency, HCFA, in a federal audit.
HCFA argued that the exception did not apply because the State never
made a claim in the first place. Therefore, HCFA did not make any
proposed adjustment to expenditures. HCFA Br., p. 14.

It is true that Alaska never did make a claim for the specific amounts
in the disallowance in this case before August 1987; we found above that
the footnoted amounts were not "claims". Alaska did, however, make
claims each quarter on a QER for expenditures for payments to LTC
facilities. The audit in question considered the amounts of these
claims for expenditures, and found that Alaska had overclaimed for some
periods and underclaimed for others; it was, therefore, a proposed
adjustment to expenditures claimed by the State.

So far as Alaska's August 1987 claim sought the amounts underclaimed,
based on the audit in question, it came under the regulatory definition
of a claim based on an audit exception. See, e.g., New York State Dept.
of Social Services, DAB No. 521 (1984).

The audit in question is entitled "Report on the Application of the
Medicare Ceiling Provision to Medicaid Reimbursement, State of Alaska
Inpatient Hospitals and Long-Term Care Facilities, July 1, 1983 through
June 30, 1985." Alaska Tab 19. Although this is called a "Report", and
is referred to as a "review" in the forwarding letter, it is clear that
it is an audit as we have recognized that term. See Minnesota Dept. of
Human Services, DAB No. 911 (1987); Oklahoma Dept. of Human Services,
DAB No. 809 (1986).

The forwarding letter stated that the review was performed by the HCFA
Regional Office in Seattle. The federal government accepted it because
the responsible federal agency, i.e., HCFA, proposed to make an
adjustment in the claims for prior years based on the Report. 8/ The
proposed adjustment appears (at page 8 of the Report) under the heading
Recommendations. 9/ The auditors recommended that the State make an
adjustment on the next HCFA 64 report. It is stated as a decreasing
adjustment because it includes both hospital and LTC Medicaid payments,
and HCFA offset the underclaimed LTC payments against the much larger
overclaimed hospital payments to arrive at a net figure due from the
State. However, for the two fiscal years included in the report, 1984
and 1985, the payments made by the State to LTC facilities were in fact
under the Medicare ceiling by a net amount, for the two years, of
$567,259. Therefore the recommended adjustment for LTC facilities
alone, without hospitals, was an increasing adjustment, i.e., the State
had underclaimed.

The disallowance in this case covers only FFP claimed for payment to LTC
facilities, and not hospitals, so we concern ourselves only with the
part of the report applicable to payments to the LTC facilities. In
fact, for one of the two years the State had overclaimed, according to
the report, by claiming $150,136 over the Medicare ceiling for 1985 and
underclaimed, for the other year, by claiming under the Medicare
ceiling, in the amount of $717,395 for the 1984 fiscal year. As to this
latter amount (so far as it is included in the disallowance in this
case) the audit exception principle certainly should apply. If HCFA can
ask the State to make a decreasing adjustment and pay back amounts of
payments to LTC facilities which the report found to be over the
Medicare ceiling, then it must permit the State to ask for an increasing
adjustment in the amounts underclaimed by claiming for amounts which the
report found were under the Medicare ceiling.

The audit exception provision of the statute would be meaningless if it
did not apply to a situation such as the one here. In New York, we said
(at page 9) that if the audit "is accepted by the responsible federal
agency, then the state may recover FFP in the underclaim, just as the
federal agency can recover back FFP if there is an overclaim."

HCFA cited our decision in New York State Dept. of Social Services, DAB
No. 982 (1988), in support of its position that the exception in the
statute for a claim based on an "audit exception" did not apply here
because the federal government must accept the proposed adjustment in
order to have an audit exception. In New York, we said (at page 4) that
HCFA did not accept the proposed upward adjustment in the audit in
question by accepting New York's downward adjustment of its claims.
However, the audit there was a state audit, and we found that the mere
fact that New York voluntarily reduced its claim for FFP in one item
which was beyond the filing period did not mean that New York's claim
for additional FFP on other items in the same state audit had to be
similarly accepted as timely.

Here, HCFA clearly accepted the entire audit by making a recommendation
that the State return a substantial amount of FFP based on that audit.
Even as to a state audit, we said in New York, supra, that if HCFA
adopted the entire audit, then "it could not pick and choose between
specific claims based on it." Id. at 7, n. 3. Since HCFA accepted the
entire audit by asking the State to make refunds based on it, a claim
based directly on that audit must be recognized as filed timely as an
"audit exception." 10/

We must assume on the record before us that the amount of the underclaim
for LTC facilities for 1984 was included in the disallowance in this
case because Alaska stated that its claim in August 1987 was a claim for
amounts it voluntarily had not claimed for the years 1984 through 1986.

It may be that the State has already received payment for at least part
of the amount the report identified as an underclaim. The later report,
which is HCFA Exhibit C, is dated February 12, 1988, which was after the
State claim in August 1987. However, the forwarding letter states that
it finalizes HCFA's position and report on the Medicare limit
"applicable to Medicaid reimbursement in Alaska for Fiscal Years 1984
and 1985." This letter states that in July 1987 the State had concurred
with amounts applicable to the "gross" excess payments to LTC
facilities, and made a decreasing adjustment. So far, of course, as the
State has received payment of any part of the underclaim listed in the
February 1987 report by offsetting this against any overclaim, HCFA
would not have to pay the State again.

In light of the above discussion, we conclude that any amount listed in
the February 1987 report as an underclaim by the State for FFP in
payments to LTC facilities (and included in the disallowance in this
case) would meet the requirement for an audit exception to the timely
filing statute when the State filed its claim in August 1987. As far as
the particular amount identified as underclaimed, the timely filing
statute would not bar consideration of that claim on its merits. HCFA
would of course not have to pay any amounts already paid or credited to
the State.

III. THE FAIRNESS ARGUMENT

Alaska argued that "fairness" dictated treating the August 1987 claim as
timely filed. Alaska Br., p. 20; Alaska Reply Br., p. 14. This
argument was predicated partly on the State's appeal before the Board on
the merits of the upper limits controversy, Board Docket No. 88-217,
and the audit which presumably led to it. We do not in this case review
the merits. In fact, we refused to consolidate that case with this one
because the legal issues are different.

The State also contended that one reason Alaska delayed filing its
August 1987 claim was HCFA's approval of the 1985 and 1986 State plan
amendments on long-term care reimbursement and its acceptance of the
accompanying upper limits assurances, despite the fact that HCFA was
aware that payments at the rates under its State plan in fact exceeded
the upper limits. The State's argument was that HCFA "should have
known" that its approval of the plans "could reasonably be taken" as an
indication that it would be "appropriate" for the State "to claim
amounts previously netted out of its claim." Alaska Reply Br., p. 15.
However, none of this, even if true, eliminates the timely filing
requirements of the statute.

IV. HCFA'S DENIAL OF ALASKA'S WAIVER REQUEST

Section 1132(b) of the Act provides for a waiver of the two-year filing
limit on claims for federal funding for good cause. The implementing
regulations define good cause as "lateness due to circumstances beyond
the State's control." Such circumstances include, but are not
necessarily limited to, acts of God and documented action or inaction by
the federal government. The regulation also states that circumstances
beyond a state's control do not include neglect or a state's
administrative inadequacy. See 45 C.F.R. 95.22; see also 46 Fed. Reg.
3528 (January 15, 1981).

Alaska recognized that there is an unresolved issue as to whether we may
properly review the Secretary's decision to deny a request for a waiver
of the two-year filing limit. Nevertheless, the State noted, somewhat
inaccurately, that we had reviewed the merits of similar arguments by
two other states, citing Tennessee Dept. of Health and Environment, DAB
No. 921 (1987), and Hawaii Dept. of Social Services and Housing, DAB No.
662 (1985). Alaska Br., pp. 24-25. 11/

Additionally, Alaska correctly noted that the preamble to the
implementing regulations did not limit the definition of good cause to
the circumstances enumerated in the regulation. Thus, Alaska asserted,
the regulatory standard was more flexible than evidenced by HCFA's
decision in denying the waiver. Alaska also argued that HCFA abused its
discretion in refusing the State's request for a waiver. Finally,
Alaska contended that HCFA's rejection of Alaska's request for
reconsideration of the waiver was so cursory as to be arbitrary. Alaska
Br., pp. 25-27; Alaska Reply Br., p. 22.

HCFA argued that, since the decision to waive the two- year filing limit
is entirely within its discretion, its decision to deny Alaska's request
for a waiver is not subject to Board review. Alternatively, HCFA
asserted that Alaska failed to satisfy the regulatory criteria for a
waiver. Specifically, HCFA argued that the record was bereft of
"documented action or inaction of the Federal government" which would
provide good cause for the State's untimely filing. HCFA noted that the
evidence in the record belied the State's assertion that HCFA had
encouraged the State's concern that it would lose all FFP if it overpaid
its providers. HCFA asserted that the State knew, prior to the period
covered by its claim, that there was no basis for its fear of losing its
Medicaid funding. Rather, HCFA contended that the evidence clearly
demonstrated that Alaska voluntarily did not claim the federal funding
for the expenditures in issue. Therefore, the State did not satisfy the
definition of good cause established at 45 C.F.R. 95.22(a), i.e.,
lateness due to circumstances beyond a state's control. HCFA Br., pp.
24-28.

Nothing in the argument of either party has shed any new light on the
question of whether the Board may review HCFA's decision denying a
waiver of the two-year filing limit. 12/ In any event, as in Tennessee
and Hawaii, we do not need to reach that question here. The record
shows that HCFA gave full consideration to the State's request and made
a reasoned determination to deny the waiver after consideration of all
the circumstances. After reviewing the record, we find that HCFA's
decision was not arbitrary, so that we would be required to affirm the
denial in any event. Accordingly, even if we might reach a different
decision if it was our function to consider the waiver request, this
would not justify reversing HCFA's determination.

The heart of Alaska's argument for a waiver of the two- year filing
limit is that it was the:

Agency's action in cautioning the State not to claim FFP in
expenditures above the published upper limits lest all FFP be
jeopardized that caused the State to delay its claim for FFP in
expenditures that it believed were within the upper limits as
properly interpreted and applied . . . .

Alaska Br., p. 25.

But the record indicates that is not what happened. When Alaska
implemented a prospective payment system for its LTC facilities, it
chose to pay the facilities at rates which it estimated were above the
Medicare upper limits. Alaska reasoned that its peculiar situation,
primarily its geography, required payments above the limits for its LTC
facilities to furnish appropriate services to their patients.

Alaska did not, however, claim FFP in expenditures above the published
upper limits. There is no basis in the record to support the theory
that Alaska delayed claiming for FFP in expenditures that it "believed
were within the upper limits as properly interpreted and applied."
Instead, the record is replete with statements that Alaska made a
conscious choice to pay facilities above what it computed were the upper
limits, but to claim FFP only up to the limits.

The June 14, 1983, letter from the Director of Alaska's Division of
Public Assistance to HCFA's Assistant Regional Administrator could not
be clearer on what Alaska intended--

the Alaska legislature intends to pay hospitals and nursing homes
in Alaska at a level higher than that permitted by application of
the Medicare rules . . . .

Alaska Tab 5, Ex. C.

This letter goes on to say that Alaska understood that this was of
concern to Medicaid officials, but Alaska "continues to understand that
it may elect to pay at a level higher than Medicare if it finds it
appropriate to do so." (emphasis added) The letter continued:

We further understand that this would not endanger all funds for
Medicaid operation in Alaska, but rather would simply mean that the
State could not claim the portion of the payments that exceed the
Medicare limit for federal reimbursement. If in any quarterly
period the State claimed an excess, repayment of the excess would
be the remedy HCFA would initiate.

Id. 13/

In its arguments before the Board, Alaska relied primarily on HCFA's
September 20, 1983 reply to the State's June 1983 letter as the basis
for its fear that claiming above what it then estimated to be the upper
limits would jeopardize all FFP in facility payments. The State argued
that HCFA's reply suggested a method for alleviating the State's
concerns, namely, by designating the portion paid to providers in excess
of the upper limits as an "unrestricted grant or contribution." Alaska
Tab 6, Ex. B.

Alaska mischaracterized this letter. HCFA's reply spelled out how
Alaska should go about amending its State plan in order to have a
prospective payment system in operation by October 1, 1983. HCFA
clearly recognized that Alaska intended to pay its facilities above the
upper limits, but claim FFP only up to the limit. In fact, HCFA
emphasized that Alaska should have a payment system "that ensures that
the portion of the payment in excess of the limit is not claimed for
FFP." Id.

Alaska acted on HCFA's suggestions soon after receiving the September
20, 1983 letter. Further correspondence confirms that Alaska's primary
objective was to determine how it could structure its rate system to pay
above the upper limits to LTC facilities; it was content to claim FFP
only up to the limits. See Alaska Tab 7.

The fact that Alaska consciously chose not to claim FFP in payments
above the estimated upper limits until it filed its claim in August 1987
is obvious from the State's first request for a waiver from the timely
claiming requirements. There, Alaska plainly stated that for the period
in issue here, and beyond, it withheld claims for FFP in expenditures
above its estimate of the upper limits. See Alaska Tab 6, p. 3. 14/

The State also contended that it did not file a claim for the amounts
above what it had estimated as the upper limits until August 1987
because 42 C.F.R. 447.257 did not go into effect until shortly before
that date. This regulation provides:

FFP is not available for a State's expenditures for hospital
inpatient or long-term care facility services that are in excess of
the amounts allowable under this subpart.

This regulation merely states that FFP is not available for expenditures
in excess of amounts allowable, i.e., above the upper limits. Moreover,
it simply does not pertain to the circumstance here of an overall state
system designed to pay rates in excess of the Medicare limits.

Additionally, Alaska stated that it decided to file its claim in August
1987 only after receiving a July 9, 1987, letter from HCFA assuring it
that doing so would not jeopardize its claim for all FFP. See Alaska
Tab 6, Ex. C. HCFA's letter did no more than reiterate that "at no time
did Alaska face a condition of denial of any Federal funding." Id. In
any event, the record shows that Alaska had decided at least as early as
June 19, 1987, to file the claim in issue here. See Alaska Tab 24.

While the State clearly understood that the Agency as a matter of
routine would require repayment of FFP claimed in amounts in excess of
the Medicare ceiling, it was also clear that this would ordinarily occur
in the context of a state's system which in general abided by the
Medicare ceiling limitations. The point is that Alaska sought to adopt
a rate setting system via its 1984, 1985, and 1986 plan amendments which
would have as its object the routine payment of rates for LTC services
which would exceed the Medicare ceiling requirements as these
requirements were understood by both parties to apply. The record
reflects a reasonable concern by Alaska that the object of its rate
setting system (i.e., to pay rates above the legal Medicaid limits)
could affect whether or not its plan amendments were in fact approvable
at all. See Alaska Tab 6, p. 3.

What is dispositive on the waiver question presented here is that the
State chose in light of the Medicare ceiling requirements to implement a
rate-setting system whereby payments up to the limits were to be claimed
for FFP under the Medicaid program but payments beyond the limits were
to be fully absorbed by the State at its choice. This choice was not
improperly induced by HCFA, however.

HCFA's initial denial of the waiver request traces, in detail, the
history of the parties' interaction with regard to amendments of the
State plan and the State's rate-setting system. This document evidences
full consideration of the reasons advanced by the State to support its
waiver request. See Alaska Tab 5, Ex. A.

Our review of the record disclosed no inconsistency in the application
of the Medicare ceiling by HCFA. Nor have we found any other factor
which would mandate HCFA to consider as timely filed these claims for
amounts beyond the Medicare ceiling. In essence the State regarded the
amounts in question as outside the Medicaid reimbursement system when it
filed its initial claims. There is no indication that HCFA's view of the
applicability of the Medicare limits to LTC facilities changed so that
it became clear later that it had been proper all along to claim FFP in
the entire amount at issue here. The record shows clearly that Alaska
chose to forgo claiming the FFP in question. When Alaska decided to
claim the FFP the two-year claiming limitation had run. We see no basis
for compelling HCFA to determine that Alaska established good cause for
a waiver of the two-year filing requirement.

Alaska also contended that HCFA's rejection of the State's request for
reconsideration of HCFA's waiver denial was "so cursory as to be plainly
arbitrary." Alaska Br., pp. 26-27. The State pointed out that discovery
showed that the Department of Health and Human Services (Department) had
in fact refused ever to find "good cause" for granting a state's waiver
request. Therefore, the State was "led to wonder" whether HCFA can apply
the good cause test for a waiver in a "non- arbitrary manner." Id. at
27, n. 18. HCFA did in fact consider in detail the new information in
the reconsideration request. The fact that the Department had never
granted a good cause waiver means nothing without some proof that there
was any merit in any of the requests. There is, in any event, no
provision in the regulations for reconsideration of a waiver denial.

Conclusion

We sustain the disallowance in part and reverse in part, as follows:

1. We find that Alaska did not file its claim for FFP within the
time required by statute and regulation.

2. However, we find that part of the amount disallowed qualifies,
in principle, for reimbursement as an audit exception to the timely
claims requirements. We cannot determine the exact amount based on
the record before us. For example, it is not clear how much has
already been paid or credited to Alaska, and the parties need to
determine whether the amount is affected by the inclusion of the
July 1 to September 30, 1983 quarter in the audit period. See
section II. above. HCFA should determine the amount, if any, which
qualifies under the audit exception and discussion above, and
advise the State. If the State contests this calculation, it may
return to the Board only on this issue within thirty (30) days
after receiving HCFA's determination.

3. We do not reach the question of whether we can review the
denial of a good cause waiver since, in any event, the facts show
that HCFA was not arbitrary in denying a waiver.

_____________________________ Cecilia Sparks Ford

_____________________________ Norval D. (John)
Settle

_____________________________ Alexander G. Teitz
Presiding Board Member

1. Alaska's Notice of Appeal informed the Board that the State was
asking HCFA to waive the two-year filing limit in accordance with
section 1132(b) of the Act. See Alaska Tab 6. After consulting with
the parties, the Board dismissed Alaska's appeal, without prejudice,
pending HCFA's ruling on the waiver request. See Order and Notice of
Case Closing, DAB Docket No. 88-162 (October 5, 1988). HCFA denied
Alaska's request for a waiver. See Alaska Tab 5, Exhibit (Ex.) A.
Alaska reinstituted this appeal on December 8, 1988 and also requested
that HCFA reconsider its decision to deny the waiver. See Alaska Tab 5.
HCFA denied Alaska's request for reconsideration. See Alaska Tab 20.

2. A retrospective payment system is one in which payment is made on
the basis of an interim payment rate set prospectively for an accounting
period, and in which payments may be retrospectively adjusted on the
basis of cost experience during the period at issue. See 42 C.F.R.
447.272 (1980).

Under a prospective payment system, a facility is paid for future
periods under a rate determined by cost reports or budget submissions
for a base year. Once the rate is determined, frequently by including
adjustments for inflation, payments to the facility are not ordinarily
subject to any adjustment.

3. On appeal, Alaska claimed expenditures for every quarter from
October 1, 1983 through June 30, 1985. However, Alaska indicated that,
unlike the other QERs for this period, its September 1984 QER did not
contain a footnoted "claim" for overexpenditures. See Alaska Br., p.
11, n. 5.

4. Neither party brought out the fact that these regulations
(published on February 3, 1989, effective April 4, 1989) implemented
section 9512 of COBRA pertaining to overpayments, and so were effective
only for overpayments identified for quarters beginning on or after
October 1, 1985. 54 Fed. Reg. 5453 (February 3, 1989). This
disallowance runs only through June 30, 1985. However, since HCFA did
not challenge Alaska's reliance on the policy statement in the
regulation on this ground, we consider the State's argument on its
merits.

5. The State argued that since dollars are fungible, it could not
really be said "whether State or federal dollars were the source of the
moneys that funded Alaska's long-term care reimbursement expenditures in
amounts above the published upper limits." Alaska Reply Br., p. 6.
Although this, by itself, would not be dispositive in any event, the
point is contradicted by an internal State memorandum dated October 21,
1986, which speaks of the State hoping to be able to claim (after
approval of later state plans) "50% of the expenditures which were above
the upper limit and paid with all state funds." Alaska Tab 16 (emphasis
added).

6. The regulation goes on to say that excessive provider payments
attributable to rate-setting systems are to be considered overpayments
subject to the regulation only if recovery of the federal share is
pursued for discrete amounts, rather than pursuing recovery by reducing
the provider's future per diem rates. Alaska did not have to make a
choice, since it had not sought FFP in any amounts and, therefore, did
not have to pursue recovery of the federal share in any manner. In
fact, it never intended to recoup any of the admitted overpayments from
the providers. See, e.g., Alaska Tab 5, Ex. G.

7. This argument was based on HCFA Ex. A, which was an affidavit by a
HCFA accountant stating that no State official had indicated that Alaska
intended to make a claim for FFP based on voluntarily withheld excess
upper limit expenditures prior to August 7, 1987.

8. We discuss the proposed adjustment in the Report since this was
available when the State filed its claim in August 1987. Subsequently,
on February 12, 1988, the recommendations were finalized. See HCFA Ex.
C.

9. In pertinent part, the auditors stated:

We recommend that the State agency perform the following:

1. Make a decreasing adjustment on the next HCFA 64 report in the
amount of $3,548,615 ($1,774,308 FFP). This pertains to Medicaid
payments to LTC facilities and hospitals in fiscal years 1984 and
1985 that are in excess of the Medicare ceiling.

Medicaid Payments (Over)/Under the Medicare Ceiling
LTC Hospitals Total

FY 84 $717,395 $(1,946,763) $(1,229,368) FY 85 (150,136)
(2,169,111) (2,319,247) Totals $567,259 $(4,115,874)*
$(3,548,615) FMAP Rate 50% FFP
$(1,774,308)

* The Report listed this total as $4,115,879. Assuming the accuracy of
the overpayment figures for the two fiscal years, this is an obvious
transcription error.

10. The Report states that it begins on July 1, 1983. The
disallowance period does not start until October 1, 1983. We are unable
to determine from the record before us whether the amount covered by the
Report for the quarter from July 1, 1983 through September 30, 1983
would cause an increase or decrease in the amount of the "audit
exception." There may in fact be no adjustment necessary, since the
State did not operate under the prospective payment methodology until
October 1, 1983, and apparently had no problem with the upper limits
until then, since reimbursement was based on Medicare principles. So
far as any adjustment may be necessary, we direct the parties to
determine this amount. If they are unable to agree, they may return for
our assistance on this limited question within 60 days of receipt of
this decision.

11. In Tennessee, we found that the State failed to meet the
preliminary requirements for a waiver established at 45 C.F.R. 95.25 and
95.28. Tennessee, pp. 2, 5-6. In Hawaii, we noted that it was unclear
if we had "jurisdiction to pass on the correctness of the Agency's
exercise of discretion in denying a waiver." However, based on Hawaii's
"own contentions" we found that "denial of a waiver was clearly
correct." Hawaii, p. 4.

12. HCFA offered nothing more than a summary argument on the
discretionary nature of its authority to deny a request for a waiver.
It merely assumed its discretion and cited cases on the scope of
judicial review of a discretionary agency action. HCFA Br., pp. 25-26.
We note that there does not appear to be any language in the Act or
implementing regulations committing an agency's determination on a
waiver request solely to its discretion. Rather, as Alaska has pointed
out, the regulation merely provides that a waiver "shall" be granted
based upon a showing of "good cause." See 45 C.F.R. 95.34.

13. In this letter Alaska also mentioned the hardship for rural
facilities in applying the Medicare limits, and suggested asking the
Secretary of the Department of Health and Human Services for a waiver of
the upper limits for Alaska. In the September 20, 1983 reply to this
letter, HCFA stated that research had not disclosed any statutory basis
for a waiver of the upper limits. See Alaska Tab 6, Ex. B.

14. In fact, in the State's internal instructions for filing its
August 1987 claim, the language was:

Orlando, . . . this is your formal instruction to
claim the $7,925,478 which the state voluntarily
did not claim for long term care services . . . .
Alaska Tab 6, Ex. D