DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: Tennessee Department of Health and Environment
Docket No. 87-187
Decision No. 950
DATE: April 28, 1988
DECISION
The Tennessee Department of Health and Environment (State) appealed
part
of a disallowance determination by the Health Care
Financing
Administration (HCFA or Agency), in which HCFA determined that the
State
improperly claimed $1,014,620 in federal financial participation
(FFP)
under the Medicaid program, for the period November 1, 1980
through
October 31, 1983, for services provided by the State's intermediate
care
facilities for the mentally retarded (ICF's/MR). The basis for
the
disallowance was HCFA's determination that the State had failed
to
comply with a state plan provision effectively limiting the amount
of
FFP which the State could claim for inflation in setting
prospective
rates for reimbursing ICF's/MR under the state plan.
The limitation, established by a state plan amendment, worked as
follows
(the mechanics are not in dispute). An inflation factor for
each ICF/MR
was calculated by computing the average per diem cost increase
over the
prior two years. Reimbursement for each facility could not
exceed the
amount determined by applying the 50th percentile of the
accumulated
inflation factors of all ICF's/MR. Thus, a facility could
fully recover
its inflation costs if those costs did not exceed the 50th
percentile of
the inflation costs of all facilities, but facilities whose
inflation
costs exceeded that percentile could not recover the excess
portion.
The disallowance arose because the State actually paid facilities,
and
claimed FFP, based on use of the 75th percentile rather than the
50th
percentile; the 75th percentile had been the limit in effect
before
adoption of the state plan provision in question here. The
State's
primary argument in response to the disallowance was that any failure
to
comply with the limitation was "harmless error." The State
also
presented alternative arguments in support of reducing the amount of
the
disallowance, including that the effective date for the plan
amendment
should have been postponed until the amendment was finally
approved.
Based on our analysis of the record, we uphold the disallowance in
full.
The record shows that the plan amendment was in effect throughout
the
disallowance period, and the failure was in no way a "harmless
error."
Background
On August 12, 1980, the State requested HCFA approval of
several
amendments to its State plan, one of which concerned the inflation
limit
for nursing homes, including both skilled nursing facilities
and
ICF's/MR, which had "completed three full years of
program
participation." State's Ex. 2, Att. A, p. 8, item 12. The
proposed plan
amendment retained the state plan approach of allowing a cost
increase
equal to the average of such facilities' per diem cost increases
over
the last two years, but reduced the limit on such increases from
the
75th percentile of all such facilities to the 50th percentile. The
plan
amendment had a "proposed effective date" of August 16, 1980.
Id. The
HCFA regional office received the transmittal of the proposed
plan
amendment on August 14, 1980.
HCFA wrote to the State on September 30, 1980, at the completion of
its
"preliminary review" of the plan amendment proposal, and
requested
certain clarifying information, including a justification of "how
and
why the lower percentile is more reflective of inflationary
trends."
State's Ex. 2, Att. B, point 5. HCFA wrote that it was "unable
to
recommend approval of the subject amendment without a specific
response
to" each of its questions. State's Ex. 2, Att. B.
On February 6, 1981, the State responded to HCFA's request for
clarifying
information. Agency's Ex. A. With respect to the inflation
issue,
the State submitted that "it is our opinion that an effectively
and
efficiently operated facility can operate at the 50th percentile."
Id., point
5. While HCFA in its brief stated that it formally approved
the
amendments on April 28, 1981, HCFA notified the State of its
approval by
letter of June 3, 1981, received by the State on June 10,
1981. State's
Ex. 2, Att. C. The approval letter provided an effective
date of August
16, 1980, as the State had requested. Id.
During a 1983 survey of Tennessee nursing homes participating in
the
Medicaid program, HCFA discovered that the State had been continuing
to
use the 75th percentile limit in reimbursing under Medicaid.
State's
Ex. 2, Att. D. In an October 25, 1983 letter, the State
explained its
reasons for never implementing the change from a 75th to a
50th
percentile limit, and attached another plan amendment to
request
restoration of the 75th percentile limit for both skilled
nursing
facilities and ICF's/MR. Id. HCFA approved this plan
amendment request
on May 16, 1984, effective on October 1, 1983, as requested
by the
State. State's Ex. 2, Att. E. On June 12, 1987, as part of
a general
review of reimbursement for State ICF's/MR, HCFA computed
the
overpayment made to ICF's/MR resulting from the inflation
rate
discrepancy, and HCFA took the disallowance that is presently before
us.
State's Ex. 2, Att. G.
Analysis
A. Whether the State should be held to its plan
With respect to the State's primary argument that it should not be held
to
the state plan's change to a 50th percentile limit, we conclude that
the
State has presented no convincing authority that might excuse it
from
violating the basic principle that a state's program must be
operated in
accordance with the terms of its approved plan. Provisions
of the
Social Security Act in effect during the approval process here
clearly
provided that a state must comply with the methods and standards
for
determining rates of reimbursement which had to be included in the
state's
Medicaid plan. Section 1902(a)(13)(D) of the Act; see also 42
C.F.R.
447.201(b) (1979). As observed by the Agency in its brief, the
state
plan is in the nature of a contract between the State and the
federal
government. See Pennhurst State School and Hospital v.
Halderman, 451
U.S. 1, 17 (1981).
The State explained that the reason for its failure to implement
the
change to a 50th percentile limit, at least with regard to FY 1981,
was
twofold: first, that by the time HCFA informed the State of
approval of
the plan change, only "two months" remained in the fiscal year,
so that
insufficient time remained to effectuate any cost containment
measures
for that fiscal year; and second, by the time the State received
word of
the approval, the State's fiscal situation had improved so as to
obviate
the need to contain costs. State's Opening Brief, fourth and
fifth
pages (unpaginated). The State also argued that its failure to
comply
with the terms of the state plan in this instance was proper
because
"[t]he inconsistency between the state plan and the state's
Medicaid
rules was harmless as long as the state plan and the state
reimbursement
methodology satisfied the federal statutory requirements. . .
."
State's Opening Brief, fourth page. In other words, since both the
50th
percentile and 75th percentile limits were apparently acceptable
to
HCFA, and since both rates apparently complied with applicable
legal
requirements, the program was not "harmed" by any failure to comply
with
the state plan.
The State's explanation for why it failed to implement the change in
its
reimbursement practice relates primarily to its implementation during
FY
1981, rather than why it did not comply at all with the state
plan
amendment for the entire disallowance period. Regardless of
the
situation during FY 1981, the State was still obligated to implement
the
change for FY 1982 and FY 1983 while the 50th percentile limit was
in
effect. We discuss more specifically the situation during FY 1981
in
section B below, in addressing the State's alternative argument that
the
disallowance should be reduced by an amount corresponding to the time
it
took to receive approval.
Concerning the State's argument that any violation of the 50th
percentile
rule in its state plan was "harmless error," the Board has
previously
rejected this argument in another context and we see no basis
for accepting
it in the case at hand. See New Jersey Dept. of Human
Services, DGAB
No. 383 (1983), pp. 3-4. As noted by the Agency, the
State's violation
of the plan provision in question was clearly not
"harmless," at least in
terms of the fiscal effect of the violation,
since it resulted in
overpayments of FFP of approximately one million
dollars.
While the State apparently volunteered to impose on itself the
fiscally
conservative approach of using a 50th percentile inflation limit, we
do
not find that this circumstance justifies the State's violation of
the
plan provision. Once the State requested and received approval for
the
50th percentile limit, it had entered into a binding agreement
to
reimburse the facilities on this basis, an agreement on which the
Agency
could expect to rely. The State's apparent implication that
the
Agency's disallowance was based on some hypertechnical determination
is
wholly unfair in the circumstances of this case, when the State
conceded
that the lower inflation rate was based on a realistic
economic
assessment at the time it was proposed, and the Agency relied on
that
assessment in expecting the State to contain costs
accordingly..B.
Whether the disallowance should be reduced for the period
November 1,
1980 through June 10, 1981
The State argued alternatively that the Agency's disallowance should
be
reduced by $102,353.78, corresponding to the period of November 1,
1980
through June 10, 1981, because of the delay in approval of the
proposed
state plan amendment. State's Opening Brief, sixth page.
The State
maintained that the delay was the Agency's fault and apparently
argued
that the State should not be prejudiced by a circumstance which
was
beyond its control. The Agency for its part maintained that the
delay
was also attributable to the delay of the State in responding to
the
questions which the Agency sent to the State on September 30, 1980
(the
State responded over four months later on February 6, 1981), and in
the
State's choice of including the inflation factor amendment as part of
a
larger package whose consideration would take some considerable
period
of time. Agency's Brief, p. 9.
In arguing that the approval was untimely, the State relied upon 45
C.F.R.
201.3(f), which provides in relevant part:
Prompt approval of plan
amendments. Any amendment of an
approved
State plan may, at the option
of the State, be considered as a
submission of a new State plan. If the State requests that
such
amendment be so considered the
determination as to its conformity
with
the requirements for approval shall be made promptly and
not
later than the 90th day following
the date on which such a
request is
received in the regional office . . . , unless the .
.
. Regional Medicaid Director has
secured from the State agency a
written
agreement to extend that period.
* * * *
This regulation would not provide a basis for reversing the
disallowance
since it is silent as to the remedy available for the Agency's
failure
to approve the amendment within 90 days, and clearly does not require
a
delay in the effective date of the plan amendment. In any event,
we
find that the regulation by its terms does not apply to this
case,
because the record explicitly indicates that the State did not
consider
the submission as a "new State plan." The August 12, 1980
"transmittal"
of the state plan amendment clearly provides three options to
choose in
classifying the "type of plan material:" "new state plan,"
"amendment
to be considered as new plan," and, simply, "amendment."
State's Ex. 2,
Att. D. The transmittal had a check by only the choice
for "amendment."
By contrast, the transmittal of the October 1, 1983 plan
amendment, to
change the inflation factor back to a 75th percentile limit,
was checked
off in the space for "amendment to be considered as new
plan." State's
Ex. 2, Att. E. 1/
We thus conclude that the length of time it took to approve the
plan
amendment did not of itself require a delay in the effective date
until
final approval of the amendment. The only authority which the
State
offered for this does not provide any remedy for an untimely approval
of
a state plan, and in any event, the record indicates that the
provision
does not even apply to the facts here, since the state plan
transmittal
provided that the amendment was not to be considered as a "new
state
plan." The State also argued that the delayed approval
prevented
implementation of the change retroactively to August 16, 1980
(the
State's proposed effective date) for two reasons peculiar to the
State's
process: first, the State was using a prospective
reimbursement
methodology, so that the delay "adversely affected the State's
attempt
to reduce . . . cost;" and, second, the State did not
want to "risk"
undertaking the required State rule change that would have
been
necessary to change the inflation factor limit during the pendency
of
its plan amendment request. State's Opening Brief, sixth and
seventh
pages.
The State in our view did not demonstrate how these
practical
considerations involving the State's own process should have
changed the
date on which the plan amendment was effective. The State
itself
requested that the approved plan amendment be made effective on
August
16, 1980, rather than, for instance, that it be effective upon
final
approval or at the start of the next fiscal year after
approval.
Through the course of the approval process, the State never
requested
that the proposed effective date be delayed because of the timing
of the
approval process or any change in circumstances. When the State
wrote
to HCFA on February 6, 1981 to respond to the Agency's request
for
clarifying information, the State answered HCFA's question about
the
change to a 50th percentile inflation limit and provided no
indication
that it no longer intended HCFA to apply the August 16, 1980
proposed
effective date.
As to the particular significance of the State's use of a
prospective
payment methodology, the State did not even allege that use of
a
prospective payment methodology prevented the retroactive
implementation
of the change, but merely submitted that the delay "adversely
affected
the State's attempt to . . . limit cost. . . ." State's
Opening Brief,
seventh page. Apparently, all that the State intended here was
that,
since the State used a prospective rate-setting process, the
rationale
for its having submitted the request to amend the plan to include a
50th
percentile inflation limit had disappeared by the time of its
adoption,
at least for FY 1981.
Assuming for our purposes here that the delay did obviate the purpose
of
the rate change for FY 1981, this does not provide a basis for the
State
to ignore the provision of its state plan. Again, the State was free
to
propose a later effective date for the amendment once it realized
when
the proposed amendment would be approved, and, if the State failed to
do
this, HCFA was entitled to expect the State to comply with
all
provisions of its state plan for the time they were in effect. From
the
federal perspective, it may have been entirely a matter of State
concern
whether the plan provisions as they existed were favorable to the
State.
Moreover, the State may have been able to avoid this problem of
the
delayed approval by notifying providers that the inflation factor
limit
would be reduced to the 50th percentile after approval by the Agency,
so
that providers could have attempted to maintain costs accordingly.
As to the State rule change required to implement the use of a
50th
percentile inflation factor, we again find that the State offered
no
legal basis for why this should excuse the noncompliance and,
indeed,
fail to see why the Agency should have even been expected to
understand
the mechanics of the State's internal rulemaking process.
Furthermore,
the State's brief did not allege that the delay precluded the
necessary
change in State rules; the State merely complained that, if it
had
changed its rules to provide for the new 50th percentile
inflation
factor, there would have been a "risk" that it might have to change
its
rules again should the proposed plan amendment be rejected.
State's
Opening Brief, seventh page. If there was such a risk, it was a
risk
which the State assumed by its own choice in providing for use of
an
August 16, 1980 effective date. The State has again provided no
reason
why the State should not be bound by the August 16, 1980 effective
date
for the plan amendment which the State itself proposed.
C. Whether the disallowance should be reduced for the
period October
1, 1983 through October 31,
1983
The State also argued alternatively that the disallowance should
be
reduced for the period October 1, 1983 through October 31, 1983
because
the state plan was amended to revert back to a 75th percentile
inflation
factor effective on October 1, 1983. The State calculated
that the
disallowance attributable to this period was $39,057.27.
State's
Opening Brief, eighth page. The Agency explained in its brief
that it
chose an October 31, 1983 end date for the disallowance period
because
the applicable rate year, as used by the State itself in
reimbursing
facilities, extended from November 1, 1983 to October 31,
1984.
Agency's Brief, p. 10. The Agency also explained that the start
of the
disallowance period, November 1, 1980, was chosen based on
the
applicable rate year and this date was actually some months after
the
effective date for the plan amendment of August 16, 1980. The
Agency
proposed that, if the State wished to change the end of the
disallowance
period to correspond with the plan amendment effective date of
October
1, 1983, then the Agency would also change the starting date of
the
disallowance period to correspond with the August 16, 1980 date on
which
the 50th percentile inflation factor went into effect. Id.
The Agency
noted that this would result in a larger disallowance for the
State.
Id.
The State in its reply brief made no response to this explanation by
the
Agency of the choice of a disallowance period, and we find the
Agency's
explanation here to be reasonable (and arguably beneficial to
the
State). The State did not refute the Agency's observation that
the
ICF/MR facilities would be required to be reimbursed according to
the
75th percentile limit starting on November 1, 1983, under the
State's
own rate year period. Thus, while the plan amendment may have
been
"effective" on October 1, 1983, the State's own rate-setting
process
apparently would require reimbursement at the new rate starting
on
November 1. We therefore reject the State's argument that
the
disallowance should be reversed for the period October 1, 1983
to
October 31, 1983.
Conclusion
For the reasons explained above, we conclude that the State
improperly
violated the approved terms of its state plan and we therefore
uphold
the disallowance in full.
________________________________ Judith
A.
Ballard
________________________________ Donald
F.
Garrett
________________________________ Norval
D.
(John) Settle Presiding Board Member
1. The Agency, in explaining the timing of its
processing of the
State's proposed plan amendment, noted that it responded to
the proposed
amendment within time frames that were subsequently established
as part
of the Omnibus Budget Reconciliation Act of 1981, enacted on August
13,
1981. Pub. L. No. 97-35, adding section 1915(f) to the Social
Security
Act. HCFA maintained that this enactment, while admittedly not
in force
during the approval period in this case, provided an
appropriate
standard by which to judge HCFA's actions during FY 1980.
Agency's
Brief, p. 8.
Section 1915(f) of the Act provides that a request for approval of
a
proposed state plan or plan amendment "shall be deemed granted
unless
the Secretary, within 90 days after the date of its submission to
the
Secretary, either denies such request in writing or informs the
State
agency in writing" that it needs additional information. The
Secretary
then has 90 more days to decide whether to deny the request, or it
will
be deemed accepted. The Agency noted that it complied with
these
deadlines in the circumstances here, by sending the request
for
clarifying information by September 30, 1980, well within 90 days of
the
date of the initial transmittal on August 12, 1980, and by making
its
final decision on the plan amendment on April 28, 1981, within 90
days
of the date when the State sent in the clarifying information
on
February 6,