SUBJECT: New Jersey Department of Human Resources

DECISION

This case concerns a claim for federal financial participation filed by the New Jersey Department of Human Resources (New Jersey) under the Medicaid program. The rate at which the federal government participates in a state's expenditures for health care services under Medicaid is known as the "federal medical assistance percentage" (FMAP). The FMAP for New Jersey is normally 50 percent. The claim in question, however, sought reimbursement at a slightly higher rate (52.95 percent) based on a 2003 law that temporarily increased the FMAP for state Medicaid expenditures for quarters between April 1, 2003 and June 30, 2004. The Centers for Medicare & Medicaid Services (CMS) found that the temporary FMAP did not apply to New Jersey's claim. Accordingly, CMS approved New Jersey's claim for reimbursement at the normal FMAP (50 percent) rate but disallowed $1,261,528 - an amount equal to the difference between the amount of reimbursement at the normal FMAP rate and the amount that otherwise would have been paid to New Jersey at the temporary FMAP rate. New Jersey now appeals the disallowance.

For the reasons explained below, we uphold CMS's determination to disallow reimbursement at the temporary FMAP rate. The disputed claim was based on final cost settlements that increased the payment rates for Medicaid-covered services furnished by public health care providers between July 1996 and March 2003. New Jersey contends that the cost settlements constitute, or reflect, "expenditures" made in the quarter ending June 30, 2004, a quarter to which the temporary FMAP applies. However, CMS properly determined that the cost settlements did not constitute new expenditures allocable to that quarter and that New Jersey's claim merely reported an adjustment to the amount of expenditures incurred for quarters prior to the period to which the temporary FMAP applies. Accordingly, we affirm the disallowance of $1,261,528.

[Page 2] Background

Medicaid is a program, established by title XIX of the Social Security Act (Act), in which the federal government and the states jointly share in the cost of providing health care to low-income persons and families. Each state operates its own Medicaid program in accordance with broad federal requirements and the terms of its state Medicaid plan.

A state is entitled to "federal financial participation" (FFP) in "expenditures" made under its state Medicaid plan. See section 1903(a) of the Act; 42 C.F.R. �� 433.10(a), 433.15(a). ⁽¹⁾ The bulk of a state's Medicaid expenditures are payments for "medical assistance." That term is defined in section 1905(a) of the Act as meaning particular categories of services that must or may be included in a state plan (as "covered services"), when provided to individuals who meet specified requirements ("eligible individuals"). Medicaid regulations use the term "services" to refer to the types of medical assistance specified in section 1905(a) and defined in Subpart A of the regulations at 42 C.F.R. Part 440, such as inpatient hospital services, nursing facility services, and physician services. 42 C.F.R. � 400.203.

The federal government's share of amounts expended as medical assistance is known as the "federal medical assistance percentage" (FMAP). Section 1903(a)(1) of the Act. For the periods in question, New Jersey's FMAP was 50 percent. NJ Br. at 6.

Section 401(a)(3) of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (TRRA), Public Law 108-27, authorizes a temporary increase in the FMAP of 2.95 percent for the third and fourth quarters of fiscal year 2003 (April 1 to September 30, 2003) and the first, second, and third quarters of fiscal year 2004 (October 1, 2003 to June 30, 2004). ⁽²⁾ Shortly after the [Page 3] TRRA's enactment, CMS issued policy guidance -- State Medicaid Directors Letter #03-005 (June 13, 2003) -- informing states that the "increased FMAP is available for expenditures incurred by states in the applicable quarters" (i.e., the quarters between April 1, 2003 and June 30, 2004). NJ Ex. Aa11.

Each state with an approved Medicaid state plan receives advance awards of Medicaid funds on a quarterly basis, based on estimated expenditures for each quarter "reduced or increased to the extent of any overpayment or underpayment which the Secretary determines was made . . . to such State for any prior quarter[.]" Section 1903(d)(1) of the Act. States then file quarterly claims for FFP in their actual Medicaid expenditures using a form called the Quarterly Medicaid Statement of Expenditures (QSE). See Connecticut Dept. of Social Services, DAB No. 1982 (2005). On this form, a state reports expenditures made in the most recent -- or "current" -- quarter for various categories of Medicaid-covered services. See id. at 4 n.2; CMS State Medicaid Manual (SMM) � 2500. In addition, for each service category, a state may report an "increasing adjustment" or "decreasing adjustment" with respect to expenditures reported on a previous QSE for some "prior quarter" (that is, a quarter prior to the "current quarter"). Connecticut Dept. of Social Services at 5 n.3; SMM � 2500.1(B) (instructions for lines 6-7). In effect, these adjustments retroactively increase or decrease the amount of expenditures claimed by the state for some prior quarter. The amount of allowable FFP to which a state is entitled for services for any quarter is calculated by applying the applicable FMAP to the actual expenditures reported for that quarter on a QSE, after adjustments for any unallowable costs claimed.

Some additional background is needed to understand the nature of New Jersey's disputed FFP claim. The parties agree that the claim reflects "cost settlements on interim rates" involving "public providers." NJ Br. at 3-4 & n.2; CMS Br. at 9. This implies that New Jersey uses some form of retrospective reimbursement system to calculate -- and claim FFP for -- its expenditures for Medicaid-covered services that are furnished by hospitals or other medical facilities owned by the state (or other public entities). New Jersey offers no precise description of the process that resulted in the disputed claim. The use of [Page 4] the "interim rate" terminology and New Jersey's reliance on a prior Board decision involving New Jersey (see below) both suggest that the rate-setting system is materially similar to the retrospective system originally developed for Medicare and adopted by many states. Also, CMS relied on a number of prior Board decisions describing how that system works in connection with public providers, and New Jersey did not seek to distinguish its system from those described. ⁽³⁾

Under the retrospective reimbursement process, a state or other public entity appropriates or makes available funds to enable the public provider to operate during a given fiscal period. During that period, the provider furnishes Medicaid-covered services. Not all of the provider's costs qualify for Medicaid reimbursement, however. Instead, the state must determine the allowable Medicaid reimbursement using per unit rates set according to the methods and standards established by the Medicaid state plan multiplied by the units of service each provider provided to Medicaid eligible individuals in the relevant period. ⁽⁴⁾ Initially, the amount of the allowable Medicaid reimbursement for a particular provider for a particular type of service (e.g., inpatient hospital services) during a given quarter is calculated using an interim per diem or other interim per unit rate (e.g., $1,000 per patient day). That interim rate reflects the provider's historical underlying costs (e.g., for personnel, supplies, equipment, etc.) of providing that service, trended forward to account for inflation and other factors. After the end of the state's fiscal or cost reporting year, the provider submits a cost report for that year, which is subject to audit and ultimately results in a "cost settlement." The provider's actual costs of providing Medicaid services during the cost reporting period may justify a final rate higher or [Page 5] lower than the interim rate for that period. ⁽⁵⁾

The parties agree that during the quarter ending June 30, 2004, New Jersey made final cost settlements that increased interim payment rates for public providers that had been previously used to claim FFP for the quarters between July 1, 1996 and March 31, 2003. See NJ Br. at 4 & n.3; CMS Br. at 9. On its QSE for the quarter ending June 30, 2004, New Jersey reported the cost settlements as expenditures of that quarter. In calculating the amount of FFP due for these expenditures, New Jersey applied the temporary FMAP authorized by the TRRA.

On December, 1, 2004, CMS issued a letter deferring New Jersey's claim for FFP in the cost settlements and requesting "documentation to support that these cost settlements should be claimed as current quarter costs" (that is, as medical assistance expenditures of the quarter ending June 30, 2004). NJ Ex. Aa01. CMS suggested in its deferral letter that New Jersey was entitled to FFP at the regular FMAP rate, not the higher temporary rate, because the cost settlements should have been "tied back" to the quarters between July 1996 and March 2003, a period not covered by section 401 of the TRRA. Id. In addition, CMS's letter asked New Jersey to "make available . . . all related documents and materials which may be necessary in determining the allowability of the affected claim," including "all supporting workpapers and detailed descriptions of the approved methodology employed in preparing the claim." NJ Ex. Aa02.

In response to the deferral, the Commissioner of the New Jersey Department of Human Services provided no documentation but wrote a letter to CMS dated February 1, 2005, which states in relevant part:

A review of the available information indicates New Jersey has always afforded consistent treatment of all cost settlements for both private and public providers. All cost settlements are recorded as a current expenditure in the quarter in which the Department of Human Services' Division of Medical Assistance and Health Services (DMAHS) paid the provider or otherwise processed an accounting transaction to record such payments. New Jersey contends this process is in [Page 6] accordance with federal regulation at 45 C.F.R. 95.13(b), and the provisions of the Departmental Appeals Board Decision 1016, which conclude that an expenditure occurs in the quarter in which a state agency paid a medical provider or made an accounting entry to that effect. The claims referenced in this correspondence are based on transactions processed through the New Jersey Medicaid Management Information System during the quarter ending June 30, 2004.

NJ Ex. Aa03.

On May 5, 2005, CMS issued a $1,261,528 disallowance, stating that it disagreed with New Jersey's interpretation of 45 C.F.R. � 95.13(b). CMS found that New Jersey's cost settlements were "adjustments to prior year costs" and, as such, must be claimed not as expenditures of the current quarter (i.e., the quarter ending June 30, 2004), but as an adjustment to "payments" made to providers in prior quarters "when the interim rate was in effect." NJ Ex. Aa06 (stating that "[w]hen the cost settlement is made, the settlement must be claimed as an adjustment to prior year cost"). As indicated, these prior quarters, from July 1, 1996 through March 31, 2003, predate the period to which the temporary higher FMAP rate applies. The amount of the disallowance is the difference between the federal government's share of the claimed cost settlements at the temporary FMAP (52.95 percent), and its share of those settlements at the normal FMAP (50 percent).

In its appeal, New Jersey reasserts its position that the cost settlements reflected "current expenditures" and were therefore reimbursable at the temporary FMAP. NJ Br. at 8. New Jersey contends that its position is supported by the language of section 95.13(b), provisions of CMS's State Medicaid Manual, and prior Board decisions. Id. at 8-17. CMS responds that the cost settlements are not "new expenditures" but instead are "adjustments to prior year costs." CMS Br. at 12. CMS asserts that "CMS policy" and "DAB precedent" establish that "for adjustments to prior period costs, the expenditures are deemed paid when the payments are either made or recorded under the interim rate, and the applicable FMAP rate is the rate that is in effect at such time, not the rate in effect at the time a subsequent adjustment is made." Id. at 2.

Discussion

The Medicaid statute provides that "for each quarter," the federal government must reimburse the state "an amount equal to [Page 7] the [FMAP] . . . of the total amount expended during such quarter as medical assistance" under the approved state Medicaid plan. Section 1903(a)(1) of the Act. CMS has interpreted this provision as requiring the federal government to reimburse the state at the FMAP rate in effect at the time the expenditure was made. See SMM � 2500(D)(2). The parties do not disagree with this interpretation. Furthermore, they agree that the outcome of the appeal hinges on whether the cost settlements constitute or reflect expenditures of the quarter ending June 30, 2003. If they do, then New Jersey is entitled to FFP in those expenditures at the temporary FMAP rate authorized by the TRRA, which was in effect during that quarter. If not, then New Jersey is entitled to FFP at the normal FMAP rate, and we must therefore uphold the disallowance.

Neither the statute nor the Medicaid regulations defines either the term "amounts expended as medical assistance" or the term "expenditure." However, the regulations at 45 C.F.R. Part 95, governing the filing of FFP claims under various Social Security Act programs, including Medicaid, address the issue of when an expenditure is made. Specifically, section 95.13(b) states that an "expenditure for services" under title XIX is "made in the quarter in which any State agency made a payment to the service provider." ⁽⁶⁾ 45 C.F.R. � 95.13(b)(emphasis added). The term "payment" is not defined, but it is commonly understood to mean the disbursement or transfer of money (cash) or some other valuable thing to discharge some obligation, such as compensating another for goods or services that have been or will be received. See Black's Law Dictionary 7^th ed. (defining "payment" as the "performance of an obligation, usually the delivery of money"); see also Webster's Third New International Dictionary (1976) (defining payment, in part, as (1) "the act of paying or giving compensation: the discharge of a debt or an obligation" (2) "something that is paid: something given to discharge a debt or obligation"). For purposes of Medicaid, the term "State agency" means "any agency of the State, including the State Medicaid agency, its fiscal agents, a State health agency, or any other State or local organization which incurs matchable expenses." 45 C.F.R. � 95.4.

As we have discussed in prior decisions, determining when a state agency has made "a payment" for a Medicaid-covered service is [Page 8] difficult when the service has been provided by a public provider. See New York State Dept. of Health, DAB No. 1867 (2003). When a private provider performs a Medicaid-covered service, the provider is not entitled to payment until it submits a reimbursement claim for the service. If the claim is approved, the state usually disburses cash to the provider in compensation for that service. See New Jersey Dept. of Human Resources, DAB No. 1016 (describing the claims submission and payment process for a private provider). In contrast, there is ordinarily no post-service transfer or disbursement of cash to compensate a public provider for Medicaid services rendered. That is because the state or other public entity finances the public provider's operations on a prospective or ongoing basis. "A state does not ordinarily pay itself" for Medicaid services that its own facilities provide. Id. at 7. In recognition of how public providers are financed, CMS's State Medicaid Manual states that an "expenditure" for a Medicaid-covered service provided by a public provider is deemed to occur when the expenditure is "paid or recorded, by any State agency" (emphasis added). SMM � 2560.4(G)(1)(a)(i). Applying this definition, the Board has held that an expenditure occurs when the public provider furnishes a Medicaid-covered service and the state, using the appropriate payment rate, either makes an actual (cash) payment for the service or records an expenditure for the service in its accounting records. New Jersey Dept. of Human Resources at 9; see also New York State Dept. of Health.

In the present case, it is apparent that for the quarters between July 1, 1996 and March 31, 2003, some state agency in New Jersey made expenditures for Medicaid services, and the amount of those expenditures was determined or calculated on the basis of an interim payment rate. For each of these quarters, New Jersey filed a QSE in which it reported, as "current quarter" expenditures, the Medicaid expenditures that were made during the quarter based on interim rates. Then, during the quarter ending June 30, 2004, New Jersey made cost settlements for the quarters between July 1, 1996 and March 31, 2003. The cost settlements retroactively increased the interim rates that were the basis of New Jersey's earlier FFP claims for those quarters.

New Jersey concedes that the cost settlements, along with the ensuing FFP claim that triggered CMS's disallowance, amount to one or more "adjustments to prior costs." NJ Br. at 17. The regulations define an "adjustment to prior year costs" as "an adjustment in the amount of a particular cost item that was previously claimed under an interim rate concept and for which it is later determined that the cost is greater or less than that originally claimed." 45 C.F.R. � 95.4. Thus, a more precise [Page 9] description of the dispositive issue is whether, in these circumstances, an adjustment to prior year costs may properly be claimed as a "current quarter" expenditure (or an expenditure of the period in which the relevant cost settlement was made).

The statute and Medicaid regulations do not explicitly address that issue. CMS has, however, long interpreted the regulations in 45 C.F.R. Part 95 to mean that a Medicaid expenditure does not occur when a public provider claims FFP based on an "adjustment" to expenditure amounts previously claimed for some "prior period." See Maryland Department of Health and Mental Hygiene, DAB No. 607 (1984) (taking note of HHS's position that an expenditure does not occur at the time of a "subsequent adjustment"). That interpretation is reflected in the CMS State Medicaid Manual, which indicates that while "[i]ncreasing adjustments related to private providers are considered current expenditures for the quarter in which the expenditure was made," increasing adjustments relating to public providers are merely "adjustments to prior period claims" (not "current expenditures") and are "matched using the FMAP rate in effect at the earlier of the time the expenditure was paid or recorded by any State agency." ⁽⁷⁾ SMM � 2500.2(E)(5) (citing 45 C.F.R. Part 95 and SMM � 2560).

We find this interpretation reasonable because it is inherent in the definition of an "adjustment to prior year costs." That term is defined by the regulations as an "adjustment" to the "amount of a particular cost item" that was "previously claimed under an interim rate concept[.]" 42 C.F.R. � 95.4. Such an adjustment occurs, according to that definition, because the state has "later determined" that the "amount" of a cost item was, in fact, greater or less than "originally claimed" for some prior period. Id. A reasonable implication from this language is that when the state adjusts for the difference between an interim payment rate and a final rate, the state does not incur or make a new expenditure for a particular cost item but simply adjusts the amount of the expenditure made for that item in a prior period -- namely, the period for which FFP had been "previously" or "originally" claimed. Stated more concisely, the adjustment is meant to reflect the fact that the allowable reimbursement amount under Medicaid for a particular unit of service for which "a payment" was made in some prior period was more or less than [Page 10] previously claimed.

CMS's interpretation of when an "expenditure" is made for purposes of public providers is also reasonable because it attempts to tie the federal government's share as closely as possible to the quarters a state agency actually made cash outlays to finance the provision of Medicaid services. As we explained, a state disburses cash on an ongoing basis in order to finance a public provider's operations, which include the provision of Medicaid-covered services. A state or other public entity may disburse cash to enable a public provider to pay for some underlying costs of providing patient care prior to the time the provider provides a Medicaid service, but the right to reimbursement under Medicaid does not arise until a unit of a covered service is provided to a Medicaid eligible individual. For purposes of Medicaid, the CMS State Medicaid Manual considers the Medicaid expenditure for a particular item of service to have been made when the state first either pays the public provider for that particular item of service or records the expenditure in its records, whichever is earlier. In contrast, an adjustment for the difference between an interim and a final rate during the cost settlement process involves no new Medicaid service. The adjustment simply recognizes that the actual cost of the service is more or less than the amount previously paid or recorded for that service.

An additional reason for deferring to CMS's interpretation is that a state has greater control over the cost settlement and claim submission process involving public providers than it does when the process is dependent on, or subject to, the actions of private actors. We agree with CMS that allowing states to claim cost settlements involving public providers as current quarter expenditures "would leave the Medicaid program vulnerable to abuse by States who could simply time their claims submissions to coincide with those quarters when an enhanced rate is in effect." Response Br. at 2.

We also agree with CMS that a contrary interpretation would obviate the statutory exception allowing a state to claim FFP for an adjustment to prior year costs beyond the applicable two-year filing period. With certain exceptions, a claim for FFP in an expenditure must be filed within two years after the calendar quarter in which the state makes the expenditure. See section 1132(a) of the Act. The Act lists a small number of exceptions to this two-year filing rule. Id. One exception is for "adjustments to prior year costs." Id.; see also 45 C.F.R. � 95.19; Tennessee Dept. of Health and Environment, DAB No. 921 (1988). This exception recognizes that a state with a [Page 11] retrospective reimbursement system needs a reasonable amount of time to adjust interim rates as actual cost information is received and reviewed, and that this reasonable period may exceed the two-year filing period called for by section 1132(a) of the Act. In such systems, subsequent adjustments are "unforeseen and unavoidable." 46 Fed. Reg. 3529 (1981). The purpose of the exception would be defeated entirely, however, if such adjustments were treated as current quarter expenditures. South Carolina State Health and Human Services Finance Commission, DAB No. 943 (1988), aff'd, S.C. Health & Human Servs. Fin. Com'n v. Sullivan, No. 88-1313-16 (D.S.C. July 17, 1989), aff'd, 915 F.2d 129 (4^th Cir. 1990); cf. North Ridge Care Center, DAB No. 1857 (2002) (noting that, in general, the Board strives to apply or interpret statutory or regulatory language in a way that does not render some provisions superfluous). If an adjustment to prior year costs could be claimed as a current quarter expenditure, there would be no need to give a state more than two years after an expenditure is made based on an interim rate in order to file a claim based on a final rate. The state could easily comply with the two-year filing rule by waiting until the final cost settlement and filing a claim within two years after the settlement.

The Board has, in other cases, implicitly endorsed or approved the CMS interpretation that precludes a state from claiming adjustments to prior year costs as current quarter expenditures. New York State Dept. of Health; South Carolina State Health and Human Services Finance Commission. New York State Dept. of Health involved Medicaid FFP claims filed by the New York State Department of Health (NYSDOH) seeking disproportionate share hospital (DSH) adjustments to previously filed claims for inpatient hospital services. The hospital services were provided in fiscal years 1994-1995 by state-operated psychiatric hospitals. Then, in 2000, the Office of Mental Health (OMH), the state agency that operated the hospitals, determined that, for fiscal years 1994-1995, all but one of the hospitals qualified as a "high DSH" and were therefore eligible for an enhanced federal payment equal to 200% of the hospitals' uncompensated costs. Accordingly, in September 2000, OMH submitted a request to NYSDOH for DSH payment adjustments for the period April 1, 1994 to March 31, 1995. In turn, NYSDOH filed an FFP claim for the DSH adjustments. The Board indicated that the DSH adjustments were "amounts added to the basic Medicaid per unit rates for inpatient hospital services provided by the psychiatric hospitals operated by OMH." DAB No. 1867, at 22.

CMS disallowed a portion of the claimed adjustments on the ground that NYSDOH's claim was filed beyond the two-year filing period [Page 12] prescribed by section 1132(a) of the Act. On appeal, NYSDOH contended (among other things) that its claim for the adjustments was timely. NYSDOH asserted that for purposes of the timely claims requirement, the relevant "expenditure" occurred on September 27, 2000, the date on which OMH submitted its request for DSH payments to NYSDOH. According to NYSDOH, this was the appropriate date to use because "the 'expenditure' at issue is not for costs, but an additional reimbursement by the federal government[.]" DAB No. 1867, at 9 (quoting NYSDOH's brief).

The Board rejected this argument, concluding that the relevant expenditure occurred not when OMH requested the DSH adjustment, but when OMH first made an accounting entry reflecting the cost of the hospital service (as determined based on the per unit Medicaid payment rate or charge), or when OMH actually paid the hospital for the service, whichever was earlier. The Board found that NYSDOH failed to establish when OMH "first recorded an amount" for the hospital services in question but found that this event likely occurred well before 2000. Under these circumstances, said the Board, "the disallowed amounts at issue [were] properly treated as retrospective adjustments to the amounts of expenditures previously made and claimed for services provided in the period April 1, 1994 through March 30, 1995, rather than as new expenditures triggering a new two-year period." DAB No. 1867, at 23. The Board found this conclusion consistent with both section 95.13(b) and the definition of "adjustment to prior year costs" in section 95.4. ⁽⁸⁾

[Page 13] New Jersey accurately notes that the State Medicaid Manual permits states to claim "cost settlements" and "other increasing adjustments" involving private providers as expenditures of the quarter in which the adjustments are made (i.e., as current quarter expenditures), whereas the manual instructs states to claim increasing adjustments involving public providers as prior period expenditures. SMM � 2500.1. New Jersey contends that there is no justification for this disparate treatment. NJ Br. at 13-15. CMS reasonably made this distinction, however. Under section 95.13(b) an expenditure for services under Medicaid is considered to have been made "in the quarter in which any State agency made a payment to the service provider." If a cost settlement involving a private provider increases an interim Medicaid payment rate for a Medicaid service provided in a prior fiscal period, the increase ordinarily results in an actual cash payment by a state agency to the provider or in some other equivalent transaction that satisfies the state's obligation to pay the provider based on the settlement. With respect to the private provider, moreover, arguably the state has no obligation to the provider for the additional amount until the cost settlement process is complete. A public provider may not receive any additional payment, however, if it has already received state funds sufficient to cover all of the actual costs of providing the service, and no new obligation to the provider arises from the cost settlement. ⁽⁹⁾ The adjustment to the Medicaid reimbursement rate in that situation is done solely for purposes of determining the allowable amount of a FFP claim.

New Jersey contends that CMS's position that an adjustment to prior year costs should be "tied back" to the period when the interim rate was set contradicts section 95.13(b), SMM � 2560.4(G)(1), and the Board's decision in New Jersey Dept. of Human Resources, DAB No. 1016. NJ Br. at 10-12. According to [Page 14] New Jersey, these authorities indicate that an expenditure is made "when the State pays a provider or makes the equivalent accounting entry." Id. at 10. New Jersey asserts that accounting entries for the claimed cost settlements were made in the quarter ending June 30, 2004 and thus were properly claimed as expenditures of that quarter. Id. at 11-13.

We find no merit in these assertions. First, New Jersey has essentially conceded that it submitted claims for expenditures in prior quarters using the interim rates. By doing so, New Jersey was representing that it made "a payment" to the service provider in those prior quarters. Thus, it is consistent with section 95.13(b) to consider the expenditures to have been made in the prior quarters. Moreover, as discussed above, section 95.13(b) must be read together with the definition of "adjustment to prior year costs" to give effect to both provisions. CMS's interpretation does that, whereas permitting a state to control the timing of expenditures merely by making some new accounting entries would undercut the timely claims provisions.

Section 2560.4(G)(1) of the State Medicaid Manual provides that an expenditure is made with respect to a public provider "when it is paid or recorded, whichever is earlier, by any State agency." Interpreting that to permit multiple payments or recordings for a public provider is unreasonable when the context and purpose are considered. While the State Medicaid Manual does not specifically state that once the state agency has recorded any amount for a particular cost item for a public provider, any increase in the amount must be treated as a prior period expenditure, the manual implies this by distinguishing public and private providers for purposes of the exception and by stating that payments to private providers for rate adjustments are treated as "current expenditures."

CMS's interpretation is also consistent with the Board's decision in New Jersey Dept. of Human Services, DAB No. 1016. That case involved public providers, but the FFP claims at issue were not based on adjustments to prior year costs. The Board held merely that, for purposes of the timely claims provisions, a reimbursable Medicaid expenditure occurs not when the state disburses cash to cover the provider's operating expenses (e.g., for salaries, utilities, and vendor payments) but when a state agency actually pays the provider for a Medicaid service based on the applicable Medicaid payment rate or records an entry for that payment in its accounting system. This holding was based on the wording of section 1903(a) of the Act, which refers to "amounts expended as medical assistance," as well as other provisions of the Act. Nothing in the Board's decision suggests or implies [Page 15] that an adjustment to prior year costs qualifies as a current expenditure for the quarter in which a cost settlement is made.

New Jersey asserts that because transactions reflecting the cost settlements were "processed by the MMIS" during the quarter ending June 30, 2004, they were appropriately identified in the QSE as expenditures of that quarter. NJ Br. at 5, 11-12. However, New Jersey produced no evidence that the cost settlements resulted in a recognition of current quarter Medicaid expenditures under its system or basis of accounting. In fact, New Jersey provided no evidence at all concerning the providers involved or New Jersey's system and procedures for "processing" or accounting for Medicaid payments with respect to those providers. Furthermore, New Jersey's appeal briefs are unclear about the nature of the alleged accounting entries. New Jersey merely states that "additional amounts are . . . processed by the New Jersey Medicaid Management Information System (MMIS) and recorded in the State's accounting records." NJ Br. at 3. This assertion is not inconsistent with finding that New Jersey was merely adjusting amounts previously claimed for prior quarter costs.

New Jersey asserts that its position is supported by section 2500(D)(2) of the State Medicaid Manual, ⁽¹⁰⁾ by State Medicaid [Page 16] Directors Letter #03-005, and by a document containing questions and answers about how the temporary FMAP applies. NJ Br. at 12-13; Reply Br. at 9-10. However, we see nothing in these provisions or documents that supports New Jersey's position or conflicts with CMS's longstanding interpretation. For example, SMDL #03-005 provides the following guidance regarding "prior period adjustments":

Expenditures incurred during a particular quarter, which are not reported by states as a current quarter expenditure, must be reported on the Medicaid quarterly expenditure report, Form CMS-64, as a prior period adjustment. For such prior period adjustments expenditures, the available applicable FMAP will relate to the quarter it was initially incurred. If an expenditure was incurred in one of the five quarters referenced in the legislation, the (increased) FMAP associated with that quarter would be the applicable FMAP for such expenditure.

Id. (emphasis added). Although SMDL #03-005 refers to prior period adjustments as "expenditures," it clearly implies that, for purposes of applying the FMAP, such an adjustment is allocable to the quarter in which it was "initially incurred" not to the quarter in which the "adjustment" is made.

New Jersey asserts that it "has consistently included cost settlements as current expenditures in the quarter in which DMAHS [Division of Medical Assistance and Health Services] pays the provider or otherwise processes an accounting transaction in accordance with the federal regulation at 45 C.F.R. � 95.13(b)." NJ Br. at 5. New Jersey produced no evidence that it had routinely claimed cost settlements as current quarter expenditures, however. New Jersey also failed to allege or show that CMS knew about or approved the practice. Furthermore, New Jersey has long had notice of CMS's interpretation requiring that adjustments to prior year costs be treated as prior period expenditures. As indicated, that interpretation is reflected in instructions contained in the State Medicaid Manual, and New Jersey did not deny that it had notice of the interpretation.

[Page 17] Finally, we take note of CMS's representation that while New Jersey may not apply the temporary FMAP to the cost settlements at issue here, New Jersey will be able claim FFP at the temporary FMAP rate for cost settlements that relate to expenditures earlier claimed (on the basis of interim rates) for quarters to which the temporary FMAP applies (April 2003 to June 30, 2004). CMS Br. at 17. Thus, New Jersey will ultimately get FMAP at the temporary FMAP rate for the full, allowable Medicaid reimbursement amounts for particular services for which it first paid or recorded any amount in one of the five quarters for which that FMAP rate applies. New Jersey could not reasonably expect anything more under the TRRA.

Conclusion

New Jersey has not shown that CMS's longstanding policy that precludes a state from claiming cost settlements for public providers as a current quarter expenditure is, on its face or as applied, inconsistent with the statute or regulations or otherwise unreasonable. Accordingly, we sustain CMS's determination to disallow $1,261,528 of the FFP claim submitted by New Jersey for the quarter ending June 30, 2004.

Donald F. Garrett

Sheila Ann Hegy

Judith A. Ballard
Presiding Board Member

1. The current version of the Social Security Act can be found at www.ssa.gov/OP_Home/ssact/comp-ssa.htm. Each section of the Act on that website contains a reference to the corresponding United States Code chapter and section. Also, a cross reference table for the Act and the United States Code can be found at 42 U.S.C.A. Ch. 7, Disp Table.

2. CMS notified the public about section 401 of the TRRA in the June 17, 2003 Federal Register. 68 Fed. Reg. 35,889. This Federal Register notice stated that "after adjusting FMAP due to the maintenance of the 2002 or 2003 FMAP where applicable, each State is eligible to receive a 2.95 percentage point increase for each of the last 2 calendar quarters of fiscal year 2003 and the first 3 calendar quarters of fiscal year 2004." Id.

3. The Board has encountered retrospective reimbursement systems for public providers in a number of cases. See, e.g., New York State Dept. of Social Services, DAB No. 452 (1982); Pennsylvania Dept. of Public Welfare, DAB No. 703 (1985); New Jersey Dept. of Human Services, DAB No. 1016 (1989); Washington Dept. of Social and Health Services, DAB No. 1397 (1993); Kansas Dept. of Social and Rehabilitation Services, DAB No. 2014 (2006).

4. Section 1902(a)(13) of the Act requires that each state have a state Medicaid plan to determine proper rates for reimbursement of provider services. See also 42 C.F.R. � 447.250(a).

5. Cost settlements could result in changes in the units of service claimed, as well. Claims for units of service that were not previously claimed could raise a timely claims issue, however.

6. The Board has considered section 95.13(b) to be relevant for determining when an expenditure was made in other cases in which the timeliness of an FFP claim is not at issue. See Maryland Dept. of Human Resources, DAB No. 896 (1987).

7. The Forward to the State Medicaid Manual states that its "[i]nstructions are official interpretations of the law and regulations, and, as such, are binding on Medicaid State agencies." SMM, Forward � B(1).

8. Reading sections 95.4 and 95.13(b) together led the Board to conclude the following:

� When any state agency records or pays (whichever is earlier) an amount that includes an amount for a particular item of service provided by a public facility (such as a day of inpatient hospital service provided to a specific patient), that is considered an "expenditure" for that service triggering the two-year claiming period.

� An increase in the amount paid or recorded for that particular item of service is not a new expenditure; if the increase is not claimed within the two-year period from when an amount for that item of service was first paid or recorded, the relevant issue is whether the exception for an adjustment to a prior year cost applies.

DAB No. 1867 at 21.

9. Arguably, the situation could be somewhat different with a public provider not owned by the state. Even for non-state-owned public providers, however, the state may not actually make a payment to either the provider or the public entity that owns the provider. Instead, the state may simply treat that entity's expenditures as certified public expenditures for purposes of meeting its non-federal share (matching) requirement. In any event, New Jersey did not here document any payment to a provider and did not argue that some of the public providers were not state-owned.

10. Section 2500(D)(2) states in relevant part:

When reporting expenditures for Federal reimbursement, apply the FMAP rate in effect at the time the expenditure was recorded in your accounting system. An expenditure occurs when a cash payment is made to a provider. Noncash expenditures, such as depreciation, are made when they are recorded in the accounting records in accordance with generally accepted accounting principles. The term State means any agency of the State including the State Medicaid agency, its fiscal agents, a State health agency, or any other State or local organization incurring matchable expenditures.

Section 1903(a)(1) of the Act provides that HCFA reimburse you quarterly an amount equal to the FMAP of the total amount expended during such quarter as Medical Assistance under the approved State plan. It provides that HCFA reimburse you at the FMAP rate for the quarter in which the expenditure was made, even if the expenditure is not claimed for Federal reimbursement until some later quarter. To establish the FMAP rate applicable to a given expenditure, determine when the expenditure was made.