GAB Decision 630
March 18, 1985
Missouri Department of Social Services;
Ballard, Judith A.; Ford, Cecilia S. Settle, Norval D.
Docket No. 84-159
The Missouri Department of Social Services (DSS/State) appealed a
decision by the Health Care Financing Administration (HCFA) disallowing
$4,892,069 in federal financial participation (FFP) claimed by the State
under Title XIX (Medicaid) of the Social Security Act. DSS sought FFP
in payments it made at Medicaid reimbursement rates to the Department of
Mental Health (DMH) for services provided by five intermediate care
facilities - mentally retarded (ICFs/MR) operated by DMH. These rates
were calculated based on the facilities' costs; after an audit, HCFA
disallowed the part of the Medicaid rates which reflected certain
Statewide administrative costs and DMH-wide administrative costs
allocated to the ICFs/MR. The basis for the disallowance was that DMH
had not submitted, for approval by the Department of Health and Human
Services' Division of Cost Allocation (DCA), a cost allocation plan
which included methods for allocating these costs as indirect costs on a
departmental level within DMH. For the reasons set out below, we remand
the disallowance to HCFA, on the bases discussed below. Our decision is
based on briefs and evidence submitted by the parties, as well as HCFA's
response to a preliminary analysis of this appeal which we issued
December 19, 1984. Summary of Decision The State's claim is for
expenditures for services provided by five State institutions. It is
undisputed that the institutions provided Medicaid reimbursable services
to eligible individuals and that DSS claimed FFP in expenditures for
those services as measured by per diem rates. It is also undisputed
that the rates were calculated in accordance with the system for
reimbursing providers, approved in the State Medicaid plan. (Of course,
HCFA now has an opportunity to further examine the claims to ensure that
the approved reimbursement system was followed.) The dispute here arises
because that system was "cost-related," that is, the rates were
calculated using various underlying costs incurred by the
institutions.(2) The specific underlying costs used in calculating the
part of the rates questioned here are "central services" costs (that
is,
costs of support services such as accounting, personnel, and payroll
provided to the institutions by other governmental components).
Medicaid reimbursement systems may permit a state to include some of
these central services costs in calculating a per diem rate for public
institutions, so long as they are properly allocated to the institution.
During the time period in question here, the State had an approved cost
allocation plan (CAP), allocating central services costs from the
statewide level to DMH and a CAP allocating costs from DMH to the
institutions themselves which was on file with DSS. Notwithstanding all
of the above factors, HCFA took the disallowance on the basis that the
CAP allocating the central services costs to the institutions had not
been approved by DCA. HCFA based its position primarily on an Office of
Management and Budget Circular (OMB A-87). OMB A-87 sets out procedures
for timely submission of CAPs covering central services costs. HCFA said
that the State was precluded from using central services costs in its
per diem rate calculations if it did not follow these procedures. Below,
we conclude that the OMB A-87 cost principles simply do not apply in
determining what costs can be used to calculate a Medicaid reimbursement
rate. Indeed, OMB A-87 specifically exempts public providers of medical
care from its requirements. OMB A-87 does refer generally to central
services costs, requiring timely submission of both a statewide CAP
allocating these costs and indirect cost proposals for each governmental
department or unit charging indirect costs to federal grants. But,
here, the State is charging payment of the rate as a direct cost of
Medicaid. Neither OMB A-87 nor Medicaid regulations requires a state to
follow CAP procedures for a governmental component which is providing
services to program recipients, but not itself claiming indirect costs
under a federal program. This omission, whether by design or not, is
critical here; where the State did not have notice that approval
procedures applied, it is simply unfair to preclude the State from
claiming otherwise allowable rates solely because the State did not
follow those procedures. Certainly, HCFA has a legitimate interest in
assuring that using central services costs to calculate a rate does not
result in any inequity to the federal government. But HCFA did not
allege that the lack of an approved allocation method during the
relevant period renders the State unable to provide those assurances.
The State had an approved statewide CAP covering the costs, and had
developed a CAP for DMH, allocating the costs to the institutions, which
was on file with DSS.(3) On remand, HCFA can further consider whether
the State's allocation method resulted in a fair distribution of the
costs and may reaffirm the disallowance, in whole or in part, if the
State cannot document the allocability of the costs. Background The
amount in question here is that part of the Medicaid reimbursement rates
which reflects indirect costs allocated to the five ICFs/MR during the
period July 1, 1980 through June 30, 1983. The indirect costs were
central service costs incurred for budgeting, personnel administration,
and payroll services performed by State administrative branches as well
as similar costs incurred by DMH administrative offices. The Statewide
CAP, which was approved by DCA, allocated Statewide central services
costs to the State's departments. DSS also had a CAP, approved by DCA,
in accordance with CAP requirements specific to Medicaid. See 42 CFR
433.34 (1981); 45 CFR Part 95, Subpart E (1982). Neither of these CAPs
addressed allocation of costs from DMH to the ICFs/MR. The State did,
however, have a separate CAP for DMH which allocated to benefitting
components of DMH indirect costs which had been distributed to DMH (by
the Statewide CAP) as well as those indirect costs incurred by DMH for
services it performed for those components. /1/ The State said that this
CAP was approved by the Medicare fiscal intermediary for the Medicare
program within the State and also was filed with the State Medicaid
agency (DSS). /2/ The plan was not submitted to DCA for approval.
(4) Under the DMH CAP, the Statewide indirect costs allocated to DMH and
indirect costs incurred by DMH were allocated throughout DMH. Some of
these costs were allocated to the five ICFs/MR in question. These costs
were then used when the Medicaid reimbursement rates for those
institutions were calculated. The State alleged that in 1981 DMH
submitted an indirect cost proposal to DCA in connection with another
program, but that proposal was not reviewed, and was ultimately
withdrawn as unnecessary. The State alleged that DMH asked DCA at that
time whether the submission of the proposal was required because of the
provider reimbursement DMH received under Medicare and Medicaid. DSS
alleged that DCA "indicated no such requirement," and provided an
affidavit supporting this allegation. (DSS Exhibit B, para. 10) In its
comments on our preliminary analysis, HCFA indicated that DCA had
informed DMH only that a rate was not necessary for the specific program
which had been the subject of the DMH-DCA discussions at that time.
HCFA contended that none of the documents considered in those
discussions addressed indirect costs relative to Medicaid/Medicare.
Significantly, however, HCFA did not allege that it had ever
specifically told DMH that it must submit a CAP. (HCFA Response to
Preliminary Analysis, p. 5, para. 5) HCFA's Arguments HCFA asserted that
the State had not negotiated an indirect cost rate for DMH and that,
under the Department's Grants Administration Manual, para. 6-100-30A,
DSS could not be reimbursed for indirect costs when it had not
negotiated this rate. HCFA also relied on OMB A-87 Attachment A,
Sections J.1. and J.2. Those sections provide, in part:
1. General. A plan for allocation of costs will be required to
support the distribution of any joint costs related to the grant
program. . . .
2. Requirements. The allocation plan of the grantee department
should cover all joint costs of the department as well as costs to be
allocated under plans of other agencies or organizational units which
are to be included in the costs of federally-sponsored programs. . . .
HCFA also referred to guidance on the preparation and submission of cost
allocation proposals by State and local governments, set out in the
Department's Guide No. OASC-10, dated December 1976. Section I, p. 2,
contained the statement:
The failure of a State or local government to comply with cost
allocation plan requirements will act to(5) preclude its recovery of
central support and indirect costs as a charge against Federal grants.
. . . Further, at p. 3, the Guide stated:
It is not necessary that the cost allocation plans reflect all State
or local support service costs or all department/unit indirect costs.
But, it is necessary that the plans reflect all costs for which a claim
is to be made. DSS' Arguments The basic premise underlying DSS' position
was that the costs charged to federal grants were those incurred in
payment of the Medicaid rates, not the central service costs themselves.
Therefore, DSS argued, the costs claimed (rates) were medical vendor
payments and were exempt from cost allocation requirements specific to
Medicaid. DSS further argued that the cost allocation requirements did
not apply because they were inconsistent with requirements applicable to
Medicaid provider reimbursement. /3/ Finally, DSS argued that HCFA
had(6) a responsibility, which it did not meet, to notify DMH that it
must submit a cost allocation plan for approval by DCA.
Analysis We conclude that none of the provisions relied on by HCFA
require a state to have a DCA-approved CAP for allocating departmental
indirect costs to institutions providing Medicaid services in order to
claim Medicaid reimbursement rates calculated using those indirect
costs. We also conclude that HCFA did not give notice to DSS or DMH
that such a plan must be submitted to DCA for approval. In view of our
decision, we have not analyzed each of DSS' arguments separately. The
Applicability of OMB A-87 We agree with HCFA that OMB A-87 applies
generally to the State's claims under Medicaid. OMB A-87 applies to
costs charged to federal grants to state and local governments; Medicaid
funds are grants to states. Additionally, we agree that central support
service costs incurred at the state or departmental level are the type
of joint costs that generally should be covered by a cost allocation
plan. However, the State is correct that its publicly-owned Medicaid
providers are exempted from the provisions of OMB A-87. As explained in
OASC-10, OMB A-87 does not apply to such institutions because their
organization differs markedly from other operations of State and local
governments. (OASC-10, p. 18) Thus, special cost principles apply.
(Below, we discuss what principles apply under Medicaid.) /4/
Moreover, even if OMB A-87 did apply, OMB A-87 simply does not address
the question of when a State can include central services costs in
determining institutional reimbursement rates. OMB A-87 requires that a
CAP include any indirect costs claimed as a "charge to" federal funds.
Here, however, DSS is not charging the indirect costs themselves, but is
including those costs allocated to the five ICFs/MR when calculating a
reimbursement rate for those providers. To understand way this
distinction is relevant, it is important to understand generally how
Medicaid provider reimbursement works and what DSS is claiming.(7)
Medicaid Provider Reimbursement Methods Used by DSS Under Medicaid, the
cost of services provided by intermediate care facilities is determined
according to the methods set out in the approved state plan. See 42 CFR
Part 447, Subpart C. Here the State plan adopted the Medicare
retrospective reimbursement system for the period July 1, 1980 through
October 31, 1981 and then adopted a prospective reimbursement method for
the period beginning November 1, 1981. Under the retrospective system,
the State paid an interim rate based on estimated expenditures and then
adjusted that rate to reflect actual costs, as limited by the Medicare
principles and standards. Prospective reimbursement systems use
historical costs (those of a prior base year), adjusted for inflation,
to determine a rate for a future period. That rate is not adjusted to
reflect the actual costs incurred in that period. The costs used to
calculate the prospective rate for the period between November 1, 1981
and June 30, 1983 were the costs from the period November 1, 1980
through October 31, 1981. Using these methods, DSS established per diem
rates for reimbursing DMH for services provided by the ICFs/MR. The
applicable standards and principles for determining the allowability of
costs included in the rates and for determining how the rates were
calculated were those set out in the Medicaid regulations, 42 CFR Parts
442 and 447, the Medicare regulations at 42 CFR Part 405; the Provider
Reimbursement Manual (for the period July 1, 1980 through October 31,
1981); and the State plan. Public and Private Provider Reimbursement
Generally When a state Medicaid agency submits a claim for FFP in
expenditures for services provided by institutions (public or private),
the claim is based on the applicable per diem rate for each patient day
of service provided to a Medicaid recipient. In other words, the costs
or expenditures claimed are the payment to the povider. The amount
which can be paid under the State plan is established by the rate, which
in turn is calculated according to the applicable methods using the
provider's costs. As noted above, under a prospective system, the
provider's costs used in calculating the rate are not the actual costs
of providing the services for which the prospective rate is paid but are
costs from a prior period. /5/
(8) When a private provider is reimbursed for services provided under
Medicaid, there is no question that the state Medicaid agency's cost in
which it claims FFP is the payment made based on the per diem rate
calculated for that provider. The underlying costs used to calculate
the rate are incurred by the provider, not the state, and although
Medicaid reimbursement principles apply to the costs included in the
rate, the costs themselves are not the costs claimed by the state for
FFP. When the provider is a public institution, the claim is also for
payment for services, in the amount of the rate. However, the process
of paying for services provided by a public institution is more complex
than when the state pays a private provider because the state is in
effect paying itself, that is, one department is paying another (in this
case DSS is paying DMH for services provided by institutions operated by
DMH). CAP Requirements and the Rates The costs incurred as central
support services and used in calculating reimbursement rates are part of
the pool of joint costs which may have been charged to other federal
programs or activities. Thus, the federal government has a legitimate
interest in ensuring that the costs have been properly allocated to the
units, programs, or institutions that benefitted from the services. The
difficulty is that OMB A-87 and other CAP provisions simply do not
address provider reimbursement and the Medicaid regulations do not
require approval of cost allocation(9) methods used by a provider
agency. /6/ No explanation of how the two sets of standards relate to
each other is given. /7/
OMB A-87 refers generally to "joint costs" and requires such costs
to be
included in a CAP where they are charged to federal funds. (OMB A-87,
Attachment A, Section C.2.c) Strictly speaking, however, the costs
charged to federal funds here are the provider payments, in the amount
determined by the per diem rates, not the costs used in calculating the
rates. The payment of the rate for ICF/MR services to Medicaid
recipients is a direct cost, clearly allocable to Medicaid. Both
OASC-10 and section 6-100-30A of the Grants Administration Manual, in
referring to CAPs other than statewide CAPs, speak of indirect cost
proposals which must be submitted by each governmental unit that wishes
to claim indirect costs on federal grants. Moreover, the Provider
Reimbursement Manual (HIM-15), Part 1, section 2156.2, which applied to
the period July 1, 1980 through October 31, 1981, sets out acceptable
allocation bases for various types of central support services and
requires approval by the Medicare fiscal intermediary only for an
allocation basis different from that listed or for an additional type of
service. /8/ Nothing in the manual or(10) elsewhere specifically
indicates that, if an institution is providing Medicaid services, the
allocation method must be approved by following OMB A-87 CAP procedures.
Thus, the State could have reasonably thought it met applicable CAP
requirements and what it was doing was acceptable both from the
standpoint of its claims for indirect costs of administering the
Medicaid program and its claim for per diem rates for Medicaid services.
Moreover, HCFA has not said that it cannot now adequately determine the
allocability of the costs. The costs were included in statewide CAPs
submitted on a timely basis and, the State alleged, in indirect cost
plans for DMH on file with DSS. The allocation method used was that
approved by the fiscal intermediary for Medicare so, on its face, it is
not an unreasonable method. In commenting on our preliminary analysis,
HCFA raised for the first time the question of whether the allocation
method was a fair one. On remand, HCFA can determine whether the
allocation method results in a fair distribution of costs to the
institutions and whether the rate calculations were in accordance with
the applicable State plan reimbursement methods and principles of
allowability. To the extent the State cannot show that the costs were
allocable and allowable, HCFA may reaffirm its disallowance, in whole or
in part, and the State can appeal that decision. We hold only that,
under the circumstances here, HCFA cannot disallow rates calculated in
accordance with the State plan, using allowable and allowable costs,
solely on the basis that the DMH CAPs including those costs were not
previously approved by DCA. The existing provisions on CAP procedures
simply did not give the State adequate notice that this was
required.(11) Conclusion Accordingly, we remand this disallowance to
HCFA in the amount of $4,892,069, for further consideration consistent
with our determinations above. /1/ The relationship between indirect
cost rates and cost allocation plans is as follows. The
Department's guide on CAPs, OASC-10, explains that central services
costs are generally treated as indirect costs and included with indirect
costs generated within each department or unit performing a federal
grant for allocation to benefitting programs by means of an indirect
cost rate. A government agency that wishes to charge support service
costs to federal grants must prepare a statewide central service cost
allocation plan to allocate the central service costs to departments or
unit which they benefit. Then an indirect cost proposal must be
submitted for each department or unit wishing to claim indirect costs on
federal grants. (OASC-10, p. 10.) /2/ There is some dispute
concerning the scope of the fiscal intermediary's approval. HCFA
contended that the costs here were not included in the plans approved by
the fiscal intermediary. The record is unclear on this point, although
it does appear that the allocation method (i.e., "inpatient days")
used
for Medicaid was the same as that approved by the fiscal intermediary.
In any event, resolution of this dispute is not necessary to our
decision here. /3/ DSS also argued that DMH is a "lower tier
organization" as defined by OASC-10 and, as such, its CAP was to be
submitted to DSS rather than to DCA. OASC-10 provides that cost
allocation plans for "lower tier organizations" such as hospitals
should
be submitted to the grantee department rather than DCA and the grantee
department has the responsibility for assuring that the costs are
determined in accordance with federal principles. DSS argued here that
DMH is a "lower tier organization" because it is merely providing
services to the Medicaid program in return for payment by DSS. HCFA
responded by noting that, "based upon total dollars allocated under the
Statewide CAP," DMH is the third largest department in the State. HCFA
argued that the OASC-10 "definition" of a lower-tier organization
intentionally excludes other state agencies and therefore, could not
encompass DMH, but HCFA did not point to any language in OASC-10 which
specifically says this. HCFA also said that the ICFs/MR, and not DMH,
were the providers. We agree with HCFA that DMH is not itself a
provider medical institution, nor is it part of DSS (which is the
grantee department here), so the concept of a "lower tier organization"
does not readily fit this situation. But the State's position that DMH
should be treated as a "lower tier organization" for CAP purposes
is no
less convincing than HCFA's position which treats DMH like a grantee
department. /4/ HCFA argued that Board Decision No. 293,
Pennsylvania Department of Public Welfare, April 30, 1982, supported its
position that OMB A-87 applies to this claim. In that decision, the
Board concluded that indirect costs must be included in an approved CAP.
That decision did not involve provider reimbursement, but, rather, costs
claimed for administration of the Medicaid program in Pennsylvania.
Therefore, OMB A-87 applied there in a way it does not apply here.
/5/ We mention the use of a prospective reimbursement system to point
out that the per diem rate is not merely a shorthand summary for a
number of cost items which otherwise could be separately charged to
Medicaid. For example, the State could not have submitted a claim for
1983 expenditures based on the fact that accounting services were
provided to its ICF/MRs in 1982. Yet, it is permitted to use the costs
of those services in calculating its 1983 per diem rate. In commenting
on our preliminary analysis, HCFA referred to "the Board's concept that
per diem rates are not costs." (HCFA Response to Preliminary Analysis,
p. 4, para. 2) To the contrary, our point is that the Medicaid
reimbursable cost is the per diem rate charged for services provided to
recipients and that the indirect costs of services to the ICFs/MR are
not themselves reimbursable under Medicaid, per se. /6/ DSS
argued that the payment of the reimbursement rate to DMH by DSS
constituted a "medical vendor payment" which is exempt from CAP
requirements specific to Medicaid. It is reasonable to consider the
payments in this light since DSS has purchased services from DMH just as
it would from a private provider. HCFA argued that the ICFs/MR were the
providers, not DMH, but, as the State pointed out, the relationship
between DMH and its ICFs/MR is analogous to the relationship between
private providers and their home office/parent company. /7/ The
Board has previously noted the generality and ambiguity inherent in
attempting to apply federal government-wide standards such as those
contained in OMB A-87 to Medicaid reimbursement of public providers.
See e.g., New York Department of Social Services, Decision No. 452, July
29, 1983; Illinois Department of Public Aid, Decision No. 467, September
30, 1983. More specifically, the Board has cited the difficulty in
applying CAP requirements to provider institutions. See Iowa Department
of Human Services, Decision No. 624, February 12, 1985. /8/ HCFA stated
that section 2156 does not apply to DMH's allocation to the
provider but only to allocation of costs within the provider
institutions, but pointed to no specific language supporting this view.
Section 2156 states that the costs of government furnished facilities
and services are includable in the allowable costs of government
operated providers to the extent the costs are (1) reasonable, (2)
related to patient care, (3) allowable under Medicare, (4) allocated on
an acceptable basis. The types of givernment costs listed are precisely
the kinds of costs generally incurred by central service components of
State governments, rather than the institutions themselves. We could
find nothing in the section indicating that it is limited solely to
costs incurred by the provider institutions themselves.
JUNE 06, 1985