Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Indiana Department of Public Welfare
DATE: January 24, 1992
Docket No. 91-27
Audit Control No. A-05-89-00091
Decision No. 1294
DECISION
The Indiana Department of Public Welfare (State) appealed a
determination
by the Health Care Financing Administration (HCFA)
disallowing $1,019,701 in
federal funds claimed under Title XIX of the
Social Security Act (Act).
Indiana claimed these funds for inpatient
services furnished by Kingwood
Hospital (Kingwood), a Medicaid provider,
from October 1, 1986 through May
31, 1989. HCFA found that Kingwood was
an "institution for mental
diseases" (IMD) and, therefore, that federal
funds were not available for
services provided to individuals between
the ages of 21 and 65 who were
patients in Kingwood.
The State argued that any erroneous payments it made to Kingwood were
a
result of HCFA's certification of Kingwood as a hospital rather than
as
a psychiatric hospital. The State contended that if HCFA had
certified
Kingwood as a psychiatric hospital, state regulations would
have
precluded Kingwood's claims and these disallowed payments would
never
have been made to Kingwood.
We conclude that this disallowance should be upheld in full. Below
we
discuss the legal and factual background of the case and then
consider
the State's arguments.
Legal Background
A. Exclusion of Medicaid reimbursement for services provided in an IMD
Title XIX of the Act establishes a cooperative federal-state program
known
as "Medicaid" to enable states to furnish "medical assistance" to
eligible
individuals. Section 1901. Section 1905(a) defines "medical
assistance"
as payment for a range of services including inpatient
hospital
services. However, except for inpatient psychiatric hospital
services
for individuals under the age of 21, that section specifically
excludes
payment for services for individuals under the age of 65 who
are patients in
an IMD. See sections 1905(a)(1), (4)(A), (14), (15),
(16), (24)(B).
(Indiana has codified this exclusion at Indiana Code
section
12-1-7-14.9(a)(7), 470 Indiana Administrative Code 5-8-1(g)(4)
and
5-8-13(b)(1).) Therefore, a state is not entitled to
federal
reimbursement for inpatient services provided in an IMD to
Medicaid
patients between the ages of 21 and 65. 1/
As of 1988, section 1905(i) defined the term "institution for
mental
diseases" as ". . . a hospital, nursing facility, or other
institution
of more than 16 beds, that is primarily engaged in providing
diagnosis,
treatment, or care of persons with mental diseases . . .
." Prior to
that time, the Secretary promulgated regulations defining
an IMD as a
facility "that is primarily engaged in providing diagnosis,
treatment or
care of persons with mental diseases." 42 C.F.R.
435.1009. A facility
is determined to be an IMD if its "overall
character" is "that of a
facility established and maintained primarily for
the care and treatment
of individuals with mental diseases, whether or not it
is licensed as
such." Id. (emphasis added). Further, HCFA issued
specific guidelines
to states for identifying an IMD. State Medicaid
Manual, section 4390,
subsection B. Indiana law tracks federal
standards by defining the term
IMD to include all facilities which meet the
requirements of Title XIX
and related federal regulations. Indiana
Public Welfare Code section
12-1-7-14.9(7).
In Connecticut Dept. of Income Maintenance v. Heckler, 471 U.S.
524
(1985), the Supreme Court addressed the question of what type
of
facility can be considered an IMD. In that case, Connecticut
argued
that an IMD was limited to traditional state "mental
hospitals."
However, the Court upheld the Secretary's broad definition of IMD
under
which a facility such as an intermediate care facility may be an
IMD.
Id. at 529-30. In discussing section 1905(a)(1) of the Act, the
Court
specifically noted that a hospital may be an IMD. Id. at 529,
536.
B. Certification of facilities to participate in Medicaid
Separate from the question of whether a provider is an IMD is the
question
of the certification of the provider for participation in
Medicare and
Medicaid. 2/ In that process, a provider may be certified
by HCFA
pursuant to a range of provider classifications on the basis of
the
provider's staff, services, and physical plant resources. See 42
C.F.R. Parts
482-485. For example, a hospital may be certified as a
hospital or a
psychiatric hospital. 42 C.F.R. 482.11-482.42 (hospital)
or
482.60-482.62 (psychiatric hospital). To be certified as a
psychiatric
hospital, a facility must meet enhanced treatment and record
keeping
standards. 42 C.F.R. 482.60-482.62. The classification for
which
a hospital is certified determines the hospital's method
of
reimbursement. 42 C.F.R. 412.20-412.27.
Medicare/Medicaid certification is ordinarily a two-step process
involving
both the State and federal health agencies. 3/ First, the
State agency
responsible for the State hospital licensure (in this case
the State Survey
Agency of the Indiana State Board of Health) collects
an extensive range of
information concerning the facility's staff,
physical plant, and services.
4/ Section 1902(a)(33)(B). It then
transmits that information to
the HCFA Regional Office and recommends to
HCFA the certification
classification. The HCFA Regional Office has the
final authority to
determine whether a facility should be certified. 42
C.F.R. 488.11,
488.12; State Operations Manual, section 1008 at State
Ex. K.
Factual Background
As of 1984, Kingwood was licensed as an 89-bed hospital with a
distinct
part psychiatric unit of 36 beds. State Ex. C. In 1985,
Kingwood
increased its distinct part psychiatric unit to 58 beds.
Id. This unit
then comprised 66% of Kingwood's total bed
capacity. In 1985, Kingwood
was also sold to a corporation doing
business as PIA Psychiatric
Hospitals, Inc. State Ex. D. HCFA was
informed of this transfer. Id.
In 1986, Kingwood notified the State that it intended to increase
its
number of psychiatric beds from 58 beds out of 89 beds (66%) to 79
beds
out of 89 (88%). State Ex. Q. This notice was not provided
to HCFA.
State Ex. C. In 1986, Kingwood did, in fact, increase the
number of its
psychiatric beds to 79. State Ex. Q. However,
Kingwood continued to
report to the State and to HCFA in its certification
survey that its
distinct part psychiatric unit contained only 58 beds.
State Exs. F, G,
and H.
Until 1989, when HCFA retroactively reclassified Kingwood as a
psychiatric
hospital, Kingwood was certified by HCFA as a hospital
rather than as a
psychiatric hospital. State Ex. B. During this time,
Kingwood
repeatedly characterized itself as a hospital with a distinct
part
psychiatric unit. State Exs. F, G, H. The State Survey
Agency
repeatedly accepted Kingwood's designation and recommended that
HCFA
certify Kingwood as a hospital. Id.
In 1989, Kingwood informed HCFA that, as of 1986, 79 of Kingwood's
beds
were psychiatric beds. After that notice, HCFA determined that
Kingwood
should have been classified as a psychiatric hospital as of 1986 on
the
basis that at least 58 of its beds had been psychiatric beds. State
Ex.
C.
Subsequently, the Inspector General conducted an audit and determined
that
Kingwood was an IMD as of 1986. State Ex. B. The I.G. then
found
that Indiana had been overpaid during the period October 1, 1986
through
May 31, 1989 for reimbursements it made to Kingwood for patients
between
the ages of 21 and 65.
Analysis
The State agreed that Kingwood was an IMD during the
disallowance
period. Further, the State did not argue that a general
hospital could
not be an IMD. Rather, the State's argument may be
summarized as
follows: HCFA failed to properly review and consider
information HCFA
received from the State Survey Agency. Based on this
information, HCFA
should have classified Kingwood as a psychiatric hospital
as early as
1986. Had HCFA done so, under State regulations, Kingwood
would not
have been able to file Medicaid claims for patients between 21 and
65
and there would have been no overpayment. Transcript of October 4,
1991
conference (Tr.) at 6, 34-35. While the State recognized that it
had
made a mistake in continuing to accept Kingwood's representation that
it
was a hospital, the State argued that it would be inconsistent with
the
cooperative nature of the Medicaid program for the State to bear
the
entire burden for both parties' mistakes.
Below we explain why we conclude that, even if HCFA should have
classified
Kingwood as a psychiatric hospital, HCFA's failure to do so
would not provide
a basis for overturning the disallowance.
A. The State failed to articulate any legal theory for its position.
Title XIX contains a clear prohibition against payment for services
in
IMDs for patients between the ages of 21 and 65. However, the
State
failed to articulate any relevant legal theory in support of
its
position that it was entitled to these funds in spite of
this
prohibition. The State argued that its defense was in the nature
of
"last clear chance." Last clear chance is a tort theory which holds
that
the party "who has last clear chance to avoid damage or injury
to
another is liable." Black's Law Dictionary (1968). The State
did not
cite any authority for applying a tort theory to the
regulatory
relationship between grantee and grantor agencies.
The State also asserted that the disallowance was contrary to
the
cooperative nature of the Medicaid program. The Board has
repeatedly
concluded that the Medicaid partnership between state and
federal
governments does not relieve the states of the duty to administer
their
programs within the requirements of the Act and their own
statutes. See
Massachusetts Dept. of Public Welfare, DAB No. 262
(1982); New York
State Dept. of Social Services, DAB No. 311 (1982); Ohio
Dept. of Public
Welfare, DAB No. 637 (1985). This line of cases has
been upheld on
appeal. See e.g., Massachusetts v. Secretary, 749 F.2d
89 (1st Cir.
1984), cert. denied, 472 U.S. 1017 (1985); Perales v. Heckler,
762 F.2d
226 (2d Cir. 1985).
The Board concluded that it is appropriate generally for a state to
bear
the risk of improper payments to providers because the state is
the
primary administrator of the state program, and the state is in
the
better position to ensure that payments are not improperly made and
to
recoup payments that are improperly made. See Massachusetts, supra
at
13-14; New York, supra at 7. These considerations apply in this
case:
o The State was in a much better position than HCFA to
observe the
services offered at Kingwood and to determine whether Kingwood
should
have been certified as a psychiatric hospital rather than as a
hospital.
The State's survey team made repeated on-site visits to Kingwood
and had
direct contact with Kingwood.
o The State had a broader and more fundamental role than
HCFA in
reviewing the nature of Kingwood's services. Under State law,
the State
was responsible for the separate State process of licensing
facilities
as hospitals or psychiatric institutions.
o As of 1985, the State had information which should have
prompted
its survey team specifically to review whether the nature of
Kingwood's
services was shifting to almost exclusively psychiatric. The
State
Survey Agency knew that Kingwood had been sold to a corporation
doing
business as PIA Psychiatric Institute, Inc. which owned 12
other
facilities called "psychiatric institutes." Further, in 1986
Kingwood
informed the State that it intended to increase its psychiatric
beds
from 66% to 88%. 5/
o The State had the responsibility of ensuring that it did not
make
improper payments to IMDs. While its regulations prohibit payment
for
some services in IMDs, it could identify no state practice
for
identifying which institutions, other than psychiatric hospitals,
might
be IMDs. Tr. at 80-82; see also Audit Recommendations, State Ex.
B at
p. 12. Since general hospitals, intermediate care facilities
and
skilled nursing facilities can all be IMDs, the lack of a
practice
exposed the State to errors in this area. The Kingwood overpayment
was a
result of this programmatic failure to implement a methodology
to
identify IMDs.
o The State has direct recourse against Kingwood to recover
these
erroneous payments. 6/
Therefore, Indiana did not allege circumstances which would overcome
the
clear prohibition on federal funding for IMD services and its duty
to
administer its program in accordance with this prohibition.
B. Equitable estoppel is not a basis for overturning
this
disallowance.
The State argued that, but for HCFA's failure to reverse the
State's
determination that Kingwood was a general hospital, the State would
not
have paid Kingwood. This is essentially an equitable estoppel
defense.
However, even assuming the federal government may ever be estopped
on
grounds short of affirmative misconduct (which the State does
not
suggest was the case here), the State failed to meet its burden
to
demonstrate even traditional elements of estoppel. These elements
would
include that (1) HCFA made a misrepresentation; (2) the State
reasonably
relied on the misrepresentation; and (3) the State suffered a
detriment
as a result of the reliance. Heckler v. Community Health Services
of
Crawford County, Inc., 467 U.S. 51, 59-61 (1984); see also Office
of
Personnel Management v. Richmond, 110 S.Ct. 2465, 2471, 2476
(1990)
(government can never be estopped to pay money contrary to
Congress'
appropriation).
In this case there was no misrepresentation by HCFA to the State.
HCFA
merely accepted the State Survey Agency's conclusions about
Kingwood's
appropriate certification.
The second element of estoppel involves reasonable reliance. The
State
argued that, since HCFA had the final authority to determine
a
provider's classification, the State was entitled to rely on
HCFA's
acceptance of its recommendation. We disagree for several
reasons.
o While HCFA is vested with the authority to alter a
provider's or a
state's classification, it does not have the burden of
questioning every
decision a provider or state makes as to
classification. See section
1864. In fact, HCFA represented that
the classification is often a
matter of provider choice and the general rule
is that the providers'
choices are respected. Tr. at 10-11,
38-41. Therefore, nothing in the
Act, the regulations or HCFA's
operation standards establishes that a
state may rely on HCFA's acceptance of
the state's erroneous
recommendation to shield itself from its own error.
o The State Survey Agency was in a far superior position to
notice
and assess Kingwood's evolving character. The Survey Agency
visited and
observed Kingwood, reviewed its patient charts, talked with
its
administrators and medical personnel. In contrast, HCFA
Regional
Office's contact was limited to a review of documents prefaced by
the
State's recommendation that Kingwood was a hospital.
o The certification process is completely separate from the
process
used in determining whether a facility is an IMD. They are
different
determinations which involve different considerations.
Therefore,
HCFA's certification of Kingwood as a hospital was not a
reasonable
basis for the State to conclude that it was not an IMD.
o The definition of a psychiatric hospital in section
1861(f) looks
to the nature of services rather than number of beds. For
example, a
majority of a facility's beds could be psychiatric but, if it was
not
filling those beds, it could still be a hospital. Therefore, the
fact
that the State informed HCFA that 66% of Kingwood's beds were
in
Kingwood's psychiatric unit is not sufficient to charge HCFA with
the
knowledge that Kingwood was a psychiatric hospital. 7/
o The definition of an IMD is related to many factors, only
one of
which is the number of patients with mental diseases. State
Medicaid
Manual, section 4390 B. at HCFA Ex. A. Further, a number of
mental
disorder diagnosis codes are exempted from being considered
mental
diseases for purposes of determining IMD status (e.g., organic
brain
syndrome or autism). State Medicaid Manual, section 4390 D. at
HCFA Ex.
A. Therefore, the fact that the State informed HCFA that 66%
of
Kingwood's beds were in Kingwood's psychiatric unit is not sufficient
to
charge HCFA with the knowledge that Kingwood was an IMD.
The final element of estoppel is detriment. We find that the
State
failed to establish detriment because (1) there was no showing that
the
State would not have incurred expenses for the patients in some
other
State-funded institution if they had not been placed in Kingwood,
and
(2) there was no showing that the State cannot recover these funds
from
Kingwood.
Therefore, we conclude that HCFA's failure to reverse the
State's
recommended classification of Kingwood as a hospital does not create
an
estoppel defense to this disallowance.
Conclusion
On the basis of the foregoing analysis we uphold this disallowance
in
full.
_______________________________ Donald F.
Garrett
_______________________________ Norval D. (John)
Settle
_______________________________ Judith A.
Ballard Presiding Board
Member.1. Section
1905(h)(1)(C) provides that an individual who
was
receiving inpatient psychiatric services immediately preceding
the date on
which he attained age 21 may continue to receive them until
the individual
attains the age 22.
2. Hospitals receiving payment under Medicaid must meet
Medicare
participation requirements. 42 C.F.R. 440.10. Therefore,
to
participate in Medicaid as a psychiatric hospital, a hospital must
meet
the Medicare standards set forth at section 1861(f) of the Act and
42
C.F.R. 482.60-482.62. Section 1861(f) defines "psychiatric hospital"
as
an institution which "is primarily engaged in providing . .
.
psychiatric services for diagnosis and treatment of mentally ill
persons
. . . ."
3. While the state ordinarily has a role in certifying Medicare
and
Medicaid facilities, that role differs according to the federal
program
involved. In both programs, the state has the responsibility
of
actually conducting the survey and gathering the information
to
ascertain whether the provider meets the conditions of
participation.
For Medicaid-only facilities, the state certifies the facility
and
enters into a provider agreement with the facility. For
Medicare-only
facilities and Medicare/Medicaid facilities, the state
certification
serves as a recommendation to the HCFA Regional Office.
42 C.F.R.
488.12. Kingwood was both a Medicare and Medicaid
facility.
4. The certification review is conducted pursuant to detailed
federal
forms which require the State survey agency to examine virtually
every
aspect of how the facility manages it business. See 42 C.F.R.
488.26.
For example, for hospitals the State survey agency must review
the
hospital's licenses, its personnel's licenses, its governing
structure,
its admitting practices, its institutional plans for budgeting,
its
medical staffing and nursing staffing, its pharmaceutical services,
its
food services, and its physical environment. See 42
C.F.R.
482.11-482.42. In this case, the State survey agency also
completed the
federal inspection form for a distinct part psychiatric unit
(Form
HCFA-437 at State Ex. G), which concerns the personnel, medical
records,
standards for psychiatric evaluations, treatment plans, progress
notes,
discharge planning, and nursing, psychological, social and
therapeutic
services.
5. The State argued that this was simply a statement of intent,
and,
subsequently, Kingwood failed to report that it had expanded
its
psychiatric unit. Tr. at 56. However, this letter provided
additional
information which should have put the State Survey Agency on
notice to
look beyond the provider's representations and to focus on the
overall
nature of Kingwood's services.
6. In the hearing, the State argued that HCFA's
retroactive
reclassification of Kingwood as a psychiatric hospital
somehow
diminished the State's recourse against Kingwood. In fact, HCFA's
action
would seem to improve the State's position against Kingwood since
the
State represented that Kingwood received enhanced
retroactive
reimbursement as result of the reclassification. Acceptance
of the
benefit of the reclassification would seem to subject the facility
to
the detriment of that status, i.e., preclusion of claims for
certain
categories of Medicaid recipients.
The State's recourse against Kingwood is also strengthened by the
fact
that Kingwood underreported the number of its psychiatric beds by 22%
in
the 1986, 1987, and 1989 surveys. State Exs. F, G and H.
7. Indiana submitted an affidavit from the Director of Medicaid
Program
Operations. State Ex. P. She represented that a HCFA Region V
Program
Representative in the Survey and Certifications Operations Branch
told
her that it was an oversight by HCFA not to have taken action
to
reclassify Kingwood as of 1985 and that, as a general rule of thumb,
the
HCFA Regional Office considers a facility to be primarily engaged
in
providing psychiatric services when 50% or more of its total
bed
capacity is devoted to psychiatric services. We do not find
this
affidavit to be compelling for several reasons. There is no showing
this
HCFA official had authority to articulate HCFA policy. Further, a
"rule
of thumb" hardly constitutes promulgated policy and there is no
showing
that this "rule" was memorialized in any instructions to state
surveyors
or HCFA reviewers. Finally, the "rule" looks to the use of
the beds
rather than the actual number of beds that are designated
as
psychiatric. As HCFA explained, a facility could have the majority
of
its beds designated as psychiatric and still be general hospital if
it
was not using all of its psychiatric beds. Tr. at
25.