GAB Decision 730
March 20, 1986
Massachusetts Department of Public Weflfare;
Docket No. 85-162
Garrett, Donald F.; Settle, Norval D. Ballard, Judith A.
The Massachusetts Department of Public Welfare (State) appealed a
determination by the Health Care Financing Administration (Agency)
disallowing federal financial participation in the amount of $4,523,612
claimed by the State under title XIX of the Social Security Act for
services provided in six State-owned intermediate care facilities for
the mentally retarded (ICFs/MR) during the period July 1, 1981 through
June 30, 1982. The State's claim was based on a per diem rate increase
approved by the State's Rate Setting Commission (RSC) for each of the
facilities. The Agency disallowed the costs on the ground that the rate
increases were not authorized by the State's title XIX plan. As
discussed below, we find that there was no authority for the rate
increases in the State plan, and we therefore uphold the disallowance.
Statutory, Regulatory and State Plan Provisions Regarding Payment Rates
Section 1902(a)(13)(A) of the Social Security Act states that a state
plan
for medical assistance must provide:
for payment of . . . intermediate care facility services
provided
under the plan 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 which must be incurred
by
efficiently and economically operated facilities in order to
provide
care and services in confirmity with applicable State and Federal
Laws,
regulations, and quality and safety standards. . . . /1/
(2)
Implementing regulations at 42 CFR 447.252(a)(2) (1981) further provide:
The payment rates used by the Medicaid agency must be determined
in
accordance with methods and standards developed by the agency.
In addition, 42 CFR 447.253(b) (1981) provides:
The (State) plan must specify the methods and standards used by
the
agency to set payment rates. /2/
The State's title XIX plan provided in pertinent part:
The State agency will pay the reasonable cost of inpatient
hospital
services in accordance with the principles adopted by the
Massachusetts
Rate Setting Commission. . . . /3/
Both the State plan and the RSC regulations for determining
payment
rates provide for use of a prospective rate-setting methodology
to
compute ICF/MR per diem rates. Under this methodology, actual
costs
reported by the facility for a base year, defined in this case as
two
years prior to the year for which the rate is being set, are
adjusted
for inflation and divided by total base year patient days to reach a
per
diem rate. (State plan, Attachment 4.19-A; RSC regulations,
114.1 CMR
5.06) This rate is multiplied by the number of patient days in the
rate
year to determine the amount reimbursable under title XIX.
The State plan further provides that a hospital may apply for
an
administrative adjustment "to the prospective rate or to the
allowed
base cost" based on the following "incidents":
a. A capital expenditure or change in service made under
authority
of a determination of need issued by the Department of Public
Health.(
3)
b. A substantial program change which did not require
a
determination of need.
c. An increase in cost made necessary by requirements
of
governmental units, e.g., additional licensure requirements imposed
by
Public Health, changes in minimum wages, etc.
d. An extraordinary increase in operating cost, which is
beyond the
reasonable control of the hospital, not reflected in the
inflation
factor and which gravely threatens the financial stability of
the
hospital.
The RSC regulations also provide for "administrative adjustment of (a) .
.
. rate or charge" based on various grounds including the following:
* * *
(i) A hospital not subject to the licensing provisions of M.G.L.
. .
. which did not utilize a significant number of beds during the
base,
intermediate or rate year due to a substantial program change
affecting
Patient days, and for which it would be inequitable to utilize base
year
patient days in establishing rates and charges.
We note that the Agency asserted that a State plan provision
ineffect
during the first nine months of State fiscal year 1982 would
have
prohibited the reduction of patient days used to calculate the
rate.
The Agency indicated, however, that it did not rely on the provision
for
the disallowance. (Agency's brief dated December 18, 1985,
pp. 7-8)
The provision in question required the use of actual long-term
care bed
days or 95% of total available long-term bed days, whichever is
greater,
in the denominator of the rate. The State stated, however,
that this
provision was not applicable to the facilities in question here,
citing
a clarifying amendment to the State plan approved by the
Agency
effective April 1, 1982, which provided that for facilities such as
the
ones in question here, allowed bed days are in all cases equal to
actual
bed days. (State's reply brief dated February 13, 1986,
pp. 17-18, and
Ex. B-1)
Factual Background
On April 7, 1982, the Department of Mental Health requested that the
RSC
approve administrative rate adjustments for the six facilities
in
question for state fiscal year 1982 (July 1, 1981 through June
30,
1982). This request was made when the State legislature failed
to
appropriate all funds requested by the Department of Mental Health
for
the facilities. (State's brief dated November 15, 1985, pp.
25-27)
Requests for three(4) other rate increases for these facilities
were
approved by the RSC for the same year and not challenged by the
Agency.
These three increases were for increased costs incurred to
improve
conditions in the facilities as required by consent decrees which
had
been in effect for several years. (Agency's brief dated December
18,
1985, p. 6; State's reply brief dated February 13, 1986, p. 16)
The
consent decrees also required that community facilities be
made
available for patients for whom placement in such facilities rather
than
in an institutional setting was appropriate. (State's brief
dated
November 15, 1985, pp. 17-18, n. 2) Here, the State requested
that
intermediate year (fiscal 1981) patient days rather than base
year
(fiscal 1980) patient days be used to compute the rates.
This
adjustment was requested "due to an intense
deinstitutionalization
effort" (i.e., an effort to move patients out of
ICFs/MR into community
placements), which had resulted in "an 8.29% decrease
in patient days."
(State's appeal file, Ex. C) The request cited paragraph
(i) of the
administrative adjustment provisions of the RSC regulations as
authority
for the adjustment. The adjustment was approved by the RSC
effective
July 1, 1981. (State's appeal file, Ex. C) The State later
claimed that
the adjustment could also be justified under paragraphs b.
or c. of the
administrative adjustment provisions of the State plan.
(State's appeal
file, Ex. H, p. 2)
The Agency disallowed the costs claimed based on the rate increases on
the
ground that the provision relied on by the RSC to approve the rate
increases
was not contained in the approved State plan. (State's appeal
file, Ex.
J, pp. 1-2) /4/ The Agency also found that the provisions of
the State plan
which the State asserted permitted the rate increases
were not
applicable. Specifically, the Agency found that there was
no
"substantial program change" as required by b., and that there was
no
"increase in cost" as required by c. (Id., p. 3) On appeal to
this
Board, the State did not pursue the argument either that (i) of the
RSC
regulations or that b. of the State plan was applicable (conceding
that
the RSC regulations "limited the definition of substantial
program
change" so that(5) it did not apply here). /5/ Rather, the State
argued
that c. and d. of the State plan were applicable. (State's brief
dated
November 15, 1985, pp. 13, 25; State's reply brief dated February
13,
1986, p. 7)
As discussed in detail below, we find that the rate increases were
not
justified under either c. or d. of the State plan. While we
give
deference to a state's interpretation of its own plan in
appropriate
circumstances, we are not constrained to defer to a
state's
interpretation where that interpretation is not a reasonable
one. The
interpretation advanced by the State here in support of the
rate
increases was not one articulated by the RSC. Instead, the
RSC
summarily approved the increases on the basis of a request by the
State
which cited a provision the State now admits was not applicable.
Thus,
in finding the State's interpretation unreasonable, we are not
looking
behind a considered determination by the State rate-setting
agency.
Moreover, we think that a less expansive interpretation of its plan
than
the State advanced here is appropriate since the rates were
determined
based on a prospective rate-setting methodology. The
underlying intent
of such a methodology--to encourage providers to better
control
costs--is defeated if adjustments to reflect actual costs are
available
in any case where the prospective rate does not reimburse the
provider
for all costs incurred (much less in the present case where
application
of the original per diem rates for State fiscal year 1982
resulted in
Medicaid compensation exceeding each facility's operating
costs). In
addition, the fact that the State sought and was granted
several other
rate increases in the same fiscal year for the same six
facilities calls
for closer scrutiny of the rate increases in question
here; the
repeated adjustment of the rate for each facility is not
entirely
consistent with the intent of the prospective rate-setting
methodology
to set in advance a rate which gives the provider an incentive to
keep
costs down.
Another consideration bearing on the degree of deference to be accorded
to
the State's interpretation is that, since the facilities in question
here
were State-owned, the cost to the State for running the facilities
was the
same regardless of the per diem rates approved by the RSC. The
per diem
rates affected only the amount of federal financial
participation to which
the State was entitled. In the case of a private
provider, however, the
State must reimburse the provider at(6) the per
diem rate, so that, unlike
the situation here, the State could not
receive a windfall if the rate were
unjustifiably increased. Although
the windfall in this case partially
compensated the State for operating
losses for the six facilities in the two
prior years, it was
inappropriate for the State to seek an adjustment on this
basis.
Thus, we do not defer to the State, and find, contrary to the
State's
position, that neither paragraph c. nor d. of the State plan
adjustment
provisions authorized the rate increases at issue here. Both
of these
provisions specifically require an increase in costs. However,
the
State did not contend that for purposes of this adjustment there was
any
increase in the costs reported by any facility. Instead, the
State
contended that the per patient cost in each facility increased since
the
costs for each facility remained constant and the number of patients
in
each facility decreased. This is clearly not what was intended by
the
reference in the State plan provisions to cost increases, however.
The
State plan provides that:
(actual) base year costs as determined in accordance with and
allowed
pursuant to the Principles of Reimbursement for Provider 42 U.
S.C.
1395 et seq., are reported by hospitals and are used to calculate
per
diem rates for the rate year. . . .
It continues:
Base year cost increases beyond actual inflation may be allowed
only
on grounds described in Section 10 below, headed
Administrative
Adjustments.
This indicates that the cost increases permitted as
administrative
adjustments are increases in total costs reported by a
facility for the
base year, not per patient cost increases as contended by
the State.
The State cited language in the State plan prefacing the
adjustment
provisions which refers to "adjustments to the prospective rate or
to
the allowed base cost," arguing that adjustments to either the
numerator
or denominator of the rate figure were properly considered
adjustments
to the rate. (State's reply brief dated February 13, 1986, pp.
5-6)
However, this argument loses sight of the fact that the State relied
in
this appeal only on c. and d. of the State plan adjustment
provisions,
which specifically refer to cost increases.
Moreover, this reading of the plan provisions is consistent with
the
adjustment provisions of the RSC regulations. Paragraphs (b) and (d)
of
the latter adjustment provisions(7) are nearly identical to c. and
d.
of the State plan. /6/ There is no provision in the State plan
which
parallels the provision of the RSC regulations originally relied on
by
the State in requesting that the RSC approve the rate increases.
Since
the latter provision--(i)--refers specifically to changes in
patient
days, it can reasonably be inferred that neither (b) nor (d),
and
therefore neither c. nor d. of the State plan, were intended to
permit
an adjustment based on a change in patient days.
Even if the State's interpretation is adopted, it is not clear that
the
State in fact experienced per patient cost increases. Such
increases
would be possible only if the costs reported by each facility
remained
constant (or increased) despite the reduction in the number of
patients.
The Agency identified several types of costs which it appeared
might
reasonably have decreased as a result of the decreased patient
load.
(Agency's brief dated December 18, 1985, p. 7) In response, the
State
asserted that the 8.29% reduction in patient days which prompted
the
request for the rate increases was not sufficient to permit a
reduction
in fixed costs such as light and heating or in service costs such
as
cleaning and laundry. (State's reply brief dated February 13, 1986,
p.
15) The State also asserted that food costs increased from 1980 to
1981.
(Id., p. 14) However, the State provided no documentation to support
its
assertion regarding fixed costs and service costs. The
documentation
provided regarding food costs indicates only that budgeted food
costs
increased and does not reflect costs actually incurred.
(State's
appeal(8) file, Ex. A1-A6) /7/ The State also asserted that the
price of
oil increased by 50% between 1980 and 1981. (State's reply
brief dated
February 13, 1986, p. 15) However, the State provided no evidence
that
such increased costs were a factor in requesting the rate
increases
here. There is thus no clear evidence that some costs did not
in fact
decrease in each facility as the result of the decreased patient
load.
Although the foregoing conclusions are sufficient to support
the
disallowance, we note further that, even if we assume that the
cost
increase contemplated by the State plan adjustment provisions is a
per
patient cost increase, and that the State in fact experienced such
an
increase in each facility, it is not clear that the increase was
"made
necessary by requirements of governmental units," as required by c.
The
State argued that the deinstitutionalization of a large number
of
patients, and the resultant increase in per patient costs, was
required
by federal statutory and regulatory provisions mandating
active
treatment of patients in ICFs/MR as a condition of federal
funding.
However, while federal requirements such as the active
treatment
requirement foster deinstitutionalization, the State did not show
that
there was a direct nexus between those requirements and the
specific
reductions in patient population on which the rate increases
were
purportedly based.
Furthermore, it is not clear that any per patient cost increases here
were
"beyond the reasonable control" of the facilities, as required by
d. of the
State plan. As indicated above, although the State argued
that it could
not have reduced certain costs which appeared to bear a
relationship to the
number of patients in a facility, it did not
establish this as a matter of
fact. (It is thus unnecessary to consider
the State's contention that
the cost increases threatened the financial
stability of the facilities, as
also required by d.)(9)
Conclusion
For the foregoing reasons, we conclude that the rate increases on
which
the State's claim was based were not authorized by the State
plan.
Accordingly, we uphold the disallowance in the amount of
$4,523,612.
/1/ This provision
applies here since under 42 CFR 447.251
intermediate care facilities include
ICFs/MR. /2/ Both
this
regulation and the regulation quoted above implemented statutory
changes
regarding payment for long-term care facility services made by
section
962 of the Omnibus Reconciliation Act of 1980 (Pub. L. 96-499).
The
regulations were published as an "Interim Final Rule With
Comment
Period" effective September 30, 1981 (46 Fed. Reg. 47964). Both
parties
here took the position that the regulations were applicable
although
they were published after the beginning of the year in
question.
/3/ Although for federal purposes an ICF/MR is not a hospital,
under the
State plan, hospitals include ICFs/MR. (State's reply brief
dated
February 13, 1986, p.
16) /4/ The Agency also stated
that, in
view of the fact that the application of the rates as adjusted
resulted
in Medicaid reimbursement exceeding each facility's operating costs
for
the year in question, the "inequity" required for application of
this
provision was not present. (State's appeal file, Ex. J, p. 4)
The
operating costs for each facility exceeded Medicaid reimbursement
in
State fiscal years 1980 and 1981, however, resulting in a net loss
for
the three-year period. (State's brief dated November 15, 1985, p.
23)
/5/ RSC regulation 74-26 states that such a change must involve a
new
service with additional annual operating expenses exceeding
$100,000.
(State's reply brief dated February 13, 1986, p.
7) /6/
Paragraphs (b) and (d)
of the adjustment provisions in the RSC
regulations provide as follows:
(b) Statutory or regulatory
requirements of a governmental unit or the
federal government have
generated a substantial increase in allowable costs
as adjusted pursuant
to 114.1 CMR 5.15 during the base, intermediate or rate
year. * * * (d)
There has been an extraordinary increase in operating costs
beyond the
reasonable control of a health care facility during the
base,
intermediate or rate year which is not reflected in the inflation
factor
and which gravely threatens the financial stability of the health
care
facility. /7/ Documents
showing that the proposed food budget
for state fiscal year 1981 for two of
the facilities was insufficient
indicate that the original budget request in
each case was based on too
low an estimate of the number of patients in the
facility. (State's
appeal file, Ex. A3 and A4) Thus, these documents do
not support the
State's position that food costs increased with a decreased
patient
population.
MARCH 28, 1987