Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Louisiana Department of Health and Hospitals
Docket No. A-94-88
Control No. LA-93/001/MAP
Decision No. 1542
DECISION
The Louisiana Department of Health and Hospitals
(Louisiana or State) appealed a February 4, 1994
determination of the Health Care Financing Administration
(HCFA) disallowing $13,605,926 in federal financial
participation (FFP) in Medicaid expenditures under Title
XIX of the Social Security Act (Act) for nursing facility
costs. The disallowance resulted from a State
Performance Evaluation and Comprehensive Test of
Reimbursement Under Medicaid (SPECTRUM) review of nursing
facility rates in Louisiana during the period July 1,
1989 through June 30, 1991. There are five disputed
issues, each of which is discussed in turn below, under
the following headings: (1) minimum wage adjustments,
(2) documentation issues, (3) customary charge issues,
(4) Omnibus Budget Reconciliation Act of 1987 (OBRA '87)
adjustments, and (5) waivered facilities issues.
For the reasons explained below, we reverse the
disallowance as to the first issue and sustain the
disallowance as to the remaining issues.
General background
Title XIX of the Social Security Act (Act) provides for
federal participation in expenditures for medical
assistance to needy persons made by states in accordance
with an approved state plan. Section 1903(a) of the Act.
The state plan is a comprehensive written statement
describing the nature and scope of the Medicaid program
and specifying the methods and standards to be used by
the state to set payment rates. 42 C.F.R. 430.10,
447.201, 447.252(b). Payments to providers must be made
at rates determined in accordance with the methods and
standards in the plan. 42 C.F.R. 447.253(i).
An essential feature of the system is that states have
considerable flexibility in selecting the methodology to
include in their state plans. Specifically, the Boren
Amendment, adopted in 1980, permitted states to develop
diverse methods of provider reimbursement for nursing
facilities--
through the use of rates (determined in accordance
with methods and standards developed by the
State . . .) which the State finds, and makes
assurances satisfactory to the Secretary, are
reasonable and adequate to meet the costs of
efficiently and economically operated facilities in
order to provide care and services in conformity
with applicable State and Federal laws, regulations,
and quality and safety standards . . . .
Section 1902(a)(13)(A) of the Act, as amended by Pub. L.
No. 96-499, 962 (Omnibus Budget Reconciliation Act of
1980). The Board has previously found that the intent of
Congress in adopting the Boren Amendment was to increase
state flexibility in rate-setting and to minimize the
burden on the states of unnecessary paperwork, consistent
with assuring accountability. Missouri Dept. of Social
Services, DAB No. 1189, at 2 (1990); South Dakota Dept.
of Social Services, DAB No. 934, at 2 (1988).
In light of this emphasis on flexibility in rate-setting,
greater weight is given to states' interpretation and
intent in construing state plan provisions than might
have been accorded prior to the Boren Amendment, but
states are not free to implement ad hoc changes or to
ignore the methodology set out in their approved state
plans. Missouri at 2-3; South Dakota at 5. States must
use the methodology in the state plans, once adopted and
approved.
In reviewing disputes involving the interpretation and
application of a state plan, the Board will generally
defer to a state's interpretation of ambiguous language
in its own plan, provided the interpretation is
reasonable and does not conflict with federal
requirements. The Board has described the approach as
follows:
First the Board looks to the language of the plan.
If the language is ambiguous, it looks to whether
the state's interpretation gives reasonable effect
to the language of the plan as a whole. In
considering the state's explanation of intent, the
Board considers whether it is reasonable in light of
the purpose of the provision and program
requirements. The Board may also consider
consistent administrative practice as evidence of
intent.
Missouri at 5.
Louisiana had an approved State plan with the same basic
methodology for rate-setting throughout the relevant
period. 1/ The State plan provided for statewide per
diem prospective rate-setting to reimburse private
nursing facilities. 2/ Under the plan, Louisiana
calculated a base rate for each classification for the
period 1983-84 and then adjusted the rate for inflation
annually on July 1st (the beginning of the State fiscal
year). The rate was calculated using five cost
categories: food, aides and attendants' salaries, other
nursing services, other routine costs, and fixed costs,
plus a flat five percent return on investment allowed on
the total. Each July 1st, the first four cost
categories, i.e., excluding fixed costs, were inflated by
use of factors derived from specified indices measuring
inflation in particular prices. The "food" category used
a factor from the Consumer Price Index for all Urban
Consumers -- South Region (CPI) for Food for the
preceding calendar year; the "other nursing services"
category used a factor from the CPI for Medical Costs;
the "other routine costs" category used a factor from the
CPI for All Items; and the "aides and attendants
salaries" category used a factor based on the average
annual wage for production or non-supervisory service
workers in Standard Industrialization Code 80. All these
factors were obtained by Louisiana from the United States
Department of Labor in the spring of each year. Once the
cost categories were adjusted for inflation as described,
their sum constituted the new base rate, to which the
inflation factors would be applied the following year.
In March 1992, HCFA initiated a SPECTRUM review to
determine whether Louisiana complied with federal
requirements and followed the provisions of its State
plan in setting rates for nursing facilities. HCFA
provided Louisiana an opportunity to comment on a draft
report and issued a final report on December 18, 1992
containing eight findings of which five are at issue in
the present appeal.
A hearing was held in this appeal on May 2-4, 1995. HCFA
presented one witness, Mr. Andrew Frederickson, a HCFA
accountant who performed the SPECTRUM review. Louisiana
presented four witnesses. Mr. Richard O'Shee was a
former State employee who had responsibility for setting
nursing home rates during the period in question and who
participated in the SPECTRUM review process for the
State. Ms. Carolyn Maggio was the Director of the State
bureau administering the Medicaid program during the
period in question. Mr. Mark Berger was an accountant
who served as Reimbursement Director for the Louisiana
Nursing Home Association (LNHA), a trade association
representing most of the nursing homes in the State. Mr.
Richard Greer was a member of the LNHA and an operator of
nursing homes in Louisiana.
Below, we give more detailed background information in
relation to each of the disputed findings and explain our
analyses and conclusions as to each.
Minimum Wage Adjustments
Background on minimum wage adjustments
In addition to the provision for annual inflation
adjustments to the base rate, the State plan throughout
the review period permitted the State to make interim
adjustments to its rates to account for unanticipated
changes in conditions. Under the State plan, the change
must affect at least 50% of the facilities providing the
affected classification of care. The State will consider
such an adjustment under its plan when requested to do so
by ten percent of the facilities or by an organization
representing at least that percentage of the facilities.
The plan provides that the "burden of proof as to the
extent and cost effect of the unanticipated change will
rest with the entities requesting the change." However,
the State may also "initiate a rate change without a
request to do so." State Ex. 4, at 42. 3/
Interim adjustments may be of two kinds: temporary or
base rate. Temporary adjustments are those that would
not affect the base rate for future adjustments.
Temporary adjustments may be made in the rate when
changes which will eventually be reflected in the
economic Indices, such as a change in minimum wage,
a change in FICA or a utility rate change, occur
after the end of the period covered by the Indices,
i.e., after the December preceding the rate
calculation. Temporary adjustments are effective
only until the next rate calculation which uses
Economic Adjustment Factors based on index values
computed after the change causing the adjustment.
State Ex. 4, at 43. 4/
In 1989, Congress enacted two increases in the mandatory
minimum wage: an increase from $3.35 to $3.80 (or 13%)
effective April 1, 1990, and an increase from $3.80 to
$4.25 (or 12%) effective April 1, 1991. Commenting on
the House floor, Congressman Waxman noted:
Current Medicaid law requires States to adjust their
nursing home reimbursement rates to accommodate the
increased costs that nursing homes incur in
complying with the increase in the minimum wage. Of
course, the Federal Government, through Medicaid
matching payments, will participate in payments for
these increased costs.
State Ex. 10. Louisiana is disproportionately affected
by any increase in the minimum wage since its wages are
generally lower than wages elsewhere in the country. Tr.
at 184-85. The LNHA as representative of most of the
nursing homes in Louisiana requested increases in nursing
home rates based on the minimum wage increases,
submitting one survey of expected nursing home costs
prior to the April 1990 increase and a more complete
survey prior to the April 1991 increase. Tr. at 177-88;
State Exs. 5, 6, 12 and 13.
Louisiana made adjustments to its nursing home rates in
April 1990 and April 1991. Based on its SPECTRUM review,
HCFA disallowed costs resulting from the part of
Louisiana's per diem rate attributable to both rate
increases (except for a portion of the April 1990
increase which HCFA accepted, as discussed further
below). See State Ex. 1, Att. C. The effect of the
disallowance on the per diem rates ranged from an $.82
decrease in the Intermediate Care I rate in April 1990
(from $31.00 to $30.18 per day) to a $2.39 decrease in
the Skilled Nursing rate in April 1991 (from $53.07 to
$50.68). State Ex. 1. The basis for the disallowance
was the HCFA reviewer's finding that Louisiana made the
adjustments using an inappropriate methodology. The HCFA
reviewer's findings were based on the following:
o The fact that the way Louisiana made the adjustments
did not conform to the process for a minimum wage
adjustment set out in a document (titled "Wage
Component LTC Rate"), which was provided by
Louisiana during the SPECTRUM review and which
reflected the way the HCFA reviewer would have
implemented the adjustments. Tr. at 22-23; HCFA
Ex. 9, at 18.
o A statement made during the review by a Louisiana
official which the reviewer interpreted as
indicating that Louisiana had not made temporary
adjustments, but had instead merely moved the annual
base rate adjustments forward from July to April.
Tr. at 23-24; HCFA Ex. 10; HCFA Ex. 11.
o State documents which the reviewer determined
confirmed this statement and showed that Louisiana
had moved forward the annual inflation adjustments.
HCFA Ex. 9 passim.
The amount of the disallowance related to the minimum
wage adjustments is $5,417,746.
Analysis on minimum wage adjustments
As we discuss below, we conclude that HCFA's findings
here are inconsistent with HCFA's own general approach of
according flexibility for such adjustments and are not
supported by the record. HCFA's determination here would
result in denying virtually any increase in rates to
recognize the effects of the minimum wage increases, even
though Congress clearly intended that Medicaid
reimbursement rates be adjusted as a result of the
minimum wage increases, and HCFA itself acknowledged that
some adjustment was called for.
At the hearing, the HCFA reviewer conceded that a state
is "allowed quite a lot of leeway in determining how to
make various adjustments." Tr. at 53. He testified that
HCFA would expect that a state "give us some explanation
as to why it is a necessary adjustment and then some
documentation to indicate that the magnitude of the
adjustment is appropriate . . . ." Tr. at 53.
Here, HCFA did not dispute that the questioned
adjustments were made in response to the congressionally-
mandated increases in the minimum wage, and the
contemporaneous documentation clearly labels the
increases as minimum wage adjustments. HCFA Ex. 9. The
approved State plan specifically mentions minimum wage
increases as an appropriate basis for a temporary
adjustment.
HCFA did not determine that the overall amount of the
adjustments was too high. Moreover, the record shows
that Louisiana, in fact, was conservative in calculating
the amount of the adjustments. The documentation and the
testimony presented by Louisiana indicates that State
officials, working with the LNHA, made a reasonable
effort to try to predict what the actual impact of the
minimum wage increase would be on the amount Louisiana
had to pay to reimburse the costs of an efficiently and
economically operated facility. This included looking at
survey information developed by the LNHA (which advocated
adjustments higher than those made), as well as examining
various components of the rate to determine what parts
were wage-sensitive and attempting to predict the "ripple
effect" of the minimum wage increase on wages for
employees currently above the minimum wage. The HCFA
reviewer acknowledged that it was not unreasonable to
recognize that a minimum wage increase would result in a
rescheduling of wages within a facility. Tr. at 64.
The approved State plan does not specify any particular
method for calculating the effect of a minimum wage
increase or for determining the corresponding adjustment
to the per diem rate. Thus, any reasonable method should
be acceptable. The State document on which the HCFA
reviewer relied for his finding merely sets out one
possible approach to making a minimum wage adjustment.
Essentially, this document indicates a schedule for
temporarily adding on to the rate (over and above the
base amount) one minimum wage adjustment amount in April
1990, removing that amount in July 1991, and then adding
on a different amount in April 1991, removing that amount
in July 1992. The testimony showed, however, that this
document merely evidences a process proposed by one State
official as a basis for discussion. Tr. at 104-05. HCFA
did not show that this proposal had ever been formally
adopted by any State official with authority to set
reimbursement policy. Thus, this case is different from
prior cases where a state had adopted an official
interpretation of a plan provision and then failed to
follow its own interpretation. In addition, while this
method of providing for a minimum wage index as a
discrete add-on amount is the method the HCFA reviewer
indicated he thought most reasonable, the document
proposing such an add-on does not address how the amount
of the add-on will be calculated. Therefore, we do not
know whether the amount of such an add-on would have
ultimately resulted in payments to the nursing facilities
greater than or less than the payments they did receive.
HCFA did not establish that what Louisiana in fact did
unreasonably calculated what nursing home costs would be
after the minimum wage increases, given the information
Louisiana then had, nor that it conflicted with the
language or purpose of the plan provision on temporary
adjustments. It was impossible to calculate the precise
impact of the increase in advance since no index could
provide that information, so Louisiana necessarily had to
use some estimate for purposes of prediction.
Most significantly, HCFA did not show that what Louisiana
did resulted in inflated rates. Indeed, it appears that,
if Louisiana had adopted the add-on approach and
increased the wage-sensitive part of the rate by
percentage amounts corresponding to the percentage
increases in the minimum wage, the ultimate rates would
have been higher. 5/
The real crux of HCFA's case was its conclusion that
Louisiana had inappropriately moved forward to April the
annual inflation adjustments scheduled for July. The
documents showing the calculation of the April
adjustments do not support this conclusion, however. See
HCFA Ex. 9. What Louisiana did in April was different
from merely advancing the July adjustment by three
months. The documents for the April 1990 minimum wage
adjustment indicate that it was calculated using two of
the inflation factors that would also be used for the
July 1990 annual adjustment: the relevant December 1989
CPI (.0414) for the "other routine costs" component of
the rates; and the relevant December 1989 CPI (.08) for
the "other nursing services" component of the rates.
However, in calculating the minimum wage adjustment for
the "other routine costs" component, Louisiana applied
the relevant December 1989 CPI to only 28% of the
component--the part Louisiana had determined was "wage-
sensitive." To calculate the minimum wage adjustment,
Louisiana applied to the "aides and attendants" component
of the rate an amount it labeled as the CPI predicted for
December 1990. This factor exceeded by .039 the amount
of the inflation factor applicable to the July 1990
annual adjustment (the December 1989 CPI, which was
.0663). Tr. at 55. Further, as noted above, the
undisputed context and the contemporary labeling of the
adjustment support a view that Louisiana intended the
April adjustment to be a minimum wage adjustment under
the temporary adjustment provision of the State plan.
HCFA determined that Louisiana did not make its usual
full annual adjustment in July. However, what Louisiana
did in July 1990 was effectively to make the annual
adjustment and, at the same time, remove that part of its
temporary adjustment which needed to be removed because
it reflected the inflation factors relevant to the July
annual adjustment. 6/ Removal of the duplicative part of
the April adjustment is consistent with the State plan
provision on temporary adjustments. A similar analysis
applies to the 1991 adjustments.
The HCFA reviewer here was influenced by what he
understood the Louisiana official he interviewed during
the SPECTRUM review to say. The reviewer's
contemporaneous notes recording his contact with this
official state: "In essence they (the State) agreed to
move up the yearly adjustment from July to April for wage
related items." HCFA Ex. 11. That the rates Louisiana
determined were necessary to ensure adequate
reimbursement of providers in light of the minimum wage
increase in part reflected inflation that had occurred
prior to April (that otherwise would not have been
reflected until July) does not, however, transform the
minimum wage adjustment here into the annual adjustment
scheduled for July. The permanent adjustment due in July
was not just for wage-related items and was not exactly
parallel in the factors used.
The HCFA reviewer stated his view that Louisiana should
not have considered the December 1989 CPI factors at all
because these factors would not reflect the minimum wage
increase occurring in April 1990. Tr. at 30. This
position ignores the fact that the goal of any Medicaid
reimbursement system is to reimburse the costs of an
efficiently and economically operated facility. Thus,
Louisiana could reasonably consider, in light of the
triggering event, what rate it needed to pay to
accomplish that goal. Moreover, since Congress likely
considered ongoing inflation in determining how to
increase the minimum wage, we do not consider
unreasonable the use of past, as well as predicted,
inflation factors in determining what corresponding rate
adjustments were necessary so long as the overall rate
was not excessive. Indeed, the approved State plan
recognizes a relationship between minimum wage
adjustments and ongoing inflation.
We also note that the Louisiana official on whose remarks
HCFA relied (Richard O'Shee) was the same official who
had proposed a somewhat different process from what
Louisiana ultimately adopted. His remarks at the time of
the SPECTRUM review may have reflected a feeling that his
proposal was better than what was actually done.
However, the same official convincingly testified at the
hearing that the approach ultimately adopted by Louisiana
was a conservative approach that did not lead to a rate
in excess of that permitted under the State plan. See,
e.g., Tr. at 153-54.
At the hearing, the HCFA reviewer indicated that his
finding was in part based on information he had that
Louisiana had failed to remove the April 1990 minimum
wage adjustment in July 1991, as he would have expected
if it were a temporary adjustment. See, e.g., Tr. at 58.
First, there is some dispute as to whether the State plan
would require removing in July 1991 a temporary
adjustment for the future impact of a minimum wage
increase made in April 1990, which may not have been
fully reflected in the December 1990 inflation factors
used in July 1991. Second, the reviewer's testimony is
unclear on whether he considered the fact that all except
a small part of the adjustment (the .039 of the
adjustment affecting "aides and attendants" salaries) was
effectively removed in July 1990. In any event, since
the State plan specifically permits Louisiana to make a
temporary adjustment for a minimum wage increase, the
better remedy for the failure to remove an adjustment at
the correct point in time is to disallow any overpayments
that result from the failure to remove, rather than to
disallow the adjustment for a period prior to the time it
should have been removed. Our decision does not preclude
HCFA from further examining this issue. 7/
In sum, we conclude that the minimum wage adjustments
Louisiana made here did not result in the rates paid
between April and July 1990 and April and July 1991 being
in excess of the rates permitted under the State plan.
Therefore, we reverse the disallowance as to this issue.
Documentation Issues
Background on documentation issues
In July 1990, Louisiana made two adjustments to its base
rate, in addition to the annual inflation adjustment.
The first was an increase of 5.8% to the wage-sensitive
portion of the "other routine costs" component of the
rates. The second was an increase of 7.5% to the entire
"other nursing services" component.
During the SPECTRUM review, HCFA requested documentation
of the bases for and computation of these increases. Mr.
Frederickson said that he was told by Mr. O'Shee "that no
work papers were available to explain" how Louisiana
arrived at the two adjustments. HCFA Ex. 10, at 2
(Affidavit of Mr. Frederickson); see also HCFA Ex. 11.
Louisiana has offered somewhat divergent explanations of
the two increases. The SPECTRUM report indicated that
the 5.8% adjustment was represented by State officials to
be the result of Louisiana's reassessment of the effect
of the April 1990 minimum wage increase and that the 7.5%
was a response to a statewide shortage of nurses (and
correspondingly high number of requests to waive the
nursing coverage requirements). State Ex. 1, at 12; HCFA
Br. at 6. 8/ Louisiana's initial brief also referred to
these increases as the "minimum wage adjustment and the
nursing shortage adjustment," noted that they were added
at the time of the base rate adjustment which recognized
the CPI inflation indices, and argued that
"[c]onsideration for these increases should be made to
the extent of the full base rate recalculation using the
appropriate CPI indices." State Br. at 9. In its post-
hearing brief, Louisiana asserted that both adjustments
were intended as "reduced adjustments" for the minimum
wage increase after the CPI inflation adjustment and that
the amounts were the "result of negotiations" with the
LNHA based on the survey data from the LNHA and
Louisiana's "analysis of the CPI factors and the judgment
of state officials implementing the rates." State Post-
Hearing Br. at 9-10.
The part of the disallowance relating to these issues is
$5,590,119.
Analysis on documentation issues
Louisiana argued first that it had not been given any
guidance as to what documentation must be retained to
support rate changes, so that no particular work papers
are specifically required. According to Louisiana, since
it had provided HCFA with its explanations, as well as
the CPI and survey data, no other documentation is
needed. HCFA argued that states are "required to retain
fiscal records that justify and adequately demonstrate
how" payment rates are set. HCFA Post-Hearing Br. at 39-
40. According to HCFA, the documentation provided by the
State did not justify or show how these rate adjustments
were determined.
The State is required by regulation to "maintain
documentation of payment rates and make it available to
HHS upon request." 42 C.F.R. 447.203(a). The State is
also required to establish procedures to make available
to the public "the data and methodology used in
establishing payment rates." 42 C.F.R.
447.253(b)(1)(iii)(C). 9/ Thus, it is not enough for
Louisiana to explain the reason it raised rates, but it
must also explain the methods used to determine the rates
and retain the underlying data in its documentation.
In addition, HCFA pointed to regulations at 42 C.F.R.
433.32 which require (in relevant part) that State
plans provide that the State will:
(a) Maintain an accounting system and supporting
fiscal records to assure that claims for Federal
funds are in accord with applicable Federal
requirements; [and]
(b) Retain records for 3 years from date of
submission of a final expenditure report . . . .
Thus, this regulation requires that actual expenditures
be documented as being in accord with federal
requirements. Documentation of the basis of payment
rates from which the expenditures result is essential in
determining whether the amounts expended are in accord
with federal requirements, including the requirement that
payments to providers be made "at rates determined in
accordance with the methods and standards" in the State
plan. 42 C.F.R. 447.253(i) (1992)(previously the same
section was designated 447.253(g)).
We find that Louisiana was clearly required to maintain
documentation that would show the data on which it relied
and the methodology which it used in arriving at the
particular rate adjustments at issue here. As discussed
later, we also find that the documentation proffered by
Louisiana did not satisfy this requirement.
Secondly, Louisiana argued that negotiated rates are not
prohibited. State Post-Hearing Br. at 9. Indeed,
Louisiana suggested that its State plan obliged it to
engage in negotiations such as those which it claimed led
to these two rate adjustments, when requested to do so by
LNHA (which represented about 70% of providers) or
possibly face legal challenges from providers. Id.; see
also Tr. at 228.
The State plan simply provides that the State will
"determine whether or not the rates should be changed
when requested to do so by ten percent (10%) or more of
the enrolled nursing homes, or an organization
representing at least ten (10%) of the enrolled nursing
homes . . . . The burden of proof as to the extent and
cost effect of the unanticipated change will rest with
the entities requesting the change." State Ex. 4, at 42.
It is not disputed that the LNHA represented a sufficient
percentage of the relevant providers. Nevertheless, a
request from the LNHA for a rate change due to
unanticipated conditions required only that Louisiana
determine if the LNHA had carried its burden of proof in
showing that the extent of the unanticipated change
justified a particular rate change. No requirement is
imposed to "enter into negotiations to try to reach a
mutually acceptable rate," as Louisiana claimed. Cf.
State Post-Hearing Br. at 10. In any case, HCFA did not
argue that negotiation in rate-setting is prohibited.
Rather, the issue here is whether Louisiana has shown
documentation of the basis for and amount of the rate
changes at issue. 10/ Nothing in the testimony or
exhibits relating to the role of LNHA explains why these
two increases of this magnitude occurred at this
particular time in July 1990. The question of
negotiation is thus a red herring that is not relevant to
what documentation exists to support the rate increases.
Finally, we turn to the question of whether the available
documentation in fact supports the rate increases based
on the explanations offered by Louisiana. As
documentation, Louisiana pointed to the CPI index
factors, a rate analysis sheet provided to HCFA during
the SPECTRUM review, and the results of the LNHA surveys.
None of these sources provides either a methodology or
data that correlates in any way with the amount of the
two increases at issue.
HCFA allowed the full amount of the July 1990 permanent
base increase as determined based on the CPI index
factors. Therefore, Louisiana's reference to those
factors provides no justification for the two increases
over and above the allowed adjustment for the CPI
factors. Indeed, the explanation offered in Louisiana's
post-hearing brief suggested that these two amounts were
intended to be negotiated reduced adjustments to continue
to reflect the impact of the minimum wage increase, in
addition to the normal CPI base rate increase. It is
hard to see how the CPI factors could be proffered as
documentation for amounts that are asserted to be in
addition to the effects of the CPI factors.
As to the rate analysis packet, Louisiana offered as an
expert witness, Mr. Berger, an accountant, who testified
that the packet constituted "workpapers" relevant to
these increases. Tr. at 222-25. However, when
questioned, Mr. Berger acknowledged that the packet would
document only the fact of and amounts of the increases.
He further stated that no workpapers appeared therein to
document how the amounts were calculated or explain what
they were based on. Tr. at 225-26.
In regard to the survey data, Louisiana submitted
questionnaires gathered from nursing homes by the LNHA in
1989 and 1990, but offered no explanation of how these
survey results related to the particular amounts of the
increases here. The survey (which Mr. O'Shee indicated
he did not consider totally reliable anyway, see Tr. at
146), advocated an average increase of only $1.70 to the
total rates. See Packet submitted to the Board by
Louisiana on April 7, 1995, including survey analysis at
attachment B and letter from LNHA at attachment D. The
increase provided as a minimum wage adjustment for April
1990 was represented to be approximately an increase of
$1.65 (for the most common client level of Intermediate
Care I). Tr. at 179. Louisiana did not explain how the
surveys could be said to justify further increases of the
magnitude involved here three months later.
Furthermore, the claim that these amounts reflected the
impact of the minimum wage increase is inconsistent with
the explanation offered for the April 1990 minimum wage
adjustment upheld in the previous section of this
decision. That adjustment was temporally related to the
point when the minimum wage increase took effect, and
Louisiana documented the method it used to calculate the
adjustment, including recognizing some portion of the
inflation impact on wages as part of adjusting for the
future effect of the minimum wage increase and the
consideration of the LNHA survey. But the adjustment
which we upheld included only a 3.9% increase in the
wages of aides and attendants beyond the amount subsumed
in the July inflation adjustment. Testimony at the
hearing proved that this category of workers was the most
directly impacted by a minimum wage increase, because
their salaries were at or near minimum wage level. Tr.
at 229-30. It is not believable, that after a 3.9%
increase intended to recognize the minimum wage increase
impact in the "aides and attendants" category, 5.8% and
7.5% were added in order to recognize the same event in
wage-sensitive areas of "other routine costs" and "other
nursing services" respectively, when these areas were
indisputably less directly impacted.
To the extent that a shortage of nurses or a resulting
excess of request for waivers from nursing coverage
requirements was related to the 7.5% increase, Louisiana
failed to offer any evidence of the existence and
duration of the shortage, of the connection between the
extent of the increase and the shortage, or of the
relation between the waiver request rate and this payment
rate increase (apart from the bare assertions of Mr.
O'Shee that the State intended the increase to address
these concerns). We do not express any opinion on
whether such a shortage would be a sufficient basis for
an increase under the State plan; instead, we conclude
that, in this case, Louisiana simply offered no
documentation that this increase was connected in timing
or in magnitude to a nursing shortage.
We conclude that Louisiana has failed to document the
basis for the two adjustments at issue. Therefore, we
sustain the disallowance as to this issue.
Customary Charge Issues
Background on customary charge issues
The State plan contained a provision throughout the
review period that limited payments to the Medicaid rate
for the particular classification of care, "or the
provider's customary charge to the public, whichever is
lower." State Ex. 4, at 41.
In the course of the SPECTRUM review, HCFA determined
from a sample of providers' audited cost reports that
some facilities reported rates charged to the public
which were less than the applicable Medicaid rate for the
corresponding period. State Ex. 1, at 4. In addition,
HCFA reported that the State indicated to the reviewers
that no process was in place in either desk reviews of
cost reports or in audits of providers to prevent or
correct payments to providers at rates exceeding their
customary charges. Id. at 5. Consequently, HCFA
recommended that Louisiana undertake a review of cost
reports during the relevant period to ascertain the
extent of payments made to facilities with customary
rates less than the applicable Medicaid rate.
Louisiana did a follow-up survey and concluded that
providers who reported customary charges below the
Medicaid rate fell into three categories: (1) those
whose cost reports were erroneous; (2) those who
increased their private rates after notification of a
Medicaid increase; and (3) those who actually did charge
less than the Medicaid rates. Louisiana did not dispute
that the payments beyond the customary rates in the third
category were properly disallowed. HCFA did not take a
disallowance as to the first category, since those
facilities submitted corrected cost reports to the State.
Tr. at 238. However, Louisiana contended that those in
the second category should not be subject to disallowance
either.
The amount of the disallowance related to the customary
charge issues is $221,300.
Analysis on customary charge issues
The timing of notifications of Medicaid increases by the
State, according to Louisiana, meant that providers only
learned of an increase during the month when it was
already in effect. Private patients are billed in
advance, however, and may be guaranteed 30 or 60 days
notice of an increase. Consequently, providers may not
have been able to adjust the private rate for up to three
months after the Medicaid rate rose. Louisiana Br. at 3.
On this basis, Louisiana argued that the comparison of
Medicaid and private rates should be made across a cost
reporting period (rather than by month, as it said HCFA
did here), so that the private rate at the end of the
year would "by definition" become the customary charge
for the period. State Br. at 4.
The dispute here did not really center on what time
periods were used for comparing customary charges and
Medicaid rates. The amount of the difference was
determined by the State as a result of its survey
following up the SPECTRUM review, and HCFA did not
challenge the calculations as to which time period were
used. The dispute focused instead on whether a period of
up to 90 days when the Medicaid rate admittedly exceeds
the provider's customary charge can be overlooked because
it may result from constraints on how quickly private
rates can be raised to match a Medicaid increase. 11/
Louisiana argued that its approach was consistent with
Medicare Principles of Reimbursement, HIM-15, paragraph
2604.3, which Louisiana quoted as defining customary
charge as "the most frequent or typical charges imposed
uniformly for given items or services." From this
language, Louisiana concluded that the HIM-15 addresses
"only the use of cost reporting periods," as opposed to
comparisons during a particular month or on a particular
date. Louisiana Br. at 3-4. However, Louisiana's
quotation of the definition of customary charge from HIM-
15 omits the first sentence of the section which reads:
"Customary charges are those uniform charges listed in a
provider's established charge schedule which is in effect
and applied consistently to most patients and recognized
for program reimbursement." The portion of the
definition cited by Louisiana, by contrast, is to be
applied only when "a provider does not have an
established charge schedule in effect and applied to most
patients." The providers at issue had reported a
customary charge amount in their cost reports. Louisiana
did not argue that the providers were not actually or
uniformly collecting those rates during the period they
were in effect. Nor did Louisiana show that these
reported customary charges were not based on established
schedules. Furthermore, nothing in the language to which
Louisiana pointed in HIM-15 supported its conclusion that
the comparison between customary charges and Medicaid
rates must be made at the end of a cost reporting period
only. HIM-15 mentioned a cost reporting period only in
discussing the situation where no patients were served
who were liable to pay on a charge basis during a cost
reporting period, which is not an issue in this case.
Mr. O'Shee testified, by analogy to the concept of usual
and customary charges in Louisiana's pharmacy program,
that the calculation of customary charge required looking
at all payors except Medicaid (i.e., private insurers or
other third party sources) for each provider in the
course of audits to determine average cost over an entire
cost reporting period. Tr. at 250. He suggested that
the cost reports reviewed by HCFA were unaudited and
might represent customary charge figures for which the
provider "simply put down" numbers not based on "actual
work." Tr. at 251. He further suggested that the
language on the cost report form might cause errors in
that it refers to private pay patients but customary
charges "to the public" might include other payors. Tr.
at 250-51, 254-55.
We do not find in this testimony a persuasive basis to
overturn the disallowance here for a number of reasons.
First, HCFA did not disallow amounts relating to
providers whose cost reports were determined by the State
to report the customary charge erroneously, so if the
entries on the cost reports were inaccurate, the related
amounts would not be included in the disputed figure.
Further, Mr. Greer, who owned a number of nursing homes,
testified for the State that his facilities took care to
report customary charges accurately, which casts some
doubt on Mr. O'Shee's suggestions that providers were
generally likely to be careless about the figures they
reported in that category on the cost report form. See
Tr. at 265-66.
Second, to the extent that the cost report form led to
any confusion, it was designed by the State itself, and
can hardly be used by the State to justify paying a
higher rate than that charged to non-Medicaid patients
simply because the State now suggests it may not have
collected adequate data. See Tr. at 255.
Third, we need not consider whether a comparison of an
audited average rate for charges over a cost reporting
period could reasonably satisfy the State plan provision,
since Louisiana presented no credible evidence that
auditors ever in fact conducted or were instructed to
conduct such a comparison. See Tr. at 253-56, 259-60.
Mr. O'Shee asserted that the averaging process was
undertaken for consistency with the pharmacy program
which was, for a time, audited under the same contract.
However, he was unable to provide any details of what the
instructions were and asserted that a chargeback to a
provider on that basis "has never come up as an issue in
any audit done to date." Tr. at 259-60. It does not
seem credible that the issue would never arise if
customary charges and Medicaid rates were in fact
compared during the audits, in light of the State's own
finding in its follow-up survey that a substantial number
of providers (i.e., the third category) were in fact
charging less than the Medicaid rate. Furthermore, Ms.
Maggio as Medicaid director was unaware of any specific
instructions to the auditors. Tr. at 334. Louisiana did
not present as evidence either any instructions to
auditors as to how to perform the comparison nor any
evidence of what comparisons in fact were performed in
regard to the cost reports at issue nor a single example
of an audit in which actual charges to multiple payors
were averaged to obtain a "customary charge."
Fourth, Louisiana argued before us that it had a policy
which created a notification or grace period in which
providers could charge Medicaid more than other payors
until they adjusted their private rates. Yet, neither
Mr. O'Shee nor Ms. Maggio provided testimony
demonstrating any such policy. When asked about such a
policy, Mr. O'Shee testified that the State concluded
after the SPECTRUM review that the comparison should have
been done on a daily basis (as HCFA has contended) and
sought recoupment retroactively, resulting in appeals by
some providers which the State is presently defending.
Tr. at 257-58. Although he asserted that the prior
policy was for annual averaging during the audit process,
this testimony is inconsistent with the apparent action
of the State in seeking retroactive recoupment from
providers and, as discussed above, is not supported by
the testimony regarding the audit process. Cf. Tr. at
256-59.
We thus conclude that interpretation of the State plan
language on customary charges put forward by Louisiana is
a post hoc interpretation that is not reasonable in light
of the language of the plan as a whole and does not
represent any consistent administrative practice or
policy of the State prior to this litigation.
Therefore, we sustain the disallowance as to the
customary charge issue.
OBRA '87 Adjustment Issues
Background on OBRA '87 Adjustment Issues
OBRA '87 required a number of changes in the payment
rates to reflect additional costs. Louisiana submitted
State plan amendment 90-08 in March 1990 to implement the
necessary rate changes and made assurances that the new
rates would be reasonable and adequate to meet the costs
of nursing facilities. HCFA Post-Hearing Br. at 21-22;
State Exs. 4, 6, 7, and 8; Tr. at 310-11.
During the SPECTRUM review, HCFA discovered mathematical
errors in Louisiana's implementation of the increase in
nursing home rates resulting from changes mandated by
OBRA '87. (Essentially, the changes were effective after
the start of the fiscal year and Louisiana used the wrong
fraction to calculate the costs for the affected part of
the year.) Louisiana conceded the mathematical errors
but claimed that it had identified offsetting
mathematical errors which should eliminate the
disallowance. 12/ The basis for this claim was that
fringe benefits were not included in arriving at the
original computation. Louisiana asserted that a fringe
benefit rate of 20% was appropriate because it was "used
in other categories which involved personnel costs."
State Br. at 5.
The amount of the disallowance relating to OBRA '87
adjustment issues is $1,208,964.
Analysis on OBRA '87 Adjustment Issues
The testimony of Carolyn Maggio at the hearing made very
clear that the omission of fringe benefits as a separate
cost element in calculating an OBRA '87 adjustment was
not an oversight but rather a conscious choice on the
part of the State. Tr. at 335-36. She testified that,
although fringe benefits could have been included, the
State chose not to do so in order to "be very
conservative" and not create an overpayment. She further
testified that, in fact, this choice to omit fringe
benefits as a cost element was the subject of "heated
discussions" with the LNHA. Tr. at 336. In light of
this testimony, Louisiana's attempt to characterize this
choice as an offsetting mathematical error is
disingenuous.
Louisiana assured HCFA that its rates under the amended
State plan, which it knew did not separately recognize
fringe benefits as an additional cost, were "reasonable
and adequate to meet the costs" of efficiently and
economically-operated nursing homes. HCFA Ex. 6, at 1-3
and Att. B; HCFA Ex. 7, Att. B-1 (cost analysis column
passim); HCFA Ex. 8; cf. 42 C.F.R. 447.253 (b)(1). HCFA
did not argue that fringe benefits would be an
inappropriate element to include in the recognized costs.
Instead, as explained below, HCFA correctly argued that
Louisiana needed to submit a plan amendment if it wished
to change its rates to reflect a different methodology to
recognize costs.
To the extent that the salary figures used by Louisiana
in its cost estimates did not reflect fringe benefits, it
is clear that the State had concluded that its rates
provided sufficient reimbursement to meet personnel costs
while avoiding either an overpayment or inadequate
payments. Louisiana made no showing that the assurances
it gave at the time of the approval of the State plan
amendment were mistaken. Nor did Louisiana show that
correcting the admittedly erroneous factor used to apply
the changes during the first partial year would somehow
alter the assurances made about the adequacy of the
rates. It is well-established that states may seek
reimbursement only for rates determined in accordance
with the State plan that is in effect. New Jersey Dept.
of Human Services, DAB No. 1143 (1990). Louisiana chose
not to include these costs in its State plan methodology
and cannot now change that methodology retroactively.
While the State has considerable flexibility under the
Boren Amendment in shaping its payment methods and
interpreting its State plan, it is not reasonable for the
State to submit to HCFA as part of its State plan
amendment materials information about the breakdown of
costs and then alter those costs retrospectively after a
review finds errors which the State would like to offset.
In reviewing state plan amendments, HCFA is entitled to
rely on the materials and explanations offered by the
State in support of its amendment.
We conclude that the disallowance relating to calculation
of the OBRA '87 adjustment should not be reduced on the
basis that not specifically recognizing fringe benefits
constituted an offsetting "mathematical error."
Therefore, the disallowance on this issue is sustained.
13/
Waivered Facilities Issues
Background on waivered facilities issues
OBRA '87 imposed a number of requirements on nursing
facilities, including having a registered nurse for at
least eight hours seven days per week, and required
states to set rates that took the increased costs of
compliance into account. States were also required to
make assurances that the methods used to establish
payment rates to long-term care facilities provide an
appropriate reduction to account for "the lower costs (if
any)" of facilities that have obtained waivers of the
nursing coverage requirements. Section 1902(a)(13)(A) of
the Act.
By amending its State plan, Louisiana made an adjustment
to its rates on July 1, 1990 to account for the increased
costs for facilities to meet the OBRA '87 requirements.
In its documentation in support of State plan amendment
90-08, Louisiana provided HCFA with an analysis of its
anticipated compliance costs which calculated an amount
for adding nursing coverage and specified that this
amount was "not to be reimbursed to facilities with
waiver of this requirement." State Ex. 9.
In the SPECTRUM review, HCFA determined that Louisiana
had paid the same rate to providers with a waiver as it
had to those that had complied with the nursing
requirements. At HCFA's request, Louisiana compiled a
list of the providers with waivers and the days of
service involved. HCFA accepted Louisiana's calculations
of the amount involved in determining this element of the
disallowance. Tr. at 269-70.
The amount of the disallowance related to the waivered
facilities issues is $1,167,797.
Analysis on waivered facilities issues
Louisiana argued that the analysis which it provided to
HCFA in 1990 was not a part of its State plan, so that
the notation that waivered facilities would not receive
the reimbursement was not a part of its approved
methodology. Further, Louisiana argued that its State
plan contained no provision which would authorize payment
of different rates to individual facilities for the same
classification of care and that its computer payment
system was not set up to calculate payments on that
basis. See Tr. at 337; see also Tr. at 294-97 (testimony
of Richard O'Shee that the State did not set up a system
with the capacity to set reduced rates for particular
facilities). In addition, Louisiana argued that it would
have been required to provide notice of such a change and
therefore it could not have undertaken to pay a reduced
rate during the time at issue.
As Mr. Frederickson testified, HCFA relied on the
submission of supporting documentation and assurances
from the State in approving the State plan. Tr. at 278-
79. The claim by Mr. O'Shee that the submission that
accompanied the State plan was merely an "estimate" that
never constituted an assurance as part of the State plan
is not credible in light of his admission that the
information in the submission was the basis for cost
estimates and part of the supporting documentation for
the State plan amendment. Cf. Tr. at 302-03. The State
plan must be interpreted in light of the supporting
materials which the State provided to HCFA as
documentation. Further, had the State plan not provided
for reduced payments to waivered facilities, it would
have been in violation of federal law and could not have
been approved. The failure of the State to set up a
payment system that enabled it to carry out the
methodology that it assured HCFA would provide for the
required reductions is hardly a justification for
overturning the resulting disallowance.
Ms. Maggio indicated that the State was fully aware of
the provision in its submission for reduced payments to
waivered facilities and intended to deal with it through
downward adjustments after receiving cost reports. She
also conceded, during cross-examination, that the State
was able to withhold funds from providers for such
purposes as collecting penalties, but argued that no
mechanism existed to adjust prospective rates for
particular providers. Tr. at 338-40. She concluded that
the State "never did come up with a methodology that we
felt was fair to reduce those rates at that time." Tr.
at 341-42. Mr. O'Shee also acknowledged that Louisiana
was aware that it should have provided for a reduced
payment to waivered facilities. Tr. at 300. While
states have great leeway to design their payment
methodology so long as they comply with federal
requirements, Louisiana may not simply ignore a
requirement in federal law, after assuring compliance in
materials submitted in support of its State plan, because
it cannot "come up" with a methodology to implement it.
Cf. Tr. at 301.
Louisiana also argued that waivered facilities did incur
some additional costs as a result of the requirements of
OBRA '87, for example, advertising, increased state hours
of nursing requirement, and costs of partial compliance.
Both Mr. Greer and Mr. O'Shee testified that the added
state nursing coverage would not be avoided by a waiver,
so some additional costs would be incurred for that
coverage even by waivered facilities, as well as for
advertising and for efforts to reach full compliance with
both federal and state law. Tr. at 297-98. 14/
The short answer to this contention is that, whether or
not the State might have identified costs incurred by
waivered facilities and taken them into account in
developing the methodology to calculate reduced rates for
waivered facilities, it did not in fact do so. Louisiana
did not make any showing that it had in fact calculated
the cost differential. Instead, it simply paid both
waivered and non-waivered facilities at the same rate.
Even were Louisiana to attempt such a calculation now,
the State plan materials did not provide any methodology
to make such a partial reduction of the OBRA '87
adjustment, since it merely stated that facilities with
waivers would not receive the adjustment. The
flexibility to select a methodology in developing a state
plan does not imply the freedom to invent entirely new
methodologies years after the fact and without having
included them in the State plan for prior review and
approval.
Therefore, we sustain the disallowance as to the waivered
facilities issue.
Conclusion
For the reasons discussed above, we reverse the
disallowance as to the minimum wage issue (relating to
FFP of $5,417,746) and sustain the disallowance as to the
remaining issues (relating to FFP of $8,188,180).
___________________________
Cecilia Sparks Ford
___________________________
Norval D. (John) Settle
___________________________
Judith A. Ballard
Presiding Board Member
1.
Louisiana amended its State plan several times during
the period at issue. See State Exs. 4, 4A, 4B, 4C, 4D,
4E, and 4F. Unless a change occurred in a relevant
provision, we have referenced the version of the State
plan at State exhibit 4.
2.
The rates were determined separately for client
classifications of care, such as intermediate care I,
intermediate care II, and skilled nursing. See State Ex.
4, at 34; HCFA Post-Hearing Br. at 4.
3.
Page number references in State exhibit citations are to
consecutive handwritten numbers in the State's appeal
file.
4.
The State plan also provides for temporary adjustments
in lump sum form for certain contingencies not relevant
here.
5.
HCFA's calculation of the disallowance amount was not
based on a methodology designed to estimate in fact what
the impact of the minimum wage increases on nursing
facility costs would be in Louisiana. Instead, HCFA
allowed solely the difference (.039) between the factor
Louisiana used to increase the "aides and attendants"
component of the rate in April 1990 and the amount of the
correct inflation factor for the July 1990 adjustment to
that component.
6.
HCFA's quarrel with the State's methodology here appears
to be a mere accounting matter. So long as duplication
was avoided, the State could have accomplished the same
result in either of two ways, i.e., by adding the entire
inflation adjustment and then removing the minimum wage
adjustment to the extent it duplicated minimum wage
factors or simply by adding on in July the non-
duplicative part of the normal July inflation adjustment.
The latter is what Louisiana did.
7.
Since it was not raised before us, we do not address
whether Louisiana failed to remove the minimum wage
adjustment properly and thereby caused excessively high
rates in later periods.
8.
Mr. Frederickson's April 1992 memorandum of his contact
with Mr. O'Shee describes both adjustments as resulting
from the State estimating again the impact of minimum
wage increases and from a State-wide nursing shortage.
9.
Although HCFA did not name these particular regulations
in its briefs, the argument that documentation
requirements apply to the setting of payment rates was
made clearly, and Louisiana had ample opportunity to
respond to the argument and to present any available
documentation.
10.
Furthermore, Louisiana presented no evidence that
negotiations with the LNHA actually took place in regard
to these increases. The only testimony from a
representative of the LNHA referred to a committee which
met with the State to discuss effects of the minimum wage
increase "when the minimum wage regulation was passed."
Tr. at 228; see also Tr. at 324-26 (Testimony of Carolyn
Maggio on negotiations with LNHA relating to April 1990
and 1991 rate adjustments). No evidence was offered of
meetings relating to adjustments in July 1990, three
months after the minimum wage increase and related
payment rate adjustments took effect, nor of how the
substance of any of these discussions resulted in
adjustments of the particular amounts involved. (The
relevance of the survey data provided by LNHA is
discussed below, but certainly offering data to Louisiana
in regard to the overall minimum wage increase does not
amount to negotiating "mutually acceptable" rate changes
of the two amounts at issue here.)
11.
It is not clear why Louisiana considered HCFA to be
making a month-by-month comparison. Mr. Frederickson
testified that HCFA compared the customary charge as
reported on the annual cost reports to the Medicaid
rates, considering both annual and special rate
adjustments. The payments to providers are made monthly
but they are based on per diem for each day's services.
Tr. at 238-41. He further explained that the charge
would be determined as of the "point of service" (i.e.,
as of the day the service was provided) which he
distinguished from the "point of payment," which would be
some time the following month. Tr. at 243-44. The
comparison is thus made day-by-day as to the rates in
effect on the day a service is provided. Conceivably,
Mr. Frederickson's testimony might be understood as
comparing the reported rate and Medicaid rate over the
entire annual reporting period, but no comparison by
month was suggested.
12.
The concession was stated in Louisiana's initial brief
and reiterated at a prehearing conference in this matter
on April 19, 1995. State Br. at 5; Summary of Telephone
Conference, dated April 24, 1995, at 4. At the hearing,
counsel for Louisiana attempted to withdraw the
concession that the fraction used was erroneous. Tr. at
191. The Presiding Board Member ruled that the State
would not be permitted to present evidence inconsistent
with its concession, in light of the lengthy prehearing
process in the case, the untimely presentation of the
issue, and the fact that the evidence then proffered by
the State was unlikely to be very persuasive. However,
the Presiding Board Member indicated then that the State
was free at any time to present any information it had to
HCFA, which could voluntarily adjust the disallowance if
it found the information persuasive. Tr. at 194.
13.
At the hearing, Mr. Frederickson indicated that HCFA
would verify that none of the disallowance taken as a
result of the errors made by Louisiana in its calculation
of the OBRA '87 adjustment duplicated the part of the
disallowance relating to facilities that received a
waiver from OBRA '87 requirements. Tr. at 272-77.
Louisiana also questioned whether any of the disallowance
was based on applying a 9/12 factor to the following year
(1991) when the adjustment affected the base rate for the
full year. State Br. at 5. HCFA should review whether
any inappropriate amount was included in the OBRA '87
part of the disallowance and make any necessary
correction.
14.
Mr. Greer also testified that considerable uncertainty
existed in the industry about when waivers were needed
and when to ask to end the waiver and how the expanded
nursing coverage required by OBRA '87 related to State
nursing coverage requirements which were also increased
during same time period. Tr. at 281-91. It was evident
from Mr. O'Shee's testimony that the confusion emanated
from the State, which did not determine clear policies
for itself or provide guidance to providers on these
questions. Tr. at 294-97. This lack of clarity does not
justify the State's failure to make certain that payments
to waivered facilities reflected their lower costs.