Massachusetts Department of Public Welfare, DAB No. 853 (1987)

GRANT APPEALS BOARD

Department of Health and Human Services

SUBJECT: Massachusetts Department  of Public Welfare

Docket No. 86-164
Decision No. 853

DATE:  March 30, 1987

DECISION

The Massachusetts Department of Public Welfare (State) appealed a
determination by the Health Care Financing Administration (HCFA/Agency)
disallowing federal financial participation in the amount of $7,752,367
claimed by the State under title XIX of the Social Security Act for
services provided in five State-owned intermediate care facilities for
the mentally retarded (ICFs/MR) during the period July 1, 1982 through
June 30, 1983.  The State's claim was based on per diem rate increases
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 in the State plan
for the rate increases, 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 conformity
       with applicable State and Federal Laws, regulations, and quality
       and safety standards. . . . 1/

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.

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 . . . , and as approved
       by the Secretary. . .  . 2/

Both the State plan and RSC regulations provided 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.  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 provided:

       Base year cost increases beyond the rate of inflation . .  . may
       be allowed only on the grounds described in Section 10 below,
       headed Administrative Adjustments.

Section 10 (of Attachment 4.19-A) provided:

       A hospital may apply at any time for an administrative
       adjustment.  The following incidents or circumstances may give
       rise to adjustments to the prospective rate or to the allowed
       base cost.

The section contains ten separate bases for an adjustment.  The State
did not rely on any of these ten bases in this appeal. Instead, it
relied on section 4 of Attachment 4.19-A of the State plan, captioned
"Allowed Inpatient Days," which is quoted later in this decision.  The
RSC regulations also provided for "administrative adjustment of [a] . .
. rate or charge" on various grounds including the following:

       (h) A health care facility has incurred or expects to incur a
       substantial change in services during the base, intermediate or
       rate years, and which expenditure or service change is exempted
       from the Determination of Need requirements. . . .

       (i) A hospital not subject to the licensing provisions of M.G.L.
       c. 111, s. 51, 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.

(114.1 CMR 5.09(1)(h) and 5.09(1)(i))

Factual Background

On May 5, 1983, the RSC approved administrative rate adjustments for the
five facilities in question for State fiscal year 1983. (State's appeal
file, Ex. 17).  The adjustments were requested under the provisions of
114.1 CMR 5.09(1)(i), quoted above.  The only explanation given was that
"[t]he decrease in patient days from those used to determine the current
rate necessitates this request."  (State's appeal file, Ex. 1)  The
decrease in patient days referred to in the request resulted from
deinstitu- tionalization," the movement of patients for whom it was
appropriate out of ICFs/MR into community placements, required by
consent decrees to which the State was a party.  The adjusted rates were
computed using intermediate year (fiscal 1982) patient days rather than
base year (fiscal 1981) patient days in the denominator.  The State
later claimed that the adjustment could also be justified under 114.1
CMR 5.09(1)(h). 3/ The Agency disallowed the costs claimed on the basis
of the rate increases on the ground that neither provision cited by the
State to justify the rate increases was contained in the approved State
plan.  In addition, the disallowance stated that 114.1 CMR 5.09(1)(h)
required a substantial increase in expenditures in order to justify a
rate increase, and noted that the State had not provided evidence of any
cost increase.

State's Arguments

The State argued first that the RSC regulations at 114.1 CMR 5.09(1)(h)
and 5.09(1)(i) were "subsumed" in the State plan. (State's brief, p. 15)
The State reasoned that since the State plan, in conformity with section
1902(a)(13)(A) of the Act, provided that the State "will pay the
reasonable cost of inpatient hospital services," any RSC regulations
which accomplished this goal were thereby part of the plan.  The State
asserted that the adjustments granted under the RSC regulations noted
above in fact accomplished this goal, contending that unadjusted rates
would have left the five facilities underfunded by $4.9 million FFP.
The Agency subsequently conceded that the unadjusted rates would have
resulted in costs exceeding reimbursement, although by less than $4.9
million. 4/

The State also noted that it had conceded in an earlier appeal to this
Board that a similar rate increase granted by the RSC for a prior fiscal
year was not authorized by 114.1 CMR 5.09(1)(i) because
deinstitutionalization was not the kind of "substantial program change"
contemplated by that provision.  The State argued in the instant case,
however, that this provision was adopted expressly for the purpose of
alleviating the "financial impact" of deinstitutionalization.  (State's
brief, p. 12)

The State also argued that the rate adjustment was authorized by section
4 of Attachment 4.19-A of the State plan.  The stated purpose of that
provision was to adjust the inpatient days reported by hospitals "for
excessive empty beds . . . to produce Allowed Inpatient Days."  Allowed
inpatient days are used as the denominator in the rate calculation.
Section 4 provided that for hospitals which are subject to State
licensure requirements, allowed inpatient days equals the greater of
actual bed days or a percentage of available bed days, defined as the
number of licensed beds times the number of days in the year.  (This
calculation was to be performed separately for maternity, pediatric,
medical-surgical, and long-term care beds; a different formula applied
to newborn beds.)  For hospitals operated by the State, however, section
4 provided that allowed inpatient days in all cases equals actual bed
days. 5/  The State asserted that the rate adjustment, which substituted
intermediate year patient days for base year patient days, was
authorized by this provision since "intermediate year patient days came
closest to reflecting actual bed days."  (State's brief, p. 17)

Discussion

The State's contention that the adjustment provisions in the RSC
regulations are subsumed in the State plan is without merit.  As
indicated previously, the State plan itself (at section 10 of Attachment
4.19-A) contains specific adjustment provisions. These provisions are
similar in format and level of detail to the adjustment provisions in
the RSC regulations.  Thus, the latter provisions are not simply a
detailed implementation of the State plan adjustment provisions.
Moreover, some of the State plan adjustment provisions are essentially
the same as adjustment provisions in the RSC regulations.  The RSC
adjustment provisions in question here are not paralleled in the State
plan.  We therefore conclude that the RSC adjustment provisions were not
intended as part of the State plan.  This conclusion is based on a
comparison of the State plan and RSC regulations; however, we note in
addition that the State presented no extrinsic evidence that the RSC
regulations were intended to implement the State plan rather than to
establish independent adjustment authority.  6/

In any event, we are not persuaded that a rate increase based on the RSC
regulations was necessary to carry out the goal of the State plan to pay
the reasonable cost of ICF/MR services.  The rates in question here were
determined based on a prospective rate-setting methodology.  This sets a
rate in advance at a level designed to give the provider an incentive to
keep costs down. As we noted in a prior decision, "[t]he 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. . . ."  Massachusetts Department of Public
Welfare, Decision No. 730, March 20, 1987, p. 5. 7/ Thus, the fact the
State incurred actual costs for its facilities in excess of what
reimbursement would have been under the unadjusted rates does not
necessarily mean that the State would not be reimbursed for the
reasonable costs of efficiently and economically operated facilities;
reasonable costs in this case may well be those covered by the
unadjusted prospective rates. Since the consent decrees which mandated
deinstitutionalization and allegedly led to the situation here had been
in effect for several years, the State cannot reasonably argue that it
could not have taken action to control costs after the rates were set.


Thus, we conclude that the State plan did not implicitly include the RSC
adjustment provisions in question. In light of this conclusion, we need
not reach the question whether the rate increases were authorized under
the terms of the RSC adjustment provisions themselves.

The State's contention that section 4 of the State plan authorized the
rate increases is similarly without merit. As discussed below, the
State's interpretation of section 4 is inconsistent with both its
language and apparent purpose. Moreover, as we noted in Decision No.
730, we find it appropriate to interpret the State plan narrowly in
considering rates for State-owned facilities; these per diem rates
affect only the amount of FFP to which the State is entitled and not the
cost to the State for running the facilities.  Also, a broad
interpretation of the State plan would defeat the intent of the
prospective rate-setting system.

The State argued that it could substitute intermediate year patient days
for base year patient days for purposes of the rate calculation based on
the statement in section 4 that, for hospitals not subject to State
licensure requirements, allowable patient days equals actual bed days.
However, section 4 does not appear to permit a change in the rate
calculation simply because the number of actual bed days may change from
one year to another. Instead, the statement relied on by the State
implies that for such hospitals actual bed days is a constant, rather
than a figure subject to adjustment.  In context, we read actual bed
days to mean actual bed days during the base year since there is no
dispute that this is what the rate calculation generally calls for.
This view is supported by the fact that the RSC regulations define the
denominator, "allowed inpatient days," as "[a]ctual inpatient days
during the base year."  (114.1 CMR 5.03(23)) 8/

Furthermore, the rate increases in question here are inconsistent with
the apparent purpose of section 4 to set a lower rate for a facility
with excessive empty beds. A rate decrease results from applying this
provision in the case of licensed hospitals since it calls for the use
of the greater of actual bed days or a percentage of available bed days
in the denominator of the fraction used to calculate the rate.  Where
there are "excessive empty beds," this acts to increase the denominator,
which in turn decreases the rate.  The language on which the State
relied merely indicates that State-owned facilities not subject to
hospital licensure requirements cannot make this adjustment and
therefore may use actual beds.  We see no justification for reading into
this exception authorization for a wholly different type of adjustment
which would have the effect of rewarding a facility for having excessive
empty beds.

Conclusion

For the foregoing reasons, we find 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 $7,752,367.

 


                           ________________________________ Charles E.
                           Stratton

                           ________________________________ Norval D.
                           (John) Settle

                           ________________________________ Judith A.
                           Ballard Presiding Board Member


1.     This provision applies here since under 42 CFR 447.251
intermediate care facilities include ICFs/MR.

2.     Although for federal purposes an ICF/MR is not a hospital, the
State plan provisions on rate-setting define "hospitals" to include
ICFs/MR.

3.     In responding to the Agency's report on its review of this
matter, on which the disallowance was based, the State cited an
additional basis for the rate increase; a third adjustment provision in
the RSC regulations (114.1 CMR 5.09(1)(B)) and an identical provision in
the State plan.  However, on appeal to the Board, the State did not rely
on these provisions.

4.     The parties compared total costs for all five facilities to total
reimbursement using the unadjusted rates.  Since a separate rate
adjustment was granted for each facility, we think it would have been
more relevant to compare the figures for each facility separately.  In
the absence of a facility-by-facility comparison, we assume for purposes
of this decision that the costs of each facility would have exceeded
reimbursement for that facility based on an unadjusted rate.

5.     Section 4 of the State plan reads as follows:

Actual inpatient days reported by hospitals are adjusted, if necessary,
for excessive empty beds by service to produce Allowed Inpatient Days.
A provider's total reported inpatient days are subdivided and adjusted
as follows:

a.  Allowed maternity days are either actual maternity bed days or 65
percent of total available maternity bed days, whichever is greater.

b.  Allowed pediatric days for teaching hospitals are either actual
pediatric bed days or 80 percent of total available pediatric bed days,
whichever is greater.  For all other hospitals, allowed pediatric days
are actual days or 75 percent of total available pediatric bed days,
whichever is greater.

c.  Allowed medical-surgical days for teaching hospitals are either
actual medical-surgical bed days or 85 percent of total available
medical-surgical bed days, whichever is greater.  For all other
hospitals, allowed medical-surgical days are actual bed days or 80
percent of total available medical-surgical bed days, whichever is
greater.

d.  Allowed long-term-care bed days are either actual long-term- care
bed days or 95 percent of total available long-term-care bed days,
whichever is greater.

e.  Adjusted well newborn days are actual well newborn days multiplied
by one-third.

Available bed days are calculated by multiplying the number of licensed
beds times the number of days in the year.  In the case of hospitals
that are not subject to the hospital licensure requirements of the
Commonwealth, including hospitals operated under the authority of the
Commonwealth of Massachusetts' Department of Public Health or Department
of Mental Health, the calculation of available bed days is not possible.
Thus, for hospitals not subject to these licensure requirements, allowed
bed days are in all cases equal to actual bed days.

6.     Apparently, rates set by the RSC are used for purposes other than
Medicaid reimbursement.  That the State may be authorized to set higher
rates under RSC regulations does not automatically mean that it can use
those rates when claiming Medicaid funding.

7.     The point that a state's failure to recover its actual costs
under a prospective reimbursement system does not alone justify changing
the plan was also made by the court in State of Arkansas v. United
States, No. 150-85C (Ct. C1., filed February 20, 1986).  The court,
affirming a Board decision, held that the State could not properly be
reimbursed for actual costs in excess of prospective rates incurred with
respect to state-owned ICFs/MR.  The court noted that "the states were
on notice that a prospective reimbursement system might not be as
accurate as a retrospective one."  The court further found that allowing
states to change their plans on their own "would seriously undermine the
desired Federal supervisory role regarding FFP," concluding that
"Plaintiff drafted the Plan in question and now must live with it.
(Id., p. 16)

8.     We do not read the State's argument as distinguishing between bed
days and patient days, and indeed it appears that the State plan uses
the two terms interchangeably.  The relevant distinction is between
available and actual bed/patient