GAB Decision 373
December 30, 1982 Nebraska Department of Health; Docket No. 82-66-NB-HC
Garrett, Donald; Settle, Norval Teitz, Alexander
The Nebraska Department of Public Health (appellant, State) appealed
the disallowances by the Health Care Financing Administration (HCFA,
Agency) of $239,644 in federal financial participation (FFP) for costs
of Life Safety Code (LSC) inspections and health surveys of Medicaid
facilities. /1/ Based on the entire record, including telephone
conferences, we uphold the full amount of the disallowances.
The Disallowances
The disallowances before the Board arose out of an audit by the
Office of Inspector General Audit Agency of the Department of Health and
Human Services, Audit Control No. 07-12100, dated September 24, 1981.
This was the final form of the audit which had gone through a draft and
a revised draft, with comments invited from the appellant on the drafts.
The disallowances, based upon the final audit recommendations, were
under two major headings. The first, based upon Recommendation No. 1 in
the audit, was for the costs of LSC inspections. This was in turn
broken up into two parts. The first (1A) was for the entire costs of
inspections which were for activities not required by or related to the
Medicare or Medicaid programs. The second (1B) was for the costs of
inspections which represented benefits attributable to the State from
the inspections. The second major division of the disallowance, based
upon Recommendation No. 5 of the audit report, was for the State share
of the costs of health surveys which jointly benefited the State and the
Medicaid program.
(2) Time Period of the Disallowances
The audit report had recommended that the State refund for
unallowable costs for LSC inspections and health surveys for the period
from July 1, 1975 through September 30, 1979. However, the original
disallowance letter, while covering inappropriate LSC inspection costs
from July 1, 1976 through September 30, 1979, covered only FY '79
(October 1, 1978 through September 30, 1979) for the joint inspection
and survey costs.
The State was, however, advised that it would have to share in the
joint costs of LSC inspections and health surveys for future periods in
the same proportion as determined for FY '79. In the original
disallowance letter of March 12, 1982, the amount from October 1, 1979
forward was "to be determined" within 30 days. On April 12, 1982 the
respondent notified the appellant of the amounts disallowed for FY '80
and FY '81. Appellant duly appealed to this Board from the
determinations for all three fiscal years.
Medicare and Medicaid Portions of the Disallowances
The original disallowance through FY '79 and the subsequent ones for
FY '80 and '81 included costs of LSC inspections and health surveys to
be refunded to both the Medicare and Medicaid programs. The Board, in
its acknowledgment of the appeal by the State, pointed out that despite
the notification to the State of a right of appeal only to this Board,
other avenues might be available for the Medicare component.
Eventually, after briefing, the Board Chair ruled that the Board did not
have jurisdiction of the Medicare portion of the appeal. This decision
is therefore concerned only with the disallowances as they pertain to
costs claimed to be improperly charged to the Medicaid program. /2/
Summary of the Decision
There are two major issues in this case. The first is the factual
one of determining the amount of the costs of LSC inspections by the
State which did not benefit the Medicaid program at all, since they were
for activities not required by or related to the Medicaid program.
Based on our analysis, we sustain the amount of the disallowance for
inappropriate LSC inspections in full.
The second issue is a mixed question of fact and law, and concerns
the determination of allocating the costs of joint LSC inspections (3)
and health surveys which are utilized not only for Medicaid
certification but for state licensure as well. The disallowance divides
this issue in two parts, the division of costs of LSC inspections, and
the division of costs of health surveys. The State charged the entire
cost of joint LSC inspections and health surveys to Medicaid. The
disallowance allocated to the State 45% of the costs of LSC inspections
of Medicaid facilities, 50% of the costs of health surveys for
hospitals, and 15% of the health survey costs for long-term care
facilities. Based on our analysis, we find these allocations to be
reasonable and sustain the full amount of these disallowances.
I. INAPPROPRIATE LSC INSPECTION COSTS
The Agency disallowed a total of $101,512 for the costs of LSC
inspections from July 1, 1976 through September 30, 1979, "which were
for activities not required by or related to the Medicare and Medicaid
programs." (Recommendation 1A) Of this amount $68,471 applied to
Medicaid and is at issue here.
A. The Audit Findings
The basis for the disallowance was that an examination by the
auditors of the time records and billings of the office of the Nebraska
Fire Marshal (who did the LSC inspection for the State Department of
Health) showed that the costs billed to the Medicare and Medicaid
programs included time spent on:
(1) inspections at facilities which did not provide health care
services, such as boarding homes, adult custodial foster homes,
theaters, jails and schools; (2) inspections at non-certified health
care facilities and hospitals accredited by the Joint Commission for
Accreditation of Hospitals (JCAH); and (3) arson investigations,
building inspections and condemnation proceedings.
(Audit, p. 10; Stipulation No. 17, Appellant's brief, p. 5)
This issue is entirely distinct from the allocation of costs of joint
LSC inspections to Medicaid and state licensure. There is no legal
issue, since the appellant does not contest the fact that the Medicaid
program should not pay for time spent on the activities listed above.
(Reply brief, p. 8) What appellant does contest is the amount attributed
by the auditors to such activities.
(4) B. The State's Reply
Appellant did not specifically address this issue either in its
appeal or in its opening brief. However, in its reply brief the
appellant contended that the State owed less than the Agency claimed for
the costs of these non-certification inspections. It also contended
that this would be borne out by a review of the record.
The Board permitted appellant to question the amount of inappropriate
inspection costs in its reply brief, over respondent's objection, even
though it had not done so in its opening brief. The appellant stated
that the Chief Deputy State Fire Marshal, a secretary, and all five
deputies "spent their full time in making Life Safety Code inspections."
(Reply brief, pp. 9-10) The statements of counsel in a brief are not
evidence, and there is no credible evidence in the record to support
this allegation.
The contention of the State is that the contracts between the
Department of Health and the State Fire Marshal provided for budgeting
to LSC inspections the equivalent of five full-time deputy fire
marshals, and these contracts were approved by the Agency. The only
supporting evidence submitted by the appellant on this issue, other than
the contracts themselves, was an affidavit by Charles Cropp, Assistant
State Fire Marshal, submitted by appellant on October 14, 1982, after
all briefing was completed. Cropp was first a Deputy Fire Marshal, and
then became in turn a Chief Deputy and Assistant Fire Marshal. Cropp
himself as a fire marshal states he worked only in connection with
inspection of health facilities. As to the other deputies, he states
that from September 23, 1976 to December 1978 there were five deputy
state fire marshals "assigned to perform only those Life Safety Code
inspections requested by the Department of Health."
C. Analysis
The contracts between the State Department of Health and the State
Fire Marshal were for fire safety inspections for purposes of state
licensure and participation in the Medicare and Medicaid programs.
These contracts did not provide that the Department of Health would
automatically pay for five full-time deputies to perform these services.
The first contract (Exhibit 2A) stated that the State Fire Marshal would
provide a staff of five deputies to perform the inspections required by
the Department of Health. The second contract (Exhibit 5) provided for
the State Fire Marshal to have a staff equivalent to five deputies, with
a provision for requesting additional staff if the workload required it.
Payment under both contracts was to be reimbursement "for the actual
costs of the services performed under the provisions of this Agreement."
(5) The agreements specifically excluded payment for other activities
of the fire marshals:
Any costs incurred by the State Fire Marshal solely in carrying out
his responsibilities under state law -- with respect to anything other
than the performance of this Agreement -- shall not be cost attributable
to this Agreement. (Exhibit 5, p. 4)
The Fire Marshal did allot the time of five full-time deputies to
performance of this agreement. The difficulty was that the auditors
found that not all of the deputies' time was being spent on performing
duties called for under the agreement. In addition to inspecting
facilities for Medicare and Medicaid certification, and for state
licensure, they were doing a variety of other duties having no
connection with certifiable facilities.
The Agency correctly denied FFP for one half of Cropp's salary as
Assistant State Fire Marshal, for he himself said "approximately half of
his time was employed in other duties." As to the remainder of his
affidavit, it is not conclusive even on its face, except that he states
that he himself worked only on inspections of health facilities. As to
the other deputies, he states that all five (including himself) were
assigned to perform only those LSC inspections requested by the
Department of Health. This paragraph of the affidavit is as significant
in what it omits as in what it asserts. In the first place, the
Department of Health requested LSC inspections for hospitals already
JCAH accredited; these hospitals did not have to be inspected again to
meet federal certification requirements. /3/ Inspections were also
requested at some time for custodial facilities, which are not
certified.
More significant is the fact that Cropp did not say that these
deputies, whom he supervised, did in fact spend their full time on
health facility inspections. What he does say is that they were
"assigned" to perform only LSC inspections requested by the Health
Department. It is perfectly plausible that in addition to these duties
assigned to them by the Health Department they also did work on arson
investigations and condemnation proceedings.
(6) The remainder of the affidavit is similarly inconclusive. It
states in paragraph 9 that for about three or four months beginning in
December 1978 other deputies assisted with reinspections of facilities
found to have deficiencies when first inspected. The next paragraph
points out that beginning in March or April 1979 there were up to 16
deputies, with four chief deputies and one assistant state fire marshal
working on LSC inspections, all of whom had other duties assigned them.
The affidavit itself is in any case subject to strict scrutiny where
it was filed so late in the proceedings. In Tennessee Department of
Public Health, Decision No. 143, January 26, 1981, this Board looked
with skepticism at an affidavit which came toward the end of the Board
proceedings. There the Board refused to reverse the disallowance on the
basis of the affidavit, although it did urge the Agency to reexamine the
disallowance in the light of the affidavit.
So here the affidavit alone is not sufficient to reverse the
disallowance. It is the State which has the burden of substantiating
its claim for FFP when challenged. The auditors' findings offer a
reasonable basis for the amount of the disallowance. In the absence of
credible evidence to the contrary, we must sustain the findings of the
audit on this issue.
D. The Meetings between the Parties
In December 1981 and again in January 1982 representatives of
appellant and respondent met in an unsuccessful attempt to resolve all
issues. Respondent submitted file memoranda of these meetings with its
motion to strike that part of appellant's brief pertaining to the
inappropriate LSC costs. The Board denied respondent's motion but these
file memoranda became part of the record here. The appellant did not
object to them as being connected with settlement negotiations, and the
Board does not consider itself bound by the technical rules of evidence.
($USee, e.g., 45 CFR 16.11(d) (1981)) Nevertheless, the Federal Rules of
Evidence do exclude statements in settlement discussions. The purpose
of such a rule is to encourage the parties to discuss their positions
freely without binding them to any offers or admissions they may make.
The Board considers the file memoranda not for the purpose of
considering any admissions by respondent but because they indicate that
the Agency representatives themselves conducted a further review of the
time records of the Deputy Fire Marshals assigned to the Department of
Health. According to the memoranda the time records for 1978 and 1979
"revealed a significant amount of inspection time" spent at non-health
care facilities, as well as on arson investigations and condemnation
proceedings. For 1977 (7) inspections were limited to health
facilities, but included numerous inspections of JCAH accredited
hospitals, which did not have to be inspected for certification.
Thus, the file memoranda support the Agency's position, but even
without them, the Board would have to uphold the disallowance on LSC
inspection costs, based on the audit findings.
At the January 1982 meeting there was a discussion about taking a
sample of the time records of all fire marshal personnel. Nothing came
of it because the other issues could not be resolved. However, nothing
prevents the Agency from now undertaking such a sampling, the details to
be worked out in cooperation with the State.
II. SHARING OF COSTS OF LSC INSPECTIONS AND HEALTH SURVEYS OF
MEDICAID FACILITIES
A. Background
In Nebraska during the period covered by the disallowances, when a
health care facility, such as a nursing home, was inspected to see
whether it met LSC and health requirements, the inspection had two
purposes. One was to see if the facility met the federal requirements
for certification for Medicaid. The other was to see if it met the
requirements for state licensure.
The two requirements are in many ways concurrent, for to be certified
for Medicaid a skilled nursing facility (SNF) or an intermediate care
facility (ICF) must meet the requirements of the particular state in
which it is located for obtaining a state license. (42 CFR 442.201 and
442.251 (1979)) The inspection for Medicaid (and also for Medicare) is
the responsibility of the same state agency which inspects for state
licensing, although in its function of inspecting for meeting Medicaid
health certification requirements it is referred to as the state
"survey" agency. (42 CFR 431.610) The state survey agency may contract
with another state agency for the LSC inspections, as Nebraska did here
with the State Fire Marshal.
State licensing requirements were for many years generally not as
strict as the federal requirements for Medicaid certification. However,
the federal government encouraged the states to tighten up their
licensing requirements by increasing the percentage of FFP for Medicaid
inspections, and in many instances the requirements became identical.
/4/ The obvious problem then arose when a (8) state inspector went to
inspect a facility at the same time for state licensure and Medicaid
certification. If the requirements were identical or nearly so,
theoretically at least it should take no longer for the two inspections
than it would for either one alone. Should the costs of the inspection
be charged all to Medicaid, or all to state licensure, or equally (or in
some other proportion) to each?
The applicable regulation is in two parts; each party cites one part
in support of its position. Thus, in determining that the State must
share in the cost of joint LSC inspections and health surveys, the first
disallowance letter cites to 42 CFR 431.610(h)(2) (1979);
FFP is not available in any expenditures that the survey agency makes
that are attributable to the State's overall responsibilities under
State law and regulations for establishing and maintaining standards.
(emphasis supplied)
The State, on the other hand, cites to the preceding subsection to
support its contention that all the inspection costs should be eligible
for FFP.
FFP is available in expenditures that the survey agency makes to
carry out its survey and certification responsibilities. . . .
(emphasis supplied) (42 CFR 431.610(h)(1))
Of course, if the licensure and certification requirements were
entirely different, without any overlap, there would be no problem.
Inspection for licensure would be charged all to the state and
inspection for Medicaid certification would be charged entirely to the
federal government for FFP purposes. So also, if the inspections were
done separately by different teams, even with similar requirements, then
there would be separate time records for each inspection, which could be
charged separately to state licensure and Medicaid inspection. /5/
B. The State's Position
Nebraska did not claim that no part of the costs of joint inspections
should be allocated to state licensure. Instead, it said (9) that there
was an allocation in the Medicaid budgets submitted by Nebraska to the
Agency for fiscal years '79, '80, and '81; the federal government
approved those budgets; and this allocation cannot be changed
unilaterally. (See Appellant's brief, p. 2 and p. 21)
Factually, there are two things wrong with this approach. First,
there was no allocation of the costs of inspections to state licensure
in the Medicaid budgets. In paragraph 41 of the stipulated Statement of
Facts submitted in Appellant's brief (p. 10), there is the following
statement:
All hospital hours were charged to the Medicare program and all
nursing home hours were charged to the Medicaid program. The only hours
charged to the state were those associated with licensure surveys of
facilities such as boarding homes, custodial foster homes, and centers
for the developmentally disabled. (All state funded.)
The other factual misconception of the appellant was that the budget
for Medicaid inspections was "approved" by HCFA. As admitted by
appellant in the conference call of October 13, 1982, a state's Medicaid
budget, as distinguished from Medicare, is not presented to HCFA for
"approval." It is presented for information purposes only, and is
used
in estimating a state's request for advance funding for Medicaid. The
actual payment to a state, after the end of a quarter, may be more or
less than the estimate on which the state drew down funds to pay out
during the quarter, based on the Secretary's determination of allowable
costs. (45 CFR 201.5 (1979))
C. The Agency's Position
The position of the Agency was that the State must share in the cost
of LSC inspections and health surveys of Medicaid institutions, since
these were also done for state licensure purposes. Under the
appropriate regulation (42 CFR 431.610(h)(2)) FFP is not available for
costs of inspections and surveys "attributable to the State's overall
responsibilities under State law and regulations for establishing and
maintaining standards."
The Agency argued that the State must work with the Agency in
arriving at some equitable allocation. The State was informed in
advance that it would have to share in the inspection costs beginning
with FY '79. It was the State's responsibility to suggest some method
of allocation. In the absence of any proposal by the State, the Agency
had no choice but to make the allocation it thought fair. The Agency
contended its allocation was fair, since it was not attempting to
enforce any allocation prior to (10) FY '79, and it reduced
substantially the disallowances proposed by the audit.
The Agency cited in support of its position two sections from the
State Operations Manual. /6/ The first is section 4100, entitled "Basis
for Determining Health Insurance Relatedness of Activity Costs," which
points out that "In those (state) agencies where activities are
performed for survey and certification only, the entire costs are paid
by the survey and certification program." It then continues: "But
in
many States these activities serve other programs in addition to survey
and certification: e.g., certification as well as licensure." The part
relied on by the Agency follows:
When this situation exists, a method of determining the survey and
certification share of the cost must be established. (See section
4514.). . . . (emphasis supplied)
Section 4514 adds little to this, although the problem is addressed
in 4514E, entitled "Charging for Multiprogram Staff: Program Activities
Not Separate."
In those agencies where some or all of the State survey activities
are shared with other on-going agency programs so that a common function
(e.g., survey of a hospital, etc.) will serve for State survey and
certification as well as for licensure or other State programs and the
work involved cannot be separated into program elements. . . . The
agency may wish to use one of the following methods or may wish to
submit another proposal for apportioning costs between the State survey
program and the other agency program(s) involved.
The two "following methods" were apparently not appropriate for
the
Nebraska situation, since neither the auditors nor the parties have
suggested that they could be used. It is the Agency's position that
this section, coupled with section 4100, requires the state to take the
initiative in establishing some method of allocation, if it finds the
Agency's proposal unacceptable.
(11) D. Analysis
The Agency admits that before FY 1979 the situation was confused, and
therefore it refused to accept the auditor's recommendations that the
State share in the cost of inspections for the period from July 1, 1975
through September 30, 1978. /7/
Application of the principle of the State sharing in the costs of LSC
inspections prior to FY-1979, as recommended by the auditors, was
determined by HCFA to be inconsistent with program procedures which were
in effect at that time. States in this Region were not advised, nor
were they expected to share in these costs prior to FY-1979.
(Disallowance letter, March 12, 1982, p. 2)
1. Notice to the State
Respondent claimed that the regulation itself was notice to the State
that allocation of inspection costs was required. Also, the Agency
contended that the provisions of the State Operations Manual set out
above constituted notice to the State that it must suggest an allocation
method if it did not agree with the Agency's. But apart from that, it
is undisputed that the State was put on notice that it would at least
have to suggest some allocation of inspection costs.
In respondent's brief there is the statement that Nebraska was
informed during a Regional Director's workshop in April 1978 that
"states must share in costs of survey and certification when (12)
applicable state licensure programs also benefit," and this was
confirmed by letter. (p. 6) This statement was not denied by the State.
The letter referred to is Exhibit #1 of Respondent's Supplement to
the Appeal File. It is dated May 5, 1978 and addressed to the Director
of the Nebraska Division of Licensure and Standards. The part of the
letter that pertains to the issue in this case is the following:
Allowance should also be made for applicable state licensure programs
share in the cost.
. . . If you find that last years time records do not give adequate
information with respect to the weight for the state licensure effort
then you should explain what appropriate weight should be given. (p.
2)
Exhibit #2 of Respondent's Supplement to the Appeal File is more
explicit:
In preparing budget projections, you should keep in mind that the
cost of activities performed by the State Survey Agency for the purpose
or benefit of the State licensure program or any other State program
must be borne by the State. The survey agency must maintain records to
identify the costs of these activities. (p. 2)
The additional clarity of this second letter is somewhat vitiated for
this case because it was written almost nine months into FY 1979.
However, the State has not contended that it was not put on notice that
it was expected to make some allocation of inspection costs to state
licensure.
2. The Audit Findings and Recommendations on Sharing the Costs
An obvious solution to the problem of sharing the costs of joint
inspections is to allocate the costs of inspecting Medicaid-only
facilities half to Medicaid and half to state licensure. For LSC
inspections, this is what the first draft audit suggested. This was
based on a showing that it was the State Department of Health's practice
"to request annual LSC inspections whether they were required for
Federal certification purposes or not." (p. 13) Also, the report stated
that the LSC requirements and inspection efforts for licensure purposes
were "at least as great as for Medicare or Medicaid purposes." (Id.)
The
report went on to recommend that: (13) the State should have shared in
one-half of the LSC inspection costs which satisfied both the Federal
certification and State licensure requirements. (Id.)
As for allocation of health survey costs, the first draft audit
report concluded that the auditors could not reasonably quantify the
extent of benefit to the State licensure program. (p. 17) Not only the
State, but some HCFA officials felt that a 50% allocation of LSC
inspection costs was unjustified. Attached to the first draft audit
report are position papers of the Principal Operating Component (POC) on
the audit recommendations. On sharing of costs of LSC inspections, the
Regional Office, Health Standards and Quality, agreed that the State
should pay for the "benefit" derived, but did not agree that the share
would necessarily be 50 percent. "Instead, the share should be based on
a reasonable determination of benefit." On determining the share of
benefits from the health surveys, the POC position placed its trust in
the SAI study, which will be considered below.
The revised draft audit was furnished the State on January 30, 1981.
The auditors reviewed the annual LSC inspection files for hospitals for
those accredited by JCAH and those not so accredited. The significance
of such a distinction is that a hospital which is accredited by JCAH
does not need to be inspected again for Medicare (or Medicaid)
certification. Hence the inspections of JCAH hospitals were for state
licensure purposes only. The time it took for these state-only
inspections could readily be compared with the time it took to inspect
similar institutions for certification.
The auditors found that the inspectors spent at least as much time
inspecting the JCAH accredited hospitals for state licensure as they did
inspecting non-JCAH hospitals for Medicare certification. The auditors
therefore recommended that the LSC inspection costs at Medicare
certified hospitals and skilled nursing facilities be charged as equally
benefiting the three programs: State licensure, Medicare, and Medicaid.
However, the inspection costs at Medicaid certified SNFs and ICFs were
allocated 55% to Medicaid and only 45% to state licensure, rather than
equally to both.
In the revised draft audit the auditors made definite recommendations
for allocating joint health survey costs. The auditors stated that
because the State Department of Health had not developed procedures for
allocating joint survey costs among the benefiting programs, they
allocated 50% of Medicaid survey costs to state licensure. The final
report was similar.
(14) 3. The SAI Report
In 1980 Systems Architects, Inc. prepared a report for HCFA on a cost
allocation methodology pertaining to the shared federal/state health
facility surveying for licensure and certification purposes. Neither
counsel here had a copy of the Report available, but since it was
referred to in several places in the audit, the Board obtained a copy
from HCFA in Baltimore. By agreement of the parties, Volume I was
included in the record of this case and a copy furnished each party.
Volumes II and III contained the design of the data base and forms and
questionnaires used in the prospect, which the Board did not feel was
relevant to the issue here. Actually, Section V of Volume I, entitled
"Recommendations" is incorporated in the Audit report furnished the
Board.
The project by SAi certainly started out with high hopes. In fact,
both parties expected that it would eventually solve the problems
encountered by the auditors in allocation. In the first draft audit,
there was the following reference to the project:
HCFA recently contracted with a management engineering firm to
develop an effective method of allocating survey costs between the
Federal certification and State licensure programs on a nationwide
basis. (p. 18)
The auditors added a caveat, that the results would not be available
in the near future, and therefore the State should not wait for any
action by HCFA based on the report before developing an allocation
procedure.
In its response to the draft audit (April 23, 1980) Nebraska stated
that it wanted to wait for the report before doing anything differently.
On the auditors' first recommendation, that the State refund for LSC
inspection costs, the State said it would:
take action upon completion of the HCFA contractual study to
establish methodologies to accurately account for LSC inspection
programs.
On the auditors' third recommendation, that the State establish
procedures to share equally in the cost of LSC inspections beginning
with FY '79, the State did not concur and followed with "(the) SAI
contract with HCFA should resolve any doubts in this area."
(15) The revised audit report made no further mention of the SAI
project. The State, however, devoted more attention to it than before.
In addition to the comments on LSC inspection costs quoted above, the
State added the following comment to the auditors' recommendations for
allocation of health survey costs:
The current method for allocating costs between programs has not been
proven to be ineffective. Attached is the Systems Architects, Inc.
Final Report Cost Allocation Methodology Project. Your particular
attention is drawn to Section V of the subject report. (p. 4)
The SAI Report was never implemented by HCFA. Its major conclusion
was in substance that since conditions were different in each state, it
was very difficult to have universal nationwide guidelines for
allocation of inspection costs.
The Report had certain specific recommendations, but none of these
recommendations helps resolve the issues in this case. If state
licensing requirements are the same or substantially similar to LSC
inspection and health survey requirements for Medicaid certification,
nothing in the Report or the recommendations would give an answer to the
problem of allocating the costs.
4.It is Reasonable to Require the State to Offer an Alternative to
the Agency Allocation
The relevant regulation, as has been pointed out, does not solve the
problem. All it says is that FFP is available for surveys for Medicaid
certification but it is not available for costs of state licensure
inspections. Unless the two surveys are done separately, an allocation
problem must arise; the more similar the requirements, the greater the
problem.
For LSC inspections it is reasonable to allocate here up to one-half
of the cost to state licensure. Although annual LSC inspections were
not required for licensure purposes in Nebraska, the State Department of
Health routinely requested the State Fire Marshal to make annual
inspections soley for licensure purposes. In 1976 the State received
approval to use the State fire code for Medicare and Medicaid
certification surveys. (Stipulated statement of facts Nos. 26 through
29, Appellant's Brief, p. 7)
Once there were the same requirements, as the audit points out, only
one inspection was necessary, since the same standards were enforced for
both State and federal purposes. The auditors recognized that the study
on JCAH and non-JCAH hospitals did not consider time spent on travel
consultations, and certain other (16) activities, but the study showed
that the average time spent on LSC inspections for licensure purposes
(JCAH hospitals) was greater than the time spent on those required for
Medicare certification (non-JCAH hospitals). The auditor's conclusion
was that "the LSC requirements and inspection effort was at least as
great for licensure purposes as it was for Medicare or Medicaid
purposes," even though their final recommendation was that only 45% be
allocated to state licensure.
The audit itself cast some doubt on whether it was entirely fair to
charge the State with an equal share of the costs of health surveys, i.
e., 1/2 of Medicaid surveys, and 1/3 of combined Medicaid and Medicare
surveys. Federal and State health requirements were not identical,
although many were similar. It is clear that the State did:
benefit from the Medicare and Medicaid health surveys because they
provided the assurances that licensure requirements were being met
without the need for and expense of separate licensure surveys.
(Revised draft audit, p. 18)
It is also a responsible conclusion, as the audit continues, that
under the program provisions cited earlier for sharing joint costs, "the
State should have paid an equitable portion of health survey costs at
Medicare and Medicaid facilities." It does not, however, follow
automatically that an "equitable" portion of the health survey costs
is
an "equal" portion.
The auditors allocated an equal share of the health survey costs to
Nebraska because "the Department of Health had not developed procedures
for allocating joint survey costs among the benefitting programs."
(Revised draft audit, p. 18)
It should be noted that the auditors did not automatically recommend
that Nebraska refund an equal share of the health survey costs. Only if
the State should develop and submit to HCFA a plan which was not
acceptable, was the State to refund for the cost of health care surveys
which benefited the State an amount which was computed based on the
State's sharing equally in the survey cost. (Recommendation No. 5)
(Id.) Even though the State did not submit a plan, the Agency in the
disallowance nevertheless allocated only 15% of the costs of health
surveys of Medicaid facilities to the State.
We are faced with the situation where the State has never suggested a
plan for allocation. It has refused to do so on two bases. The first
was there was an allocation approved by HCFA when it approved the
State's budget. The fallacy of this argument has been discussed (17)
above. The second argument of the State was that HCFA had to come up
with some guidelines for allocation. If it did not, then the State
needed to do nothing.
The Board does not believe that the State's position is a reasonable
one. We have here a case where the State would not even discuss an
allocation which might be reasonable. In its brief the State stated
that "without precise standards" to apply in determining the allocation
between the federal government and the state, "a negotiated allocation
is clearly indicated." (p. 26) Nebraska goes on to say, consistent with
its position throughout this dispute, that this means negotiation for
the future only.
The State had ample opportunity for such negotiation for the future
as far back as 1978. The two exhibits which are in the Respondent's
Supplement to the Appeal File alerted the State (in 1978 and 1979) that
allowance should be made for allocating the share of the state licensure
program. But even before this, the State Operations Manual told the
states to do something about allocating costs which benefited State
programs.
The State in its brief refers to section 4514E in the State
Operations Manual, which it entitles an "Interpretive Rule." It quotes
the provision that time records may not be an appropriate basis for
allocating costs. The State stresses the language immediately
thereafter:
The (state) agency may wish to use one of the following methods or
may wish to submit another proposal for apportioning costs between the
State survey program and the other agency (programs) involved.
(Emphasis in appellant's brief, p. 24)
The State seizes on the "precatory language" (underlined above)
in
section 4514E, and contends it "leaves it up to the state to chose which
method it will use to allocate the costs between the state and federal
government." (Id.)
The difficulty here is that Nebraska never chose a method which
allocated any of the costs of Medicaid health surveys to state
licensure.
Aside from the precatory language in section 4514E in the State
Operations Manual, the language in section 4100 is clearly mandatory.
When the situation exists where health surveys serve certification as
well as licensure, "a method of determining the survey and certification
share of the cost must be established." (Emphasis supplied) Of course
the language could have said, "The State must determine the sharing of
the cost." By using the (18) language, the sharing of the cost "must
be
established," it is left open for the state and federal governments to
get together and establish an allocation. Thus, cost allocation plans
of states generally are considered as subject to negotiation with, and
approval by, the federal government. ($USee 45 CFR Part 74, Appendix C,
Part I, Subpart J (1979))
It is true, as the State says, that the provisions of the State
Operations Manual are interpretive rules. They are not statutes or
regulations, which have the force of law. They are statements
interpreting statute and regulations, and so are to a great extent what
the State calls them, statements of what an Agency official "thinks the
statute or regulation means." (Appellant's brief, p. 22) But this does
not mean they are valueless or may be disregarded by a state. If an
interpretation by a federal agency of a regulation it is charged with
enforcing is a reasonable one, and the State had notice of it, then it
will be upheld by the Board.
III. THE NEBRASKA LEGISLATURE CANNOT CONTROL THE ALLOCATION OF
INSPECTION AND SURVEY COSTS
The State's position in its briefs is that the Nebraska legislature
controls how much money is to be appropriated for inspection and survey
of Medicaid facilities; once the appropriation is made and the budget
approved, the federal government cannot change it unilaterally.
Whatever the situation on approval of the budget may be for Medicare, we
have seen that HCFA does not actually approve the Medicaid budget.
It is true, as the State contends, that a state does not have to
participate in the Medicaid program. However, once it elects to do so,
it has to have an approved state plan and comply with applicable federal
requirements. These include not only statutes and regulations, but also
reasonable interpretations of the law and regulations of which the state
has notice.
To say that a state legislature can control how much it will
appropriate for inspection and survey of facilities is technically
correct, but loses sight of the way the Medicaid program and other
state-operated public assistance programs are financed. A state
administers its own Medicaid program; it appropriates money for the
cost of operating the program; but it cannot compel the federal
government to pay the amount of FFP to which the state believes it is
entitled. It may show the expected FFP as a credit to the amount the
state legislature appropriates for the program. It will even have the
use of the money under the letter of credit system whereby the state may
draw against its approved estimate for each quater. At the end of the
quarter it may even be paid the FFP share of what (19) it has spent over
and above the estimate. (see 45 CFR 201.5) But it may still have to
refund some of the FFP it received if a later audit (as here) shows that
the state was not entitled to all the FFP it claimed. (45 CFR 201.5(a)
(3))
The amount of money a state may appropriate for inspections and
surveys can be decreased but there are two limits. A facility must meet
all the requirements to receive a state license or it cannot be
certified. (see 45 CFR 442.201 for SNFs and 442.251 for ICFs) In
addition, it must meet all the federal health and safety requirements
under 42 CFR Part 442 generally before the facility can be certified and
receive vendor payments for patients at the facility. So if a state did
not appropriate enough money to have a proper inspection and survey of
facilities, then it would risk not receiving a share of the payments it
made to patients at the facilities.
Of course, as was discussed in the SAI report, a state could separate
entirely its inspections and surveys for state licensure and Medicaid
certification. There would be no FFP problem, for the state would
receive no FFP for the licensure inspections and the full FFP percentage
for the Medicaid certification work. Clearly this is duplicative and
overall certainly not cost effective, where the state licensure and
Medicaid certification requirements are identical, or at least
substantially similar.
It is of course possible, as the SAI report points out, for a state
to so reduce its licensure requirements that the benefit from a joint
inspection, or the cost of a separate inspection, would be minimal. It
was possible for the Nebraska legislature to appropriate less money for
inspections at the same time that it lowered the state safety and health
requirements to a bare minimum. The SAI report suggests that federal
sanctions should be taken against such "sham" action of a state. It
is
not necessary to consider this issue here, as Nebraska kept upgrading
its licensing requirements rather than downgrading them. /8/
Beginning in October 1976 the state fire code was used for Medicare
and Medicaid certification surveys. (Appellant's brief, stipulations 28
and 29, p. 7) Also in 1976 state licensure (20) requirements for skilled
nursing facilities were strengthened. (Id., stiputlation 43, p. 10) The
brief also makes reference to this on p. 21:
Now that the State requirements for licensure and the federal
requirements for certification as a Medicaid provider are more similar.
. . . (Emphasis supplied)
We are therefore not faced here with a state deliberately downgrading
its requirements for state licensure but in fact bringing them up to
where they were very similar to the federal requirements for Medicaid
certification, and where the inspections were done jointly. Under these
conditions the Nebraska legislature could not control whatever
reasonable allocation of the costs of inspections should be made to the
state licensure program.
CONCLUSION
The disallowance for inappropriate LSC costs is upheld, in the
absence of any credible evidence contradicting the disallowance
determination. The Agency may still consider reviewing the finding
based on an agreed sampling of the time records.
The disallowance for inappropriate LSC inspections and health surveys
for Medicaid certified facilities is upheld for FY '79, '80, and '81.
There was clearly a substantial benefit to the state licensure program.
In the absence of any other suggested allocation by the State the Board
finds the Agency's allocation of 45% of LSC inspection costs to the
State to be reasonable. The allocation of 50% of hospital survey costs
and only 15% of Medicaid SNFs, ICFs, and ICF/ MRs survey costs to the
State share is clearly reasonable under the circumstances. /1/ A health
care facility must meet certain federal safety and health
requirements to participate in the Medicaid program. The safety
requirements are known as the Life Safety Code. Inspections to
determine if health care requirements are met are known as health
surveys. /2/ Appellant has pursued the Medicare portion of the
disallowance appeal before the U. S. Claims Court. /3/ For JCAH
accredited hospital inspections, which were made only for state
licensure purposes, the deputies used the same forms, performed the same
procedures, and made the same follow-ups as they used when making
federal LSC inspections. (Stipulation No. 30, Appellant's brief, p. 7)
/4/ Section 249B of the 1972 amendments to the Social Security
Act (Pub. L. 92-603) increased the FFP percentage for the compensation
and training costs of personnel responsible for inspecting long-term
care facilities for Medicaid certification to 100%. /5/ The
System Architects, Inc. (SAI) report referred to below points out that
this is the "neatest" financial relationship with HCFA but involves
inevitable overlap and duplication. (SAI Report, Recommendations, Sec.
5.3, p. V-4) /6/ No question of notice of the provisions of the
State Operations Manual has arisen. The State in fact included the
cited sections in its appeal file under "The Law, Regulations and
Interpretive Rules." /7/ Decision No. 277, Pennsylvania
Department of Public Welfare, March 31, 1982, involved a similar prior
regulation on allocation. The Board there found that it was the Agency
policy, for the period of that disallowance, to pay 100% of the costs of
inspection where the requirements for federal certification were
identical, or substantially identical, with state licensure
requirements. That decision is not relevant here for two reasons.
First, it was based on a policy interpretation question (PIQ), and on
certain correspondence between federal and state officials in Region
III, and was for a prior period of time, namely 1976-1978. Second, and
more important, the decision pointed out that the Agency was not locked
into such an interpretation: The Agency could have interpreted 45 CFR
250.120(d) to require a 50% allocation to state licensure and 50% to
Medicaid inspection . . . (Id., p. 15) /8/ The affidavit of the
Nebraska Director of Health attached to appellant's reply brief and "A
Survey of Nursing Homes in Nebraska, 1967" submitted later by appellant
refer to periods before the time of the disalowances at issue here and
are not relevant because state licensure requirements did not remain the
same.
OCTOBER 22, 1983