DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: Florida Department of Health and
Rehabilitative Services
Docket No. 87-15
Decision No. 884
DATE: July 30, 1987
DECISION
The Florida Department of Health and Rehabilitative Services
(State)
appealed the decision of the Health Care Financing Administration
(HCFA,
Agency) disallowing federal financial participation (FFP) in the
amount
of $3,605,571 claimed under title XIX of the Social Security Act
(Act)
for the period July 1, 1984 through February 28, 1986. The
disallowed
costs related to a "use allowance" included in calculating the per
diem
rate paid to 43 State-owned intermediate care facilities for
the
mentally retarded (ICFs/MR). HCFA found that the use allowance did
not
represent an actual expenditure and was thus unallowable under
section
1903(a)(1) of the Act, which provides for FFP in "the total
amount
expended . . . as medical assistance. . . ." The State argued
that the
use allowance did in fact represent an expenditure, that it was
claimed
in accordance with the State's approved title XIX plan, and that it
was
affirmatively authorized by OMB Circular A-87, Attachment A, B(11).
For
the reasons discussed below, we reverse the disallowance.
The State's title XIX plan in effect during the period in
question
provided that "[a] use allowance on equity capital invested and used
in
providing resident care will be defined for purposes of the plan as
an
allowable cost . . . for non-profit providers." (State's appeal
file,
Ex. 4) It was to be computed by applying to the provider's
equity
capital (defined as the provider's investment in plant, property,
and
equipment related to patient care) a rate of return "equal to
the
average of the rates of interest on special issues of public
debt
obligations issued to the Federal Hospital Insurance Trust Fund for
each
of the months during the provider's reporting period. . . ." (Id.)
The
use allowance was then included in calculating the rates paid to
the
ICFs/MR.
The disallowance letter itself cited only section 1903(a)(1) of the Act
as
authority. This section provides that a state with an approved
Medicaid
plan may receive--
An amount equal to the Federal medical
assistance percentage . .
. of the total
amount expended during such quarter as
medical
assistance under the State plan.
. . .
(Emphasis added) After citing this provision, the disallowance
letter
stated:
The use allowance is not a net expense
or true cost to the State
and is
therefore unallowable under Title XIX. There was
no
expenditure by the State. . . .
Earlier in the disallowance letter, the Agency stated the use
allowance
did not represent "an actual expenditure by the State-owned ICF/MRs
or
the Medicaid single State Agency since the ICF/MRs are a part" of
the
State agency.
We discussed a similar argument in Hawaii Department of Social
Services
and Housing, Decision No. 779, August 21, 1986. There the
Agency argued
that reimbursement to providers under a rate calculated
including excise
taxes paid by the provider to the State of Hawaii did not
constitute an
"actual" or "net" expenditure since the taxes were paid to the
State.
We concluded that the State made an expenditure within the
everyday
meaning of the word "expenditure" as to "pay out", since the State
did
in fact pay out money to providers of medical assistance, which
included
reimbursement for excise taxes.
Here, the notice of appeal to this Board stated that--
The official audited accounting records
of the state reflect an
expenditure made
on behalf of Medicaid eligible clients
for
services rendered in the ICFs/MR in
accordance with our approved
State
plan.
The Agency did not contradict this statement. There was thus
an
"expenditure," even though the amount paid to the State-owned
providers
came back to the State treasury. As in Hawaii, "we must
reject the
Agency's position that the mere use of the term 'expended' in
section
1903(a) conclusively requires" upholding the disallowance.
HCFA also relied on a decision of the Court of Appeals for the
Fifth
Circuit denying a claim by non-profit hospitals for payment under
the
Medicare program of a return on equity capital. The Court stated
that a
return on equity was not a "reasonable cost" within the meaning of
title
XVIII because it was--
not an out-of-pocket cost at all, but is
instead an amount
assigned to substitute
for the profit element which could
otherwise be expected from the use of their capital (and
which
could be used by the plaintiff
nonproprietary hospitals to
maintain,
expand or replace their existing facilities.)
(Sun Towers, Inc. v. Heckler, 725 F.2d 314 (5th Cir. 1984))
The decision cited by HCFA fails to support HCFA's position. To
say
that a return on equity (which the State in this case called a
use
allowance) is not a reasonable cost under Medicare is not to say that
it
is not a reimbursable expenditure for purposes of title XIX.
Section
1861(v)(1(A) of the Act defines "reasonable cost" under Medicare as
"the
cost actually incurred," whereas title XIX provides for payments
to
providers based on a rate calculated using an approved
state
reimbursement system. As discussed below, the court's conclusion
that a
return on equity is not an out-of-pocket cost has no bearing on the
case
before us, where the rate was calculated using an approved system.
We find, moreover, that HCFA's scrutiny of the underlying costs used
to
calculate the rate (following its approval of the State's Medicaid
plan)
is inconsistent with section 1902(a)(13)(A) of the Act. This
section
requires in pertinent part that a state's title XIX plan provide for
the
payment of providers such as ICFs/MR--
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 that must be incurred
by
efficiently and economically operated
facilities. . . .
No specific limits are set for the rates, except that the overall
average
rates cannot be greater than what is estimated would be paid for
the services
under the Medicare principles of reimbursement. Thus, once
a state's
plan is approved, the Act does not contemplate any further
scrutiny of the
costs used to calculate the rate as long as the rate is
determined in
accordance with the state plan and Medicare limits are not
exceeded.
The Agency did not allege here that the State did not comply
with its
approved plan in developing the rates paid to the State-owned
ICFs/MR;
indeed, it acknowledged that the use allowance was expressly
allowed by the
approved State plan. The record shows also that the
Medicare upper
limit was not exceeded. Accordingly, in the absence of
any clearly applicable
rule providing that the use allowance for
state-owned providers would not be
permitted, we hold that the state
plan approval under the circumstances here
meant that the rates paid by
the State including the use allowance could not
properly be disallowed
on the basis relied on by the Agency. We do not
here decide whether the
Agency would have to approve the plan provision at
issue if in the
future it were included in a new State plan, but merely
reverse the
disallowance for the period the State plan including this
provision was
approved. 1/ The State argued that the use allowance was
specifically
authorized by OMB Circular A-87, Attachment A, B(11).
Paragraph a. of
B(11) provides that--
Grantees may be compensated for the use
of buildings, capital
improvements, and
equipment through use allowances or
depreciation.
HCFA asserted that the Circular did not apply here.
However, it is immaterial to the State's case whether or not the
Circular
applies. As indicated by our previous discussion, payment of a
rate
computed in accordance with the methods and standards specified in
an
approved state plan is an allowable expenditure for purposes of
title
XIX. Thus, the State need not point to any specific authority for
the
inclusion of the use allowance in calculating the rates in
question
here.
Conclusion
For the foregoing reasons, we find that HCFA improperly disallowed the
use
allowance component of the rates claimed for the ICFs/MR and,
accordingly,
reverse that disallowance.
_____________________________ Judith
A.
Ballard
_____________________________ Alexander
G.
Teitz
_____________________________ Donald
Garrett
Presiding Board Member
1. The Agency raised a question as to the periods
covered by the
approved State plan and the disallowance. HCFA claimed
that the State
did not have HCFA's plan approval for seven months out of the
twenty
months of the disallowance, and continued to file claims for five
more
months after receiving notice that the claims would be disallowed.
The disallowance is for the period July 1, 1984 through February
28,
1986. The disallowance letter states that the latter date was
"when
such payments to State-owned ICF/MRs were deleted from the State
plan."
Disallowance letter, p. 2.
HCFA pointed out that the State did not submit the plan amendment
until
February 1, 1985. However, it had a retroactive effective date of
July
1, 1984, so the Agency's argument that the State did not have
HCFA's
plan approval for the seven months (from July 1, 1984 to February
1,
1985) is meaningless, where the approval was retroactive.
So, also, the State cannot be penalized for continuing to claim FFP
under
an approved plan until the objectionable provision was eliminated
from the
plan. Notification that a plan provision is objectionable and
should be
deleted by an amendment does not automatically delete the