DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: Massachusetts Department of Public Welfare
Docket No. 87-127
Decision No. 933
DATE: February 4, 1988
DECISION
The Massachusetts Department of Public Welfare (Commonwealth) appealed
the
decision of the Health Care Financing Administration (HCFA)
disallowing
$622,813 in federal financial participation (FFP) claimed by
the Commonwealth
under Title XIX of the Social Security Act (Medicaid).
The claims were for
interest paid to certain hospitals on amounts which
a state court determined
had been improperly withheld by the
Commonwealth. HCFA disallowed the
claims on grounds that the interest
was not a legitimate medical expenditure,
and that it was not eligible
for FFP under applicable cost principles because
it resulted from a
violation of federal law.
The principal issue in dispute is whether the interest expense is
"medical
assistance" under the State plan, within the meaning of section
1903(a)(1) of
the Social Security Act (Act). We conclude it is not and
sustain the
disallowance.
BACKGROUND
Under section 1903(a)(l) of the Act, FFP is available at the
federal
medical assistance percentage of the total amount expended during
any
quarter as "medical assistance" under an approved state Medicaid
plan.
Section 1905(a) of the Act defines "medical assistance" as "payment
of
part or all of the cost" of covered services provided to
eligible
individuals. "Inpatient hospital services" are a mandated
covered
service.
Prior to 1981, inpatient hospital services were to be reimbursed on
a
"reasonable cost" basis. The Omnibus Budget Reconciliation Act of
1981,
Public Law 97-35 (OBRA), amended section 1902(a)(13) of the Act
to
provide that inpatient hospital services should be reimbursed
through
rates "which the State finds, and makes assurances satisfactory to
the
Secretary [of HHS] are reasonable and adequate to meet the costs
which
must be incurred by efficiently and economically operated facilities .
.
. ." Under the OBRA amendment, however, states could continue to
follow
inpatient hospital plans which had been approved under the
reasonable
cost criteria, since this was a more rigid standard. See 46
Fed. Reg.
47964 (Sept. 30, 1981).
Both before and after the OBRA amendment, section 1902(a)(13) of the
Act
and implementing regulations provided that (1) a state Medicaid
plan
must set out the methods and standards to be used by the state
Medicaid
agency in determining rates, and (2) payments to providers must be
at
rates determined in accordance with those methods and standards. See
42
C.F.R. 447.201(1980); 42 C.F.R. 447.201, 447.252 (1981).
In Massachusetts, Medicaid reimbursement rates are set by
the
Massachusetts Rate Setting Commission (Commission). In 1981,
the
Commission promulgated an amended regulation which established a
flat
rate of $70 per day for hospital inpatients on
"administratively
necessary day" (AND) status. Patients on AND status
are those patients
who are no longer ill enough to require acute care, but
for whom there
are no lower level of care beds available -- thus, the AND
patients
remain in acute care hospitals and the hospitals are reimbursed at
the
lower AND rate. The Commonwealth did not seek or obtain approval
from
HCFA of its amended method for determining AND rates.
The New England Memorial Hospital and the Quincy City Hospital sued
the
Commission in state court to have the amended regulation declared
void
and to recover Medicaid payments of which the amendment
allegedly
deprived them. On appeal of the lower court's ruling, the
Supreme
Judicial Court of Massachusetts held that the amended regulation
was
invalid because the Commonwealth had failed to provide the Secretary
of
HHS with assurances that the new rate was reasonable and adequate
to
meet the costs that must be incurred by efficiently and
economically
operated facilities, as required by the OBRA amendment.
New England
Memorial Hospital v. Rate Setting Commission, 394 Mass. 296, 475
N.E. 2d
740 (1985). The court then reinstated the previous methodology
(which
had been set out in an approved State plan). The court ordered
the
Commonwealth to reimburse the hospitals for the difference between
the
amount they would have received under the previous rate and the $70
flat
rate. New England Memorial, 475 N.E. 2d at 745. The court remanded
the
case to the lower court for proceedings consistent with its
opinion.
Prior to entry of final judgment in the lower court, the
Commonwealth
agreed to pay interest on the amounts owed the hospitals, and
the lower
court approved the agreement. Appellant's Brief, p.3;
Respondent's
Brief, p.2.
The opinion of the Supreme Judicial Court in New England Memorial
affected
not just New England Memorial and Quincy hospitals, but
approximately 107
acute care hospitals that had been paid the $70 flat
rate during the period
August 13, 1981 through September 30, 1982.
Appellant's Brief, p. 4. To
comply with the New England Memorial
opinion, the Commission first had to set
individual rates under the old
methodology for each of the hospitals.
The process was time consuming,
involving notice and comment rulemaking and
paperwork with each affected
hospital. Consistent with the agreement
approved by the lower court on
remand, the Commonwealth paid interest to each
hospital. After paying
the hospitals, the Commonwealth claimed FFP, at
the federal medical
assistance percentage, in both (1) the difference between
the $70 flat
rate and the rate calculated using the previous methodology, and
(2) the
interest. HCFA paid the former but not the latter.
HCFA disallowed the interest on the grounds that (1) it was not
an
expenditure for "medical assistance" under the approved State plan,
and
(2) it constituted a cost incurred in violation of federal law and
was,
therefore, unallowable under the cost principles in Office of
Management
and Budget (OMB) Circular A-87.
Below, we first discuss whether the interest was "medical assistance."
We
conclude that it was not. We next discuss whether this interest
is
unallowable under the OMB Circular and find that the Circular
does
provide collateral support for the disallowance.
THE MEDICAL ASSISTANCE ISSUE
The Parties' Arguments
The Commonwealth's primary argument in this case was that the
interest
should be considered "medical assistance under the State plan,"
within
the meaning of section 1903(a)(1), because the interest was part of
the
rate payments owed to the hospitals. At first, the
Commonwealth
appeared to be arguing that the rate-setting method set out in
the State
plan specifically allowed such interest as a provider cost to be
used in
calculating reimbursement rates for hospitals. HCFA pointed out
in
response that the cost principles applicable to provider
reimbursement
allowed interest only in circumstances where it was an expense
incurred
by a provider. The Commonwealth subsequently clarified that it
was not
arguing that the interest here was the kind of cost a provider
incurred
which could be specifically included in calculating a
reimbursement
rate. Tr., pp. 37-38.
Massachusetts' argument, as clarified, was essentially as follows:
o The relationship between Massachusetts and
the hospitals was
contractual,
and, since the court concluded that
Massachusetts
had breached its
obligations, the payments to the hospitals
were
the equivalent of contract
damages;
o an award of contract damages would put a
given hospital in the
same
position it would have been in had the contract
been
performed;
o money has a real value over time;
o since the rate was paid late, the hospitals
were entitled to
interest so as to
receive the value of the rate rather
than
merely the amount of the rate
as calculated under the State plan
methodology.
The State argued that denying FFP in the interest would have the result
of
giving a "windfall" to the Federal Government because it had the use
of the
money over the period of time between when the rates should have
been paid
(in 1981) and when they actually were paid (in some instances
as late as
1986).
HCFA argued that it had provided FFP for the difference between the
rates
because the resulting payment was "identical to the rate which had
been
considered appropriate under the last approved state plan," whereas
"the
interest charges in question were over and above the amounts
established
under the last approved state plan." Respondent's Brief, p.
4. HCFA
argued further that the language of the court order in New
England Memorial
was quite specific:
. . . the plaintiffs are entitled to reimbursement .
. . on the
basis of the difference between the $70 a
day AND rate declared
invalid and the routine care
rate effective as of January 31, 1981
[previous
rate], as though the latter remained in effect for
the
period in dispute.
New England Memorial, 475 N.E. 2d at 745. HCFA pointed out that
while
the Court had ordered payment in accordance with the previous
rate
methodology, the Court said nothing about interest. HCFA argued
that
the interest charge was an "add-on" to the rate and a direct result
of
the Commonwealth's "illegal conduct." Respondent's Brief, p. 5.
Hence,
HCFA concluded, the interest was not medical assistance under the
State
plan.
Discussion
Massachusetts pointed to no statute or regulation which
specifically
authorized federal funding for interest of this type, i.e.,
interest
which a state pays to providers because the state has not made
Medicaid
payments at the correct rate in a timely manner. See Tr., pp. 36,
42.
Payment of interest was a matter of agreement between the
Commonwealth
and the hospitals. While a lower court approved the
agreement, the
court did not order the Federal Government to pay any part of
the
interest.
The persuasiveness of the Commonwealth's argument fundamentally depends
on
the validity of the assertion that, since payment of the interest
was
necessary in order to give the hospitals the full value of the rates
to
which the hospitals were entitled under the State plan, the
interest
should be considered "medical assistance" eligible for FFP.
We do not necessarily disagree with the concept that the money which
the
hospitals should have received in 1981 had value over time, nor that
the
only way the Commonwealth could make the hospitals whole, as though
they
had received payment under the proper rate at the proper time, was
by
paying them interest. But this does not lead to the conclusion that
the
interest itself was part of the rate nor that the Federal
Government
must participate in the interest.
On the contrary, under the approved rate methodology there was
no
requirement that interest paid on judgments against the Commonwealth
be
included in calculating the rate. Appellant's Exs. 4 and 5; Tr. p.
22.
The rates which the court ordered were a reinstatement of rates
which
had been established under the last approved State plan. The
interest
payment was not part of that State plan methodology. The
Commonwealth's
value argument strains to characterize as "part of the rate"
what is
clearly an "add-on" to the rate. We also reject the
Commonwealth's
argument that this interest nonetheless should be considered
a
"reasonable cost" to the provider, within the meaning of the State
plan
reimbursement methodology (developed under the pre-OBRA
statutory
provision). In context, "reasonable cost" clearly means a
reasonable
cost to a hospital in providing services to Medicaid
recipients. Any
interest cost to the hospitals here was incurred
because the
Commonwealth delayed in making payment at the rates established
by the
State plan, not because the interest was a reasonable cost of
providing
services.
While the Commonwealth's value argument may be sensible from a
financial
perspective, we must be concerned with Congressional intent
regarding
FFP rather than with financial theory regarding the value of
money. We
are convinced that Congress did not intend to provide FFP for
the type
of interest in question here. The relevant statutory and
regulatory
provisions, cited above, make it clear that Congress wished the
states
to specify reimbursement methods in their state plans and to
follow
those approved methods. Moreover, Congress provided that states
must
have claims review procedures to ensure efficient payment of
provider
claims. Section 1902(a)(37) of the Act. In our view,
Congress did not
intend federal Medicaid funding to pay for costs incurred by
a state
because of the state's own delay caused by violating federal
Medicaid
law. Providing FFP here would do just that.
Moreover, under the circumstances here, we do not think it
significant
that the Federal Government might receive some monetary benefit
from use
of its share of the rate payments during the period while
the
Commonwealth delayed. Permitting the Federal Government to retain
such
a benefit, if any, and requiring the Commonwealth to pay the full
amount
of the interest will act as an incentive for the Commonwealth to
comply
with federal requirements in the future. Contrary to what
the
Commonwealth argued, permitting HCFA to retain any benefit from use
of
the funds during the period of such a delay does not violate
the
principle of cooperative federalism. That principle does not
require
the Federal Government to participate in a state's expenditures
arising
from a failure to comply with federal requirements. We also
note that
the Federal Government must demand as much certainty as possible in
its
budget process. Cf. section 1132 of the Act. Actions such as
the
Commonwealth's create uncertainty in that process.
For the foregoing reasons, we conclude that Massachusetts has failed
to
provide any reasonable basis for an interpretation that the interest
was
eligible for FFP as "medical assistance" under section 1903(a)(1) of
the
Act.
OFFICE OF MANAGEMENT AND BUDGET CIRCULAR A-87
OMB Circular A-87 supports the conclusion that the interest was
not
eligible for FFP. The Circular, entitled "Cost Principles for State
and
Local Governments," is applicable to Medicaid grants through 45
C.F.R.
74.171. Attachment B, section D.5., of the Circular states:
Fines and
penalties. Costs resulting from violations of,
or
failure to comply
with Federal, State, and local laws
and
regulations are
unallowable.
The Commonwealth argued that this provision did not apply to the
interest
costs at issue here since the heading read "Fines and
Penalties," and the
interest here was not a fine or penalty, but rather
was non-punitive damages.
Appellant's Brief, p. 11. HCFA argued that,
whatever the heading, the
interest cost fell squarely within the text of
the provision. HCFA also
disputed the Commonwealth's contention that
the interest was non-punitive,
arguing that Massachusetts court cases
based awards of interest against the
Commonwealth on a theory of
improper withholding of funds by the
Commonwealth.
In light of broad language of the text of section D.5., we think that
the
Commonwealth is reading the concept of "fines" or "penalties"
too
narrowly. Indeed, the purpose of the "headings" in the part of
the
Circular containing principles for specific items of cost is simply
to
serve as a shorthand means of alphabetizing the various cost
principles
so that they may be referred to more readily. Even if we were to
read
the heading as necessarily limiting the cost principle to costs
incurred
in violation of applicable laws or regulations and
specifically
identified as "fines" or "penalties," however, we would not
conclude
that the costs are allowable.
As HCFA pointed out, attachment B., section A. 2., states:
. . . Failure to
mention a particular item of cost in
the
standards is not
intended to imply that it is either
allowable
or
unallowable, rather determination of allowability in
each
case should be
based on the treatment of standards
provided
for similar
or related items of cost . . . . (Emphasis added.)
The Commonwealth should have known that the interest in question
is
unallowable as a cost item "similar or related" to fines or
penalties
since it is a cost resulting from failure to comply with federal
law and
regulation. 1/
The cost principles also specifically state that costs must be
"necessary
and reasonable" (Att. A, section C.1.) in order to be
allowable. Costs
resulting from a failure to comply with federal law
cannot be considered
necessary and reasonable. The Commonwealth
disputed HCFA's assertion
that the costs arose out of the Commonwealth's
noncompliance with federal
requirements by contending that the interest
arose, instead, from the
Commonwealth "coming into compliance" with
federal law. Tr., pp. 26-
27. This is a distinction without any
meaningful difference; if
the Commonwealth had not gone out of
compliance, it would not have had to
come into compliance. As HCFA
argued, the cost was avoidable. 2/ The
improper payments at the $70 rate
were a direct result of the Commonwealth's
own conduct. HCFA warned
Massachusetts as early as September 23, 1980,
and on numerous occasions
thereafter, that Massachusetts could not change its
method of
reimbursement for AND days without prior approval.
Respondent's Brief,
p. 5 and Ex. C. The Commonwealth reasonably
should bear the
consequences of its conduct because the interest would have
been avoided
if the Commonwealth had accepted HCFA's instructions. Any
benefit to
HCFA properly reflects the differences in conduct between the
parties.
CONCLUSION
Based on the foregoing, we uphold the disallowance in full.
________________________ Alexander G. Teitz
________________________ Norval D.
(John)
Settle
________________________ Judith A.
Ballard
Presiding Board Member
1. HCFA also cited to OMB Circular A-87,
Attachment B, section D.7.,
which provides that interest on borrowings,
however represented, is
unallowable. In a previous case, the
Board discussed the theory that
interest on back pay owed to California
employees was interest on a
"constructive borrowing" by the State of the
amounts owed. California
Dept. of Social Services, DGAB No. 297
(1982). The Board upheld the
disallowance on other grounds, however, as
we do here.
2. Since we find that the State could have avoided
the interest by
following its approved State plan reimbursement methods, or
using proper
procedures to amend them, we do not need to reach the issue of
whether
the Commonwealth could have avoided agreeing to pay the interest
by
reason of the doctrine of sovereign immunity. (For a discussion of
this
issue, see Respondent's Brief, p. 3; Appellant's Reply Brief, p. 2;
Tr.,
pp. 23,