GAB Decision 151
February 26, 1981 New York Department of Social Services; Docket No.
80-108-NY-HC Ford, Cecilia; Malone, Thomas Settle, Norval
On June 13, 1980, the New York Department of Social Services (State)
appealed the May 15, 1980 disallowance by the Health Care Financing
Administration (Agency) of $148,312,578 in federal financial
participation (FFP) for expenditures for public intermediate care
facilities for the mentally retarded (ICF/MRs) for the period April 1,
1974 through September 30, 1979. The issue before the Board is whether
the State was precluded in 1979 from promulgating upward adjustments in
the daily rates applicable from 1974 to 1979 for services in its ICF/
MRs by the provision in the New York State Plan for Medical Assistance
for reimbursement of ICFs on a fee schedule basis. /1/ According to the
Agency (Hearing Transcript, p. 12), as of April 1, 1979, for costs
incurred during that quarter, the State ceased making fee schedule
adjustments retroactively. The Agency has therefore withdrawn the
portion of the disallowance for the period April 1, 1979 through
September 30, 1979 -- $24,482,244 -- leaving $123,830,334 the amount in
dispute before this Board. At a hearing before the Board on December 8,
1980, the Agency stated that whether the State had failed to reimburse
its ICF/MR facilities on a reasonable cost-related basis since July 1,
1976 (and the subsidiary issue of whether publicly-operated facilities
were being reimbursed differently from privately-operated facilities) is
a compliance issue and not a proper basis for the disallowance
(Transcript, p. 11). The Agency, accordingly, withdrew this as the
basis for the disallowance.
Our decision is based on the State's application for review and
extensive documentary supplements, a compilation of documents provided
by the Agency, the Agency's response to the appeal, both parties'
pre-hearing submissions, the transcript of the hearing, and both
parties' pos-hearing briefs. /2/ We find that the Agency has submitted
no convincing evidence or argument which would support, in this case, a
conclusion that New York is precluded from retroactively amending its
fee schedule, and we therefore hold that the disallowance should be
reversed. However, we recognize that the Agency still may examine the
claimed costs to determine their allowability.
Statutory and Regulatory Background
Title XIX of the Social Security Act, 42 U.S.C. Sec. 1396, et seq.,
provides for the Establishment of cooperative federal-state programs,
commonly called "Medicaid," to provide payments for "necessary
medical
services" rendered to certain "needy individuals whose income and
resources are insufficient to meet the cost of these services." 42 U.S.
C. Sec. 1396. States are not required to institute a Medicaid program,
but if they choose to do so, they must submit to the Secretary a
satisfactory "State plan" which fulfills all requirements of the Act.
42 U.S.C. Sec. 1396a. The Secretary must approve a plan which meets all
requirements of the statute and implementing regulations. 42 U.S. C.
Sec. 1396(b). The state thereupon becomes entitled to grants of federal
funds in reimbursement for a portion of the expenditures which it has
made in providing specific types of medical assistance (including
intermediate care services) to eligible individuals under the plan and
in accordance with federal conditions. 42 U.S.C. Sec. 1396b.
Development of the New York Fee Schedule and the State's Arguments
Pursuant to the New York Mental Hygiene Law, the Office of Mental
Retardation and Development Disabilities within the Department of Mental
Hygiene was responsible for the operation of public ICF/MRs, which were
providers for Medicaid purposes. The New York State Plan for Medical
Assistance (the State Plan), attachment 4.19-B, stipulated that the
method of reimbursement for ICFs would be a "fee schedule." The fee
schedule was revised annually by the State but was not part of the State
Plan. FFP had been provided for ICF/MRs under the Plan since attachment
4.19-B was approved by the Agency effective April 1, 1974. The
Department of Mental Hygiene, under its cooperative agreement with the
single State agency (the Department of Social Services), billed the
Department of Social Services for "actual and necessary care and
services to patients" (Cooperative Agreement, pp. 85-86, Section III of
the second of two volumes of documentation submitted by the State to the
Region after the State's claims were deferred).
The development of the fee schedule was tied to the State's budgetary
process. A preliminary budget request for State-operated ICF/MRs (which
included a number of direct and indirect cost components) was reviewed
through various administrative levels before becoming part of the
Governor's budget request to the State legislature. Once the State
legislature determined the amount it would allocate to operate State-run
ICF/MRs, the State-wide per diem rate was determined based generally
upon the budget allotment, divided by the projected number of patient
days for ICF/MR care anticipated by all facilities. Each facility
received the flat per diem rate for each day of patient care. The
rate-setting process remained the same throughout the years in question.
Once determined, the rate was then promulgated in duly published State
regulations as part of the fee schedule (14 NYCRR, Chapter III, Section
60.1 (1974-1978), 14 NYCRR, Chapter III, Section 62.1 (1979)). The
upward adjustments to the rates in question here were promulgated in an
amended regulation on June 27, 1979.
For the first 2 1/2 years involved in this appeal, up to October 1,
1976, Sec. 43.01(a) of the New York Mental Hygiene Law stated that the
Department of Mental Hygiene had the authority to charge fees for its
services to patients and in (b) stated:
The commissioner, by regulation, shall establish fee schedule which
may include part of all of the costs of services, care, treatment,
maintenance, overhead and administration.
Effective October 1, 1976, Sec. 43.01(b) read:
The commissioner, by regulation, shall establish fee schedules
annually for inpatient and noninpatient services which shall be based on
the costs of services, care, treatment, maintenance, overhead, and
administration....
In 1979, Sec.43.01(b) remained as cited above, but further amendment
of Sec.43.01 added, inter alia, paragraph (c) which states in part:
Notwithstanding the foregoing, the commissioner may establish, at
least annually, schedules of rates for inpatient services that reflect
the costs of services, care, treatment, maintenance, overhead, and
administration which assure maximum recovery of such costs....
According to the Principal Budget Examiner in the Mental Hygiene and
Substance Abuse Unit, New York State Division of the Budget, who
testified at the hearing:
It has also been long a matter of state policy that in the
establishment of fees associated for state services that such fees are
related to the cost of the service being provided and that they do
insure a maximum recovery, a maximum allowable recovery. (Transcript,
p. 24)
In 1978, the State determined that its per diem rates used in
claiming FFP from April, 1974 resulted in systematic underclaiming. The
State undertook an extensive study and determined that the rates per
patient day should have been higher than those originally utilized.
Alexander Grant & Company, a national accounting firm, was employed by
the State to determine the reimbursable inpatient costs during 1974-1978
and to assist State staff in determining the costs for 1979. The
process of recalculation was finished in mid-1979. In June 1979, the
State submitted its Quarterly Estimate of Expenditures for the quarter
ended September 30, 1979. The statement included an adjustment to prior
claims for ICF/MR services.
The amount in dispute is $123,830,334. The State has asserted that
it expended $600 million annually in the ICF/MR program (Transcript, p.
74). Therefore, the claim represents approximately three percent of the
total amount expended in the program during the period in question.
The State Asserts, and the Agency has not refuted, that the
underclaiming involved two major cost areas. The first has been called
"the six month lag." Billing was based on rates reflecting the budgeted
costs for each State fiscal year which ran from April 1 to March 31.
For the period in question, however, the rates were not implemented
until October 1, the midpoint of the fiscal year, and were in effect
until September 30 of the following fiscal year. Therefore, the rates
in effect during the period April 1 to September 30 of any year were
based on the lower budgeted costs for the prior fiscal year. For
example, if there had been a seven percent salary increase for State
employees which went into effect at the beginning of the fiscal year,
that increase would not have been reflected in the federal reimbursement
rate for another six months (Transcript, pp. 75-76). Since the rates
were never adjusted to account for this six-month delay in application,
the original Medicaid claims did not accurately reflect the costs
incurred. In response to a question at the hearing, the Deputy
Commissioner for Administration of the Department of Social Services
admitted:
I don't think there is any other way around it than to say that we
simply overlooked this six month time lag a lot longer than we wish we
had. I don't know that we could really say a lot more about it except
it was a classic goof by the state. (Transcript, p. 160)
The other major cost area was unclaimed items which the State asserts
were reimbursable. Some expenses, such as certain asset depreciation,
bond interest, Facilities Development Commission management fees,
aborted project costs, costs of certain education services, costs of
dentistry services, and patient clothing costs, had either been
underclaimed or inadvertently omitted in the development of the original
rates. The process used to find and claim these costs is described in
detail in the May 25, 1979 report done by Alexander Grant and Company,
Section II, which was included in the first of two volumes of
documentation submitted by the State to the Region after the State's
claims were deferred.
In general, the State's position is as follows:
An agency may come to the realization that it has set rates that do
not reimburse the reasonable allowable costs of facility operation until
some time has elapsed after the expenditures have actually been made.
Neither the statute nor the regulations bar the submission of claims for
such amounts. Here, the claims were developed on the basis of improved
information as to items that were claimable at the outset. A systemic
error due to a lag in application of the annual fee schedule described
in the State Plan has been identified and corrected. The resulting
inputs have been recast into revised rates based not on budgeted costs
and projected eligible patient days, but on actual allowable costs and
actual patient days. The result is a reimbursement request that better
describes the items of expense which the State has incurred, and, to
date, met from its own funds. (Application for Review, p. 29)
The State admits that because facility rates were set in advance,
based upon the budget, there was the possibility that the actual
expenditures would differ from the projected expenditures upon which the
rates were based but argues that the retroactive claim was not directed
at this built-in imprecision (Grantee's Response to Board Questions,
page 24). The State asserts that the retroactive claim involved no
change from prior methodology. However, the State also admits that the
recalculation of the claims was based on actual costs and actual patient
days because those actual figures were then available. So, technically,
while the methodology might have been the same for the calculation of
both the original and the adjusted rates, the figures used to compute
the adjusted rates were not those that would have been used had the
original rates been calculated to account for the unclaimed items and
applied as of the beginning of the State's fiscal year. Therefore, the
recalculations included not only omitted costs and readjustment for the
six month lag but also reflected actual instead of estimated costs.
Agency's Position
The Agency's position is that a fee schedule is non-adjustable.
"There is a predetermined flat rate applicable to all providers of
services that remains fixed with no adjustments for any given cost year"
(Response to Appeal, p. 13). "What the State casually passes off as a
...'fine tuning'...and 'technical inprovement'...cannot be seriously
anything less than a massive readjustment to fees origninally fixed and
codified by state regulation" (Response to Appeal, p. 14). The State
proposed and the Agency approved a plan that specified that
reimbursement for ICF/MR services would be made on the basis of a fee
schedule. The retroactive adjustments were not computed according to
the methodology which HCFA claims was agreed upon by the parties and did
not represent expenditures for "medical assistance under the state
plan."n3
At the hearing and in its post-hearing brief, the Agency argued that
a fee schedule is a common reimbursement methodology used in all avenues
of commerce and it is a "stated price for a service known in advance by
both provider and receiver of the services and constitutes payment in
full for the service rendered" (Agency's Post-Hearing brief, p. 2). "To
retroactively adjust a fee schedule would be to negate its primary
character" (Post-Hearing brief, p. 3).
Discussion
It is clear from the federal Medicaid statutory scheme that when a
state plan is approved, a state becomes entitled to FFP in reimbursement
for a percentage of the costs of the state medical assistance
program.The court in State of Ga. Dept. of Human Resources v. Califano,
446 F. Supp. 404 (N.D. Ga. 1977) at 405 stated:
Pursuant to Title XIX, any state which administers a medical
assistance (Medicaid) plan that has been approved by the Seceretary of
HEW pursuant to the provisions of 42 USC 1396a is entitled to federal
financial participation in its Medicaid program. This federal financial
participation is in the form of a reimbursement for a percentage of the
total amounts spent by the state for medical assistance pursuant to the
approved state plan.
There has been no argument in this case that FFP would not have been
available had the State taken into consideration the six month lag and
the previously unclaimed items, assuming their allowability, when
calculating and applying its initial rates.
The relevant section of the State Mental Hygiene Law, under which the
fee schedules were developed and then adjusted, required that the fee
schedule reflect the costs of ICF/MR services. During the period of the
claim, the mandate had changed from a pre-1976 statement that the
schedule "may include part or all of" costs to a 1976 statement that
the
schedule "shall be based on" costs to the language added in 1979 that
the schedule "reflect the costs . . . which assure maximum recovery of
such costs."
The State has asserted, and the Agency has not contested, that the
fee schedule was set originally to capture the actual costs incurred.
This assertion is supported by the testimony of the Principal Budget
Examiner cited on page 4 of this decision and bolstered by the terms of
the agreement between the single State agency and the Department of
Mental Health noted on page 3 of this decision. In addition, given the
State statutory requirements, it would be illogical to assume that the
State would deliberately set up a reimbursement methodology that would
not capture all possible allowable costs. The description of how the
State originally set the fee schedule rate shows that, given the
constraint of having to determine an amount before the costs were
actually incurred, the State attemped to project its actual costs based
on past indicators.
The Agecny has not cited any federal statute or regulation which
expressly defines what a fee schedule is. In the absence of an express
rule, the evidence presented by the Agency does not support the
conclusion that New York's fee schedule could not be adjusted
retroactively. The Agency's position is that a fee schedule has no
unique or special meaning within the context of the Medicaid program but
is a concept known "to anyone who has ever been to a doctor's office, a
dentist's office, or a lawyer's office" (Agency's Post-Hearing brief, p.
2). HCFA has emphasized the testimony of the Director of the Division
of Alternative Reimbursement for HCFA who stated that he had never heard
of a fee schedule that was retroactively adjusted (Transcript, p. 96).
Yet this witness admitted that he had never read Article 43 of the New
York Mental Hygiene Law and that no one had ever explained to him the
provisions of that statute regarding the use of costs in generation of
the fee schedule (Transcript, p. 103). Examples given by the Agency to
support its argument include that of a midwife who charges a chicken to
assist the birth of a baby (Transcript, p. 100) and a podiatrist who
bills a Medicaid-eligible patient for a footmold and then subsequently
renders another bill which is based on a higher fee since the original
billing failed to cover all the podiatrist's costs (Transcript, p. 50).
As the State points out, the first example is not analogous to the
situation in this appeal since the fee of a chicken is a market price.
The department administering the ICF/MRs in New York was not functioning
in a marketplace since it was operating the ICF/MRs and, under State
law, was to set cost-related rates.n4 In the second example, a situation
in which an individual provider is billing for service to an individual
client in a noninstitutional setting, there was no state law requiring
that the outpatient fee be cost-related (Transcript, pp. 52, 54). In
addition, the State has indicated that its requirement that such fees
represent "full and final payment" implemented 42 CFR 447.15 which
requires that "(a) State plan must provide that the medicaid agency must
limit participation in the medicaid program to providers who accept as
payments in full, the amounts paid by the Agency" (State's Post-Hearing
brief, p. 23).
We might have found the Agency's argument persuasive if the positions
of the State and the Agency were analogous to vendor and purchaser
engaged in a marketplace transaction. There, principles of
consideration and notice would support the conclusion that a fee charged
for a particular service completes the transaction between the parties.
It is clear, however, that the State and Agency were not a vendor and
pruchaser engaged in a market- place transaction. The Agency was under
a statutory mandate to participate in costs incurred under the New York
State Plan, and the State was in essence purchasing services from itself
through its ICF/MRs and not only had to bear the costs associated with
operating these facilities but also had a statutory mandate to set fees
which reflected those costs.
As the State indicates, the term "fee schedule" has various meanings.
It can be a minimum fee schedule (See Goldfarb v. State Bar of Virginia,
421 U.S. 773 (1975)), a maximum fee schedule (as in New York's
compendium of "Fee and Rate Schedules" for services rendered in
noninstitutional settings), and an advisory fee schedule (See U.S. v.
American Society of Anesthesiologists, Inc., 473 F. Supp. 147 (S.D. N.
Y. 1979)).
Testimony at the hearing by a partner in Alexander Grant and Company
indicated that his examination of other states' plans showed that "the
term (fee schedule) . . . modified and unmodified is used for a numerous
array of services" (Transcript, p. 34). The same accountant also
testified that his examination of the "basic pronouncements concerning
generally accepted accounting principles" did not reveal any standard on
how to construct a fee schedule and whether fee schedules may be
corrected (Transcript, pp. 33-35). In its Response to Board Questions,
the State gives (pp. 10-13) a number of illustrations taken from
different approved state plans showing a great variety of phrases
incorporating the words "fee" or "rate" and "schedule."
There is nothing in the Social Security Act, in any applicable
guidance or regulation, or in the evidence in this case, indicating that
the term "fee schedule" as used here must exclude the possibility
of
retroactive adjustments. Since the New York State Plan does not
elaborate on its use of the term, it is appropriate to look to relevant
State law and practices as support for the reasonableness of the State's
actions. Particularly in view of the entitlement nature of the Medicaid
program, an examination of all elements of this case leads to the
conclusion that nothing precluded New York from claiming FFP based on
its adjusted fee schedule rates for ICF/MRs, and that New York did not
act unreasonably in doing so.
Conclusion
For the reasons stated above, we find, given the facts of this case,
that New York is not precluded from retroactively adjusting its fee
schedule for ICF/MR services. While this disallowance is therefore
reversed, we recognize that this decision may not ultimately be
dispositive of the issue of New York's entitlement to payment of the
$123,830,334 in dispute here. This decision does not address the
allowability of the costs claimed by means of the adjusted fee schedule.
If the Agency subsequently issues another disallowance on the basis of
unallowability, it would be subject to review by this Board if appealed.
Also, this decision does not limit the Agency's authority to initiate a
compliance proceeding if the Agency deems it appropriate. /1/ In its
post-hearing brief, the State argues that the issue remaining in
dispute was not raised in the notification of disallowance, either
expressly or by implication. The State may be technically correct that
the notification of disallowance does not discuss whether the State
should be bound by its original and duly promulgated fee schedules for
April 1974 through September 1979 and only briefly mentions that the
adjusted rates for the fee schedule were not developed according to the
usual means, but the Board does not believe that this alone should
result in a reversal of the disallowance. The notification of
disallowance put the State on notice that the fee schedule was at issue.
Nowhere has the State argued that it has not had the opportunity to
present its arguments in full on the relevant issue as the proceedings
have progressed before this Board. Furthermore, the issues and
arguments on both sides were developed and refined during the appeals
process, so that the Board will not find against HCFA on this basis.
/2/ Although both parties have titled their final submissions
"Post-Trial" briefs, a hearing was held in this case, so that citations
to these documents in this decision therefore will be to the
"post-hearing" briefs. /3/ The Agency has not argued that the
State's claim is improper because the State is retroactively claiming
for costs incurred up to five years before (See, e.g., Transcript, p.
149). The State argues that no law or regulation barred such action and
asserts that retroactive claims are commonplace in the Medicaid program
and, in addition, cites examples of the retroactive amendment or
application of a rate or fee schedule (See, e. g., State's Post-Hearing
brief, pp. 19-25). We therefore need not rule on whether retroactivity
per se bars this claim. Rather, our decision is concerned with whether
a fee schedule can be adjusted retroactively. /4/ Although the record
does not clearly show that all ICF/MRs during the whole period
in question were State-run, the State has asserted that "the category of
ICF/MRs through much of the claim period consisted entirely of OMRDD's
facilities" (Grantee's Responses to Board Questions, p. 6).
OCTOBER 04, 1983