DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: North Carolina Department of Human Resources
Docket No. 89-75
Decision No. 1110
DATE: November 1, 1989
DECISION
The North Carolina Department of Human Resources (State) appealed the
determination of the Health Care Financing Administration (HCFA)
disallowing $2,593,803 in federal financial participation (FFP) claimed
under title XIX of the Social Security Act (Act). The disallowed costs
represented payments made to hospitals for inpatient hospital based
physician (HBP) services (primarily services of radiologists,
pathologists, and anesthesiologists) for the period September 1, 1986
through September 30, 1988. Pursuant to the approved State plan, these
costs were included in calculating the per diem rate at which hospitals
were reimbursed during this period. However, hospitals and physicians
also billed the Medicaid program for HBP services on a fee-for-service
basis. HCFA therefore determined that the State had made duplicate
payments for these services which were required to be disallowed as
overpayments under section 1903(d)(2)(A) of the Act.
For the reasons discussed below, we conclude that the costs in question
were properly disallowed. However, HCFA stated that it would be willing
to recalculate the disallowance based on additional information which
the State offered to provide. Accordingly, we sustain the disallowance,
but direct HCFA to give the State an opportunity to provide information
pertaining to the amount of the disallowance.
Applicable Law
Under section 1903(a)(13) of the Act, as amended in 1981, inpatient
hospital services are to be reimbursed--
through the use of rates (determined in accordance with methods
and standards developed by the State . . .) which the State
finds . . . are reasonable and adequate to meet the costs which
must be incurred by efficiently and economically operated
facilities . . . .
Section 1902(a)(30) requires the state plan to--
provide such methods and procedures relating to . . . the
payment for . . . care and services available under the plan . .
. as may be necessary . . . to assure that payments are
consistent with efficiency, economy, and quality of care.
Implementing this provision, 42 C.F.R. 447.252(b) (1983) requires that
the state plan specify the methods and standards used by the state
agency to set payment rates. The regulations also require a state
Medicaid agency to pay for services "using rates determined in
accordance with methods and standards specified in an approved State
plan." 42 C.F.R. 447.253(g) (1983).
Background
Pursuant to the statutory and regulatory provisions noted above,
hospitals are reimbursed for services they provide to Medicaid eligibles
through the use of per diem rates. The State plan in effect for the
period in question here provided for use of a prospective rate-setting
system. Under this system, per diem rates were based on costs reported
by hospitals for a base year, 1981, and were not subsequently adjusted.
Thus, the rates paid to hospitals for any given year did not necessarily
reflect the cost of services actually provided in that year. The
purpose of such a reimbursement system is to give hospitals an incentive
to keep costs down, since they are entitled to the difference between
actual costs and the amount paid through the rate, if the latter is
higher. See Massachusetts Dept. of Public Welfare, DAB No. 730 (1986).
Conversely, a hospital has to make up the shortfall between actual costs
and the rate paid, if lower.
The State plan provided that "[b]ase-year Medicaid costs include . . .
combined billings for inpatient professional services. . . ," i.e., HBP
costs. State's appeal file, exhibit (ex.) 3, p. 2. The cost reports
submitted for most, but not all, hospitals for 1981 included HBP costs.
Thus, the rates paid to most hospitals for the years in question here
were calculated using HBP costs.
In July 1986, the State's fiscal agent, at the direction of the
Department of Human Resources (DHR), issued a "Medicaid Bulletin"
to
providers stating that, effective September 1, 1986, hospitals would no
longer be permitted to bill for HBP services through the per diem rate.
The Bulletin further stated that hospitals that wanted to continue
billing for HBP costs could do so separately using a hospital group
physician number. State's appeal file, ex. 7. Thus, hospitals could
still bill Medicaid for services provided by physicians, but were
required to do so separately rather than by including such costs in the
costs used to set per diem rates. Further, although this was not stated
in the Bulletin, if a hospital chose not to bill Medicaid for HBP
services, then the physicians could bill Medicaid for their services
themselves. Payments under this new billing system were based on a fee
schedule for specific medical and surgical procedures. Transcript of
9/26/89 conference call, p. 7. DHR later instructed the fiscal agent to
allow a 30-day grace period for the change in billing procedures.
State's appeal file, ex. 8. The State plan was never amended to delete
HBP costs as an element of base-year costs, however.
In 1988, HCFA conducted a comprehensive review of Medicaid reimbursement
to the State. It found that the State paid claims for HBP services
provided in several hospitals in a sample directly to physicians
associated with the hospitals through private physician number billings.
It also found that several sample hospitals were reimbursed for HBP
costs through hospital physician group number billings. HCFA concluded
that duplicate payments had been made because the per diem rates at
which most hospitals were reimbursed were calculated using HBP costs.
State's appeal file, ex. 1, pp. 6-7. HCFA estimated the amount of
duplicate payments by multiplying HBP costs contained in sample base
year hospital cost reports by the patient days paid for each rate year
and extrapolating the results to the universe of total per diem rate
billings paid to all hospitals. Id., pp. 7 - 9; State's appeal file,
ex. 2, p. 2. HCFA stated that it would be willing to revise the
disallowance to reflect HBP costs actually claimed on a fee-for-service
basis during the period in question if the State could provide
appropriate documentation. Id.
State's Arguments
The State argued that there were no duplicate payments because, under
the "Medicaid Bulletin" issued by the fiscal agent, HBP costs could
not
be billed as a component of per diem rates as of October 1, 1986.
The State also argued that, since the fee-for-service payments for HBP
services were lower than the HBP component of the per diem rates, the
State should not be penalized for switching to a fee-for-service system.
The State argued in addition that there were no duplicate payments
because the per diem rates paid pursuant to the State plan were
substantially below the hospitals' actual costs and thus no longer
covered HBP costs. The State asserted that a reduction in the approved
rates to delete the HBP component would jeopardize its working
relationship with the hospitals, which had been willing to accept these
lower rates. A related argument advanced by the State was that the
disallowance would result in rates that were not "reasonable and
adequate to meet the costs which must be incurred by efficiently and
economically operated facilities," in violation of section 1902(a)(13)
of the Act.
The State argued further that the disallowance should be reversed
because the amount in question was paid based on rates calculated in
accordance with the approved State plan.
Another argument advanced by the State was that there were no duplicate
payments because it did not pay twice for the same services to the same
physicians.
Finally, the State argued that the amount of the disallowance was
"arbitrary and capricious," and requested that, if the Board determined
that a disallowance was warranted, the Board "remand the matter to HCFA
for review of the disallowance amount and for submission of additional
information by . . . [the Division of Medicaid Assistance, DHR]."
State's brief dated 6/19/89, p. 6. As indicated above, HCFA stated that
it would be willing to recalculate the disallowance based on additional
information.
Discussion
We conclude that the revised billing procedures in the "Medicaid
Bulletin" did not prevent duplicate payments from being made. As noted
above, hospital per diem rates for the period in question were based on
1981 cost reports. Thus, as long as the State plan continued to define
base-year costs as including HBP costs, the fiscal agent could not have
separated out and denied payment for the HBP costs in the per diem rates
paid to the hospitals. Accordingly, instead of preventing duplicate
payments, the "Medicaid Bulletin" guaranteed that the State would
pay
twice for the same HBP services by requiring that HBP costs be billed
separately from per diem rates.
For the same reason, it is irrelevant that the fee-for-service payments
were lower than the HBP component of the per diem rates. Although the
State may have intended to save money by substituting fee-for-service
payments for payment of HBP services through per diem rates, this never
happened because the State did not amend its State plan.
We also reject the State's argument that no duplicate payments could
have been made if the hospitals were reimbursed for less than their
actual costs through the per diem rates. There is no dispute that HBP
costs were included in calculating the rates paid to most hospitals.
Thus, regardless of any increase in actual costs, the HBP costs
continued to be reflected in the rates. To accept the State's argument
would be in effect to grant a rate increase which was not authorized by
the State plan. The State's concern for its working relationship with
the hospitals is simply not a factor which we can consider since the
Board is bound by all applicable laws and regulations. 45 C.F.R. 16.14.
Thus, we do not have the authority to waive or reduce the disallowance
on this basis. See Nisqually Indian Tribe, DAB No. 994 (1988); Ohio
Dept. of Mental Retardation and Developmental Disabilities, DAB No. 405
(1983), p. 1.
Moreover, we do not agree that the payment of less than actual costs to
the hospitals violates the requirement in section 1902(a)(13) that
rates be reasonable and adequate. As the Board has previously noted,
this provision "does not guarantee reimbursement of actual costs."
Texas Dept. of Human Services, DAB No. 981 (1988), p. 7. The Board also
noted in Texas that the State was not in a position to complain that its
rates did not result in full reimbursement "since it could have adopted
a system which provided for reconciling estimated costs with actual
costs," rather than a prospective rate-setting system.
We also find no merit in the State's argument that the disallowance
should be reversed since the rates paid to the hospitals were based on
the approved State plan. This argument reflects a basic
misunderstanding of the nature of the disallowance. The basis for the
disallowance is that the State paid twice for the same HBP services.
HCFA did not make a specific finding that the State improperly claimed
HBP costs as an element of the per diem rate. Thus, the disallowed
costs are not necessarily those incurred by the State in reimbursing the
hospitals at the per diem rate; it is equally reasonable to view the
duplicate payments as the payments for HBP services billed on a
fee-for-service basis. Moreover, HCFA stated that it calculated the
disallowance based on the portion of the per diem rate attributable to
HBP costs only because it did not have adequate data on HBP costs
claimed on a fee-for-service basis. State's appeal file, ex. 1, p. 7.
Thus, HCFA itself clearly viewed the fee-for-service costs as
duplicating a portion of the payments made at the per diem rate rather
than vice versa.
Since we conclude that HCFA did not disallow payments made at the per
diem rate per se, it is irrelevant that these payments were made
pursuant to the approved State plan.
The State's argument that there were no duplicate payments since the per
diem rates did not reimburse the same physicians for the same services
as were paid on a fee-for-service basis also has no merit. In a
prospective rate-setting system, even though a rate is based on base
year rather than rate year costs, the provider agrees to accept payments
at this rate as reimbursement for rate year costs. Having adopted a
prospective rate-setting system, the State cannot argue that the rates
did not cover the services provided in the rate year.
Conclusion
For the reasons discussed above, we conclude that since the HBP services
were billed as part of the per diem rate and on a fee-for-service basis
in many cases, there were duplicate payments which must be disallowed.
Accordingly, we uphold the disallowance but direct HCFA to consider
additional information to be provided by the State within 30 days, or
such additional time as HCFA may allow, concerning the amount of the
duplicate payments. Within 30 days of a determination by HCFA changing
or reaffirming the amount of the disallowance, the State may institute a
new appeal on this limited issue pursuant to 45 C.F.R. Part 16.
___________________________ Donald F. Garrett
____________________________ Norval D. (John)
Settle
____________________________ Alexander G.
Teitz Presiding Board