DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: South Carolina State Health and Human Services Finance Commission
Docket No. 87-176
Decision No. 943
DATE: March 29, 1988
DECISION
The South Carolina State Health and Human Services Finance
Commission
(SHHSFC, State) appealed a disallowance by the Health Care
Financing
Administration (HCFA, Agency) of $1,043,092 in federal Medicaid
funding
claimed by the State under title XIX of the Social Security Act
(Act).
The disallowed claims were for expenditures paid by SHHSFC to the
South
Carolina Department of Mental Health, based on amended cost reports
for
the Crafts Farrow State Hospital, a state psychiatric hospital, for
the
federal fiscal years 1979 through 1984. The claims for
increasing
adjustments for the prior periods were made on an expenditure
report
dated April 30, 1987.
The primary basis for the disallowance was that the claims were not
timely
filed, as required by statute and regulation, and were not within
the
exception for adjustments to prior year costs. A secondary basis
was
that the claims were for services payable by Medicare, and since
Medicaid was
the payor of last resort, the State did not comply with
legal requirements
since it failed to bill Medicare; therefore the
claims did not reflect costs
properly claimed under Medicaid.
For the reasons discussed below, we uphold the entire disallowance on
the
ground that the claims were not timely filed, and did not come
within the
exception for adjust- ments to prior year costs. We
therefore need not
reach the secondary question of whether the claims
were for services not
payable by Medicaid, either in whole or in part.
The Facts
Crafts Farrow State Hospital (CFSH) is an inpatient mental health
facility
operated by the South Carolina Department of Mental Health
(DMH); it
participates in both Medicaid and Medicare. CFSH uses the
Medicare
principles of .reimbursement for determining its reimbursement
rates under
Medicaid. The facility uses a retrospective reimbursement
method, where
interim billing is done on a per diem basis based on
historical costs,
subject to annual cost report settlement based on
actual costs. Any
"over or under payment" between the interim billing
rate and reimbursable
program cost is calculated and final settlement is
made. Appellant's
brief, p. 2.
During the years in issue here DMH never included in its Medicaid
cost
reports the costs of ancillary services at CFSH and those costs were
not
part of the rate calculation for Medicaid. In 1986 DMH hired
a
consulting firm to review its reimbursement procedures. This
firm
reported that the all-inclusive rate claimed for CFSH satisfied all
the
requirements for interim billing, but the annual cost reports
had
neglected to include ancillary and physician costs in the
final
settlement.
DMH followed the consulting firm's recommendation to request the
State
Medicaid agency to reopen the relevant prior year cost reports
for
amendment, and to calculate reimbursable program costs for ancillary
and
physician services on the basis of Medicaid inpatient days to
total
facility inpatient days at CFSH. In early 1987 the Medicaid
agency
agreed to reopen the cost reports to allow DMH to include the
amended
cost report settlements for ancillary services. 1/ The
State Medicaid
agency thereafter executed an Interdepartmental Transfer (IDT)
to DMH
for the Medicaid rate increase to reflect the costs of the
ancillary
services during the relevant fiscal years. 2/ The
Medicaid agency then
entered the amount of the rate increase on its HCFA-64
claim for FFP for
prior period adjustments.
The State's Arguments
The State first argued that the claims were timely because
the
expenditures were made when the IDT was executed and DMH was paid on
the
basis of its amended cost reports. The date of the
expenditure,
according to the State, was the date of the IDT, which was
within the
two-year claiming period.
In the alternative, the State argued that, if the expenditures were
made
when the services were rendered, then the claim comes under
the
exception to the timely claims requirements for "adjustment to
prior
year costs."
Analysis
I. The expenditures were made when DMH paid the facility for
its
services based on its interim per diem rate.
Section 1132(a) of the Act requires that a claim for FFP "with respect
to
an expenditure made during any calendar quarter" by a State must be
filed
within the two-year period which begins on the first day of the
calendar
quarter immediately following such calendar quarter. 3/ The
regulation
states that a state agency's expenditure .for services under
Medicaid is
considered to have been made "in the quarter in which any
State agency made a
payment to the service provider." 45 C.F.R.
95.13(b). In the
definitions section of the regulation, "State agency"
for the purposes of
expenditures for Medicaid means "any agency of the
State, including the State
Medicaid Agency, its fiscal agents, a State
health agency, or any other State
or local organization which incurs
matchable expenses." 45 C.F.R.
95.4.
The service provider here was obviously the hospital. The
expenditures
for which matching FFP was claimed were the payments by the
Medicaid
agency to DMH, which operated the hospital. The situation is
obscured,
both because we are dealing with a payment under a rate, and
because we
have a state-owned provider here. It may seem that the State
is simply
paying itself. That is why the State Medicaid Manual has a
provision
that, in the case of a public provider, an expenditure, as far as
timely
claiming is concerned, is made when the State agency actually pays
over
funds or records the transaction on its books, whichever is
earlier.
State Medicaid Manual section 2560.4, G.1. This is to take
care of the
situation where a state does not actually pay out any funds to a
public
provider, but merely makes a bookkeeping entry. There is no
indication
here that only a bookkeeping entry was made, rather than
outright
payment to DMH.
In any event, the expenditure was the payment to the service provider,
not
of individual items of cost, but of a per diem rate multiplied by
the number
of Medicaid patient days. The rate is not necessarily the
sum of the
individual items of cost which the hospital paid out, such as
salaries of
employees and meals for the patients. Some of these
individual items may not
be allowable in computing a reimbursement rate,
and some that are allowable
may have a cap, where the Medicaid rate was
based on Medicare principles of
reimbursement.
It is clear that when the State Medicaid agency paid DMH for x number
of
patients at CFSH at an interim daily rate of y dollars per patient
per
day, that was the expenditure which began the running of the time
for
filing a claim for FFP in that expenditure. Additional payments
made
later on for the same period, no matter how computed, were not
new
expenditures which started a new claiming period running. They may
come
under exceptions to the filing requirements, such as adjustments
to
prior year costs, but they are not new expenditures which have
.another
two-year period in which the State could claim them. If this
were not
so, then there would be no need for the exception;
additional
expenditures could be claimed forever into the future.
The expenditures, in the sense we have described them here, were
clearly
made more than two years before the claim for FFP was filed at the
end
of April 1987. Thus, the claim was not timely, and was barred
by
claiming requirements unless it came within an exception to
those
requirements.
II. The claims were not an adjustment to prior year costs.
The State argued that, even if the claim was not filed timely, it
came
within the exception to the claiming requirements for adjustments
to
prior year costs. The regulation defines an adjustment to prior
year
costs as "an adjustment in the amount of a particular cost item that
was
previously claimed under an interim rate concept," and it is
later
determined that "the cost is greater or less than that
originally
claimed." 45 C.F.R. 95.4. The time limits for claiming do
not apply to
"any claim for an adjustment to prior year costs." 45
C.F.R. 95.19(a).
It is undisputed that the rates in question here for CFSH were
originally
claimed on an interim basis. The Board has previously
recognized that
adjustments to interim rates made during the normal cost
settlement process
would come within the regulatory definition of
adjustments to prior year
costs as an exception to the timely filing
requirement.
The classic example of this exception is in paying
providers of
medical services on a retrospective
rate reimbursement system. A
facility has an
"interim" rate set for payment based on the prior
year's costs. During the year the cost of an item or items goes
up
sharply, whether due to inflation or because of a
reason peculiar
to this cost item. At the end
of the year adjustments of the rate
are in order,
based on changes in the cost of the particular items
during the time period. However, it would be grossly unfair to
the
state not to allow it to claim for FFP based on
the retrospective
rate because it was now too late
under the time limitation statute.
. . .
New York State Department of Social Services, DGAB No. 521 (1984), p. 8.
In support of its position, the State relied on two prior Board
decisions
where certain items of costs not included in an interim rate
were considered
in finding an adjust- ment to prior year costs, even
though cost reports for
those years had apparently been closed. In
Pennsylvania Department of
Public Welfare, DGAB No. 703 (1985), certain
items of provider costs (rentals
and general obligation bond charges)
were not specifically included in
calculat- ing the interim rates or the
"final cost settlements." The stated
reason was a lack of communication
between Pennsylvania state agencies.
The analysis in that case centered
on the Agency's position that the claims
could not qualify as
adjustments to prior year costs because the specific
provider costs in
question were not claimed in the interim rate
process. The Board
pointed out, as we do above, that what is claimed in
the interim rate is
not each individual divisible item accumulated on the
provider's cost
report, but rather the per diem rate, based on those
individual items,
used to reimburse the facility.
The Board in Pennsylvania further stated that "[a]s long as this type
of
adjustment was contemplated by the rate- setting system in
Pennsylvania
and was not prohibited by the State plan," it had no basis to
find that
the claims were not adjustments to prior year costs. p. 3.
Similarly,
the State relied on Ohio Department of Public Welfare, DGAB No.
622
(1987), where amounts for deprecia- tion not included in computing
the
interim rate were permitted as prior year adjustments when later used
in
computing the per diem rate for institutional services.
However, the principle of these cases should not be extended any
further
than their particular facts. Where an interim per diem rate was
claimed
within two years, and then a state later realized that it had
mistakenly
not included costs of particular items in computing the final
rate, the
state can properly recompute its final rate to include the omitted
costs
only if the state's retrospective rate-setting process permits it
to
re-open a final rate and the adjustment itself is one
reasonably
encompassed by the state's retrospective system. Without
.this proviso,
the rationale underlying the timely claiming requirements
would be
undercut so that any rate recalculation would be proper so long as
a
state had a retrospective system. As we pointed out in New York,
the
purpose of the timely claims limitation was "to prevent the states
from
coming in many years after expenditures were made and claiming FFP. .
.
. Such delayed claiming made it difficult for the Department of
Health
and Human Services to plan its budget." p. 8. Here, even
the State
acknowledged that the approach of opening closed cost report
settlements
"seems to run counter to 42 U.S.C. section 1320b-2(a)
[section 1132(a)
of the Act] and the intent of that legislation."
Appellant's brief, p.
8.
We also said in New York that the exceptions to the time limitations
were
intended to cover only extreme situations, where it would be
patently unfair
to a state to outlaw its claim "merely because of the
passage of time."
p. 8.
The exception for adjustments to prior year costs is intended to give
a
state a reasonable opportunity to adjust its interim rate,
consistent
with the methods and procedures of its established
rate-setting
methodology. As we said in Tennessee Dept. of Health and
Environment,
DGAB No. 921 (1987), the interim rate exception is limited to
the
"state's interim and final cost settlement process." p. 4.
The two
cases cited in Tennessee in support of this principle are
Pennsylvania
and Ohio, discussed above. We recognized in Tennessee that
the
exception for adjustments to prior year costs was not intended to
permit
any adjustment whether or not related to the interim rate process.
Here the interim rate had been adjusted for the years in question,
final
settlement had been made, and the cost reports had been closed
for
several years.
In the cost reports (Exhibit B) submitted by the State as "an
example"
(Appellant's brief, p. 3) the ancillary cost amount is entered
on
Worksheet E-5, Calculation of Reimbursement Settlement for Title XIX,
as
"0". In other worksheets we find the flat statement that there was
"No
Ancillary Cost." (Exhibit B, Desk Review of Initial Cost
Report,
Worksheet C and Worksheet D).
As the Agency stated in its disallowance letter, at the time it filed
its
original cost reports the hospital deliberately did not report any
amount for
ancillary services. The State did not simply overlook or
mistakenly not
include these costs, rather it chose not to include these
costs in its per
diem rate calculation. Thus there was no question of a
mistake or a
lapse by the State in failing to include the ancillary
costs on its original
cost reports, as would more closely parallel the
circumstances in
Pennsylvania and Ohio. Here, it was a conscious
decision by the State
not to claim these costs.
The revision to the cost reports now proposed by the State is not, in
our
opinion, the type of change reasonably contemplated by section 1132
of the
Act as an adjustment to prior year costs, so that the exception
to the timely
filing requirement would not apply. Even if the State's
decision to
initially exclude these costs resulted from some error about
what costs it
ought to include in its Medicaid rate, the record reveals
no substantive
reason such an error was not subject to correction within
the two-year
limitation. In essence, it is our view that it is merely
coincidental
that this case arose in the context of a retrospective
system.
Retrospective rate-setting does not involve fundamental changes
in the
assumptions underlying the rate as part of a normal adjustment
process.
To allow the State now to make amended claims based on the
reopened cost
reports so as to include items once intentionally not
reflected in the
Medicaid rate would render meaningless the requirement
of section 1132 that
states finalize their claims in a timely fashion.
Conclusion
For the reasons stated above, we sustain the disallowance of $1,043,092.
________________________________ Cecilia
Sparks
Ford
________________________________ Norval
D.
(John) Settle
________________________________ Alexander
G.
Teitz Presiding Board Member
1. The cost reports were not reopened for physician
(ancillary)
services because of a Medicaid cap imposed by the State
Legislature.
Appellant's brief, p. 10. The ancillary services for which claim
was
made in the reopened cost reports included items such as
laboratories,
x-rays, and physical therapy. See Worksheet 13 attached
to Exhibit C.
2. In its opening brief (p. 4) the State said that the IDT
was
executed in May 1987. The Agency then pointed out that this was
after
the HCFA-64 (the form submitted quarterly by states detailing
their
Medicaid expenditures) for the prior period adjustments was filed,
and
if the State argued that the expenditure was made when the funds
were
transferred by the IDT, then the HCFA-64 claim was premature. In
its
reply brief the State stated that the May 22, 1987 date was that of
a
corrected IDT, and submitted documentation to show that payment
was
originally posted on March 26, 1987. The date of the IDT is
immaterial,
since we do not consider that the expenditure was made, as far as
timely
filing, when the funds were transferred to DMH, but rather when
the
Medicaid agency paid DMH at its interim rate for CFSH.
3. While the majority of the State's claims are governed by
the
two-year filing requirement, part of the State's claim
concerns
expenditures made during fiscal year 1979. Expenditures made
before
October 1, 1979 have a different filing deadline, originally January
1,
1981, later changed to May 15, 1981. This distinction in
filing
requirements has no effect, however, on our analysis of the
State's