GAB Decision 723
February 21, 1986
Virginia Department of Medical Assistance Services;
Ford, Cecilia S.; Settle, Norval D. Ballard, Judith A.
Docket No. 85-91
The Virginia Department of Medical Assistance Services (State)
appealed a disallowance by the Health Care Financing Administration
(Agency, HCFA) of $1,788,284 in Federal financial participation (FFP)
claimed under Title XIX (Medicaid) of the Social Security Act (Act).
The disallowance was based on an Agency review of the State's records of
uncollected provider Medicaid overpayments. The review disclosed that
the State was not returning the federal share of provider overpayments
until the State actually collected the funds from the providers.
During the course of this appeal the parties reached agreement that
the
amount of the overpayments for two providers (Kennedy House and
Manassas
Manor) had been recalculated and that the State had repaid the
federal
share of that revised figure. The State further claimed that it
had
repaid the federal share of overpayments made to another
provider
(Oakhill Nursing Home). The amount now in dispute is $112,789.
/1/
Three nursing facilities changed ownership in 1982. Pursuant
to
Virginia law the State sought to recapture the depreciation
charge
previously included in calculating the reimbursement rates paid to
the
original owners of the facilities. Of the $214,796 paid to
the
facilities based on depreciation, the State has so far been able
to
collect only $15,276.
Discussion
The general question of whether HCFA has the authority to demand
from
states the federal share of identified Medicaid overpayments
to
providers prior to the actual recovery of the overpayments by the
states
has been examined by the Board in a series of decisions. In
these
decisions, the Board has held that improper or excess payments
to
providers do not constitute "medical assistance" within the meaning
of
the Act, and that, therefore, HCFA is empowered by section 1903(d)(2)
of
the Act to adjust the federal share of these payments, even if a
state
has not yet recovered the amounts from the providers. For a
summary of
the Board's reasoning(4) on this question, see, e.g., New York
State
Department of Social Services, Decision No. 311, June 16, 1982,
and
Washington Department of Social and Health Services, Decision No.
645,
April 30, 1985. A number of the Board's decisions on this issue
have
been reviewed in court, with the district courts splitting on
the
question, but with two Courts of Appeals upholding the
Board's
reasoning. /3/
The State did not contest here the Board's reasoning in the cited
cases.
Rather, the State argued that, unlike those cases where the Board
found
improper or excess payments to be outside the scope of
medical
assistance so that the federal share was recoverable by HCFA
under
section 1903(d)(2), the payments it made to providers under
its
reimbursement system were made pursuant to its State Medicaid plan
and
thus constituted "medical assistance" within the meaning of the
Act.
Thus, the State argued, the recovery by HCFA of its share of these
costs
is limited by section 1903(d)(3) to a percentage of the
amount
actually(5) collected by the State. The State contended that
its
attempt to recover the part of the payment reflecting depreciation
upon
sale of a facility does not detract from the propriety of the
original
payment. The State claimed that its policy of recapture of
depreciation
upon sale reflects only an effort to prevent a facility from
receiving
repetitive payments for depreciation under the State's
reimbursement
system during successive transfers or sales.
The Agency responded that "although the payments for depreciation
were
initially properly paid in accordance with the State plan, they
were
subsequently rendered improper so as not to have constituted
'medical
assistance furnished under the State plan' by virtue of the sale of
the
facility and the operation of State law requiring the recapture of
all
previously paid depreciation costs." Agency Brief, p. 2. The
Agency
likened the depreciation payments to "cost settlement
overpayments"
which, in California Department of Health Services, Decision
No. 244,
December 31, 1981, the Board found recoverable under section
1903(d)(2)
because "while not improperly made, (the overpayments) cannot
be
considered to be medical assistance furnished under the State
plan."
Id., p. 6.
We agree with the Agency that the payments attributable to depreciation
at
issue here are analogous to the excess payments to providers that the
Board
in the previously cited decisions has found outside the scope of a
payment
for medical assistance within the meaning of the Act.
In cases such as California, supra, in accord with their respective
State
Medicaid plans, states advanced payments to providers of Medicaid
services
under retrospective reimbursement systems which permitted
payment at an
interim rate, based on estimated provider costs. In those
cases the
State plans also provided for a periodic reconciliation,
usually on an annual
basis, of the rate schedule with actual costs.
Often this resulted in a
downward adjustment of the rate, with a
determination that the providers had
received payments at an excess
rate. As such, the Board determined that
the federal share of those
excess amounts was an "overpayment" to the State
within the meaning of
section 1903(d) (2) because the federal government's
participation is
limited to the final rate, which was the amount established
by the State
plan as "medical assistance."(6)$% In this case Virginia's State
plan
contained a specific provision in its nursing home payment system
for
the reconciliation of depreciation costs upon the sale of a facility:
The seller of the facility shall make a retrospective settlement
with
the Program in instances where a gain was made on disposition.
The
Program will recapture the total amount of depreciation paid to
the
provider by the Program for the period of participation in the
Program
in the event the gain equals or exceeds total depreciation expensed.
No
depreciation adjustment will be made in the event of a loss
or
abandonment. A final cost report and refund of depreciation
expense,
where applicable, will be due within 90 days from the date of
the
consummation of the sale.
State's Attachment C, p. 2.
This provision clearly means that, while depreciation costs were
properly
included in the rate calculation initially, the later sale or
transfer of
that facility required a downward adjustment to the rate to
permit the State
to recapture the amounts paid for depreciation.
Otherwise, the facility will
have received payments in excess of the
amount it was properly due under the
State's nursing home payment
system. The underlying reason for this is
that the provider reported
the depreciation as a cost of providing services
for rate calculation
purposes, but the premise on which this is based (i.e.,
that the
facility's value is depreciating) is no longer valid when the
facility
is sold at a gain.
There is no basis for distinguishing a retrospective rate readjustment
to
recapture depreciation from any other retrospective adjustment
mandated by
the State plan in order to conform the rate to actual
provider costs.
Therefore, we conclude that, under the Virginia State
plan, the part of the
original rate representing depreciation does not
qualify as "medical
assistance" within the meaninng of the Act upon the
sale of the facility at a
gain.
We note that the sale of the three facilities at issue occurred in
1982,
but as of June 30, 1985, the State had still not recaptured
the
depreciation costs. For over three years, then, the sellers of
these
facilities have been in possession of Medicaid funds to which they
were
not entitled. Presumably the new owners of the facilities have
also
claimed at a rate which reflects depreciation charges. HCFA has
thus
been denied its share of the depreciation charges due to be
returned,
while also providing new funds to the State to distribute to the
new
owners of the facilities. HCFA reasonably decided that it would
not
continue to wait for the State to actually recapture the
depreciation
charges before regaining its share, especially when the(7)
State, not
HCFA, is the only party able to take action to recover from
the
facilities' owners.
In Florida, supra, the Board found that a state is liable for the
federal
share of overpayments made to facilities who subsequently went
bankrupt and
were unable to repay the state. There the Board declared
that HCFA was not
required to participate in clearly unallowable costs
despite Florida's
inability to recover those costs. We believe the
situation here is
analogous. The owners of the facilities received
funds, which, under
operation of the State plan, was in excess of the
amounts they were
ultimately due. HCFA should not be required to wait
indefinitely until
the State actually collects before the federal share
of those costs is
returned.
Conclusion
For the reasons stated above, we sustain the disallowance in the amount
of
$112,789. /1/ The State reported, and HCFA did not dispute, that
as
of June 30, 1985 the following
overpayments were still
outstanding: Elizabeth
Haynes $14,426 Westport Manor Inc.
77,756 Forest Hill Manor 107,338 $199,520 x
56.33%Federal
Share
$112,789FFP E The issue is whether there is an
overpayment, within the
meaning of section 1903(d)(2) of the Act, when a
Medicaid facility is sold
for a gain and the State Medicaid plan
provides that the State is entitled to
recover the depreciation charges
previously paid to the facility's owners as
part of the facility's
reimbursement rate. The State argued( 2) that
the rate which reflected
the depreciation charge qualified as medical
assistance under its State
plan, and therefore federal recoupment was limited
by section 1903(d)(3)
of the Act to the amount actually recovered by the
State. For the
reasons discussed below, we find that the depreciation
charge is not
medical assistance within the meaning of the Act.
Consequently, HCFA is
not precluded from recovering the federal share before
actual recovery
by the State. General Background Title XIX of the Act
provides for the
payment of federal monies to states to aid in financing
state medical
assistance programs. Any state that wishes to participate
in the
Medicaid program must develop and submit a plan that meets
certain
requirements set forth by the Secretary of the Department of Health
and
Human Services (HHS). Realizing that many states might have
difficulty
financing a Medicaid program even if subsequently reimbursed by
the
federal government, Congress also established a funding mechanism
by
which HHS advances funds to a state, on a quarterly basis, equal to
the
federal share of the estimated cost of the program. After review of
the
state's quarterly statement of expenditures, the Secretary may
adjust
future payments to reflect any overpayment or underpayment which
was
made to the state for any prior quarter. Section 1903(d) of the
Act.
Specifically, section 1903(d)(2) of the Act states: The Secretary
shall
then pay to the State . . . the amounts so estimated, reduced
or
increased to the extent of any overpayment or underpayment which
the
Secretary determines was made under this section to such state for
any
prior quarter and with respect to which adjustment has not already
been
made under this subsection. . . . The primary issue here arises
because
section 1903(d)(3) of the Act states: The pro rata share to
which the
United States is equitably entitled . . . of the net amount
recovered
during any quarter by the State . . . with respect to medical
assistance
furnished under the State plan shall be considered an overpayment
to be
adjusted under this subsection. Case Background In 1982 the Code
of
Virginia, on the subject of liens on nursing homes at Sec. 32.1 -
76.1,
provided: A. The Commonwealth shall have a lien on the
operator's
interest in the real and tangible personal(3) property comprising
a
licensed nursing home certified to provide medical assistance
services
pursuant to the State Medical Assistance Plan for the amount
of
depreciation charges previously allowed and reimbursed as a
reasonable
cost. . . . B. The medical assistance program shall, within
thirty days
of the request, provide the owner, operator or transferee with
written
notice of the amount of reimbursable depreciation expense due
the
medical assistance program. Whenever a lien has been filed under
the
provisions of this section, it may be perfected by the Commonwealth
upon
the sale of the real property to the extent of any depreciation
expense
incurred by the medical assistance program if the sums claimed by
the
Commonwealth as reimbursable depreciation expense have not been
paid
within the time period prescribed by regulation of the Board. n2
/2/
This section was subsequently amended so that it now reads that
"(upon) the
sale or transfer of the real and tangible property
comprising a licensed
nursing home . . . the transferor or other person
liable therefore shall
reimburse to the Commonwealth the amount of
depreciation previously allowed
as a reasonable cost of providing such
services and subject to recapture
under the provisions of the State
Medicaid Assistance Plan." Sec. 32.1 - 329
(1985). /3/ In
Massachusetts
v. Heckler, 576 F. Supp. 1565 (D. Mass 1984), the Board's
decision in
Massachusetts Department of Public Welfare, Decision No.
262, February 26,
1982, was reversed on the grounds that HHS had not
established that payments
to a provider at an interim rate higher than a
final rate constituted an
overpayment for purposes of section
1903(d)(2). In Massachusetts v.
Secretary, 749 F.2d 89 (1984), cert.
denied, 105 S.Ct. 3478, however,
the United States Court of Appeals for
the First Circuit reversed the
judgment of the District Court and upheld
Board Decision No. 262. That
court found HCFA's interpretation of
section 1903(d) reasonable and based on
sound policy considerations. On
October 1, 1984, the United States
District Court for the Northern
District of New York affirmed Board Decision
No. 311 in Perales v.
Secretary, Case No. 83-CV-900, aff'd sub nom.
Perales v. Heckler, 762
F. 2d 226 (2d Cir. 1985). See, also
Florida v. Heckler, Civ. No.
82-0935, (N.D. Fla. 1984), which affirmed
the Board's decision in
Florida Department of Health and Rehabilitative
Services, Decision No.
296, May 15, 1982, holding that the State of Florida
was liable for
Medicaid overpayments made to providers notwithstanding the
providers
bankruptcy; and Department of Social Services v. Heckler,
Case No.
84-4106-CV-C-5 (W.D. Mo. 1984) (appeal pending), which
reversed the
Board's decision in Missouri Department of Social Services,
Decision No.
448, June 30, 1983. Compare, Arkansas v. Heckler, Case No.
LR C 83 467,
Eastern District of Arkansas, September 17, 1984.
MARCH 28, 1987