GAB Decision 752
May 9, 1986
New York Department of Social Services;
Docket No. 84-77
Ballard, Judith A.; Settle, Norval D. Ford, Cecilia S.
The New York State Department of Social Services (NYSDSS) appealed a
portion of the disallowance by the Health Care Financing Administration
(Agency) of $21,528,197 in federal financial participation (FFP) claimed
for services in intermediate care facilities for the mentally retarded
(ICFs/MR). Based on an audit, HCFA determined that the $120 per diem
rate charged for ICF/MR services for the April 1, 1980 -- March 31, 1981
rate year had been overstated by $8.29. NYSDSS concurred with most of
the audit exceptions adopted by the Agency in its disallowance.
This dispute concerns the following: (1) whether costs for
certain
State-operated intermediate care facilities (SOICFs) which were to
begin
operations as of the beginning or at some point during the rate year
had
been duplicated in the rate calculation; (2) whether overhead
costs
that the State contended were omitted from the rate calculation
should
reduce the amount disallowed for a category of costs ("Part B
and
Non-Employee costs"); (3) whether the disallowance should be
adjusted
to reflect a rate calculation which includes other types of costs
that
the State asserted were erroneously omitted from the initial
rate
calculation.
The record consists of the parties' extensive written submissions and
the
transcripts of a two day, in-person conference and of an oral
argument held
by telephone conference.
As we discuss in greater detail below, the issues presented here touch
on
a number of complex areas, primarily concerning the requirement that
applied
to ICF/MR services during the rate year for a payment rate based
on a
reasonable cost-related reimbursement methodology.
Nevertheless,
despite its apparent complexity, this case at heart presents
two
relatively simple issues concerning (1) the reasonableness of
the
Agency's determination that the rate had been overstated by $8.29
and
(2) whether the disallowance should be adjusted by including costs
in
the rate calculation omitted initially.(2)
Summary
The statutory and regulatory provisions in effect for the rate
year
explicitly required the State to explain its rate setting
methodology
and state the cost finding methods and procedures that would be
used to
generate the costs used to calculate the rate. The New York
State plan
provided simply for reimbursement for ICF/MR services based on a
fee
schedule. Using State budget figures and various projections
concerning
facility costs and patient days, New York's Office of Mental
Retardation
and Developmental Disabilities (OMRDD) had calculated the $120
per diem
rate. OMRDD actually operated the ICF/MR facilities. /1/ The
rate
calculation used was far afield from the actual audited
cost-based
methods envisioned by the statutory and regulatory
provisions. On
balance, the Agency's determination with regard to the
extent the rate
was overstated is reasonable and probably somewhat
conservative. There
is no hard factual data to back up the State's
argument that the SOICF
costs at issue were not duplicated in the rate, and,
even if a portion
of the costs were not duplicated, this does not refute the
soundness of
the Agency's basic finding that the rate claimed was excessive.
Given
the lack of precision that we find was inherent in the State's
rate
calculation process, and our finding that the Agency's approach
to
determine the excess amount charged in the rate was both reasonable
and
conservative, we see no basis for requiring the Agency to reexamine
its
finding because of any of the alleged weaknesses in the
Agency's
determination that certain costs had been duplicated in the
rate
calculation.
Further, we agree with the Agency that the State may not properly
raise
in this proceeding additional costs allegedly omitted from the
initial
rate calculation. Regardless of any general principles we
would
otherwise apply when examining issues concerning recalculation
or
correction of prospective rates, we see no justification here for
going
beyond the four corners of the Agency's disallowance
determination.
Under the particular circumstances here, a federal audit of a
rate for
State-operated facilities developed in the(3) absence of any
written
rate-setting methods, the Agency reasonably determined that the
State
should be required to propose a separate adjustment on its
Medicaid
expenditure report reflecting the additional, omitted costs.
This will
permit the Agency to use its usual procedures to resolve
questions
regarding the allowability of the adjustment, including the
important
question of whether including the additional, omitted costs in the
rate
calculation (and corresponding calculations about the amount of FFP
due
the State) constitutes a new claim for FFP which is barred as
untimely.
The fact that the additional, omitted costs relate to a
provider
reimbursement rate may be relevant in resolving the allowability
issues
but simply does not compel the result the State advocated here.
Below, we first discuss the statutory and regulatory requirements
for
provider reimbursement systems and how the State calculated
its
reimbursement rate. We next set out the federal auditors'
findings
regarding the State's methodology and the costs used in calculating
the
rate. We also give information on ICF/MR services from the
State
Executive Budget for the rate year. We have included greater
detail
here than we might have otherwise in order to explain how the
dispute
over specific items arose and to set the context for the
conclusions
that we reach.
The Medicaid program
Title XIX of the Social Security Act (the Act) provides for
the
establishment of cooperative federal-state programs, commonly
called
"Medicaid," to provide "medical assistance" to certain
needy
"individuals, whose income and resources are insufficient to meet
the
cost of necessary medical services." Section 1901. States are
not
required to institute a Medicaid program, but if they choose to do
so,
they must submit to the Secretary a satisfactory "State plan"
which
fulfills all the requirements of the Act. Section 1902(a).
The
Secretary must approve a plan which meets all requirements of
the
statute and implementing regulations. Sections 1902(b) and
(c). With
that approval, a state becomes entitled to federal funds
reimbursing
part of the expenditures which the state has made in providing
medical
assistance to eligible individuals under the state plan, in
accordance
with federal conditions. FFP is available in "the total
amount expended
. . . as medical assistance under the State plan." Section
1903(a)(1).
The term "medical assistance" is defined by section 1905( a) "as
payment
of part or all of the costs" of care and services itemized in
the
provision. Medical assistance may include the cost of intermediate
care
facility services. Section 1905(a)(15).(4)
During the rate year, the State was required to set a
reasonable
cost-related rate for ICF/MR services.
In 1972 Congress amended Title XIX of the Act to provide in
section
1902(a)(13)(E) that a State plan must provide --
effective July 1, 1976, for payment of the skilled nursing
facility
and intermediate care facility services provided under the plan on
a
reasonable cost-related basis, as determined in accordance with
methods
and standards which shall be developed by the State on the basis
of
cost-finding methods approved and verified by the Secretary; . .
.
Social Security Amendments of 1972, section 249(a) of Pub.
L.
92-603.
The preambles to the proposed and final regulations implementing
section
1902(a)(13)(E) discuss at length both the meaning of the requirement
for
payment on a reasonable cost-related basis and the choices made by
the
Agency in issuing the regulation.
The Agency explained Medicaid reimbursement prior to the 1972
amendments
this way:
The Medicaid law did not initially include any specific
requirements
regarding the methods of payment to be used to pay for either
SNF or ICF
services. As a result, individual States were permitted to
develop
their own payment methods, subject only to the general requirement,
in
section 1902(a)(30) of the Act, that payments not exceed
reasonable
charges consistent with efficiency, economy, and quality of care.
Under
the initial Medicaid law, States developed a variety of payment
methods.
These methods ranged from the retrospective, reasonable
cost
reimbursement system used by Medicare (see 42 CFR Part 405, Subpart
D),
to prospective rates based, in some instances on State
budgetary
considerations and other factors not directly related to
actual
(long-term care) facility costs.
46 Fed. Reg. 47964, September 30, 1981.
Congress amended the Social Security Act in 1972 to require payment on
a
reasonable cost-related basis because it was concerned about the
effects
of overpayment and underpayment of providers of long-term care
services
under then current methodologies, and because it was aware that
the
retrospective,(5) reasonable cost reimbursement approach used
by
Medicare and Medicaid at that time was not entirely satisfactory.
S.
Rep. No. 1230, 92nd Cong., 2d Sess. 287 (1972).
The statutory and regulatory requirements for reasonable
cost-related
reimbursement applied to the rate year at issue here, April 1,
1980 to
March 31, 1981. These requirements are germane to this dispute
because
of the Agency's contention that the State's rate setting
methodology
varied from what was required and that the rate itself was
unreasonably
high. The parties agreed that the rate at issue here was
prospective,
in that it was set prior to the rate year and not adjusted to
meet the
actual costs incurred for ICF/MR services during the rate
year.
Conference transcript (Tr.) Vol. I, p. 32. We address more fully
below
the Agency's argument, made in light of the section
1902(a)(13)(E)
requirement, that the State's "rate-setting practice . . .
violates
these regulations so thoroughly that its rate cannot be considered
a
valid reasonable cost-related prospective rate within the meaning of
the
regulations." Agency Post-Conference Brief, p. 9-10.
During the rate year at issue here the regulations implementing
section
1902(a)(13)(E) were codified at 42 CFR 447.272-311 (1979).
The
regulations established audit and cost reporting requirements for
ICFs.
States were required to set in the State plan cost reporting years
for
participating facilities, to begin no later than January 1, 1977.
42
CFR 447.275. Providers of ICF services were required to submit
cost
reports to the state Medicaid agency which included "(an) itemized
list
of the provider's allowable costs" and "(a) list of the costs of
the
various services provided . . . as determined by applying the
agency's
approved cost-finding method to the provider's allowable costs." 42
CFR
447.274. /2/
Section 447.290 of 42 CFR required the State to describe its
procedures
for audits in its State plan. The State was obliged to desk
audit
provider cost reports within 6 months of receipt as well as provide
for
periodic onsite audits. 42 CFR 447.291-293 (1979).(6)
With regard to setting payment rates, the regulations stated, inter
alia
--
Sec. 447.301 Methods and standards for setting
reasonable
cost-related payment rates.
(a) The plan must set forth the methods and standards used by
the
agency to set reasonable cost-related payment rates.
(b) The methods and standards must be developed by the agency on
the
basis of cost-finding methods approved under Sec. 447.276.
(c) The agency must set payment rates on the basis of the
methods and
standards. The payment rates must be effective no later
than January 1,
1978.
Sec. 447.302 Actual costs.
(a) Methods and standards for determining payment rates
must
reasonably take into account actual costs of the allowable items
set
forth in Secs. 447.278 through 447.284, reported under Sec. 447.274
and
as verified by audits under Secs. 447.292 and 447.293.
(b) Payment rates must not be set lower than rates that the
agency
reasonably finds to be adequate to reimburse in full the
actual
allowable costs of a facility that is economically and
efficiently
operated.
Sec. 447.303 Economic conditions and trends.
The methods and standards for determining payment rates
must
reasonably take into account economic conditions and trends during
the
period for which the rates are set.
The Preamble to the final regulations issued on July 1, 1976 noted
that
there were a variety of acceptable methods for provider
reimbursement
and that the states had freedom to define and set the methods
they would
use. It also clearly pointed out, however, that the
Secretary had to
seek to assure that the methods (7) would result in
reasonable
cost-related reimbursement in order to carry out his statutory
mandate
to review, approve, and verify the states' methods. 41 Fed.
Reg.
27300. /3/
The Preamble also discussed the history of the amended section
1902(a)(
13)(E) and its purpose. It explained that the amended Act
provided
maximum flexibility to states to develop methods for
payment,
particularly to develop methods less cumbersome and expensive than
the
Medicare retrospective system. 41 Fed. Reg. 27300. Although
the
Preamble stated that a variety of reimbursement methods might
be
acceptable, it discussed two basic reimbursement systems,
prospective
and retrospective. It described these two systems in the
following way:
Prospective rate setting systems, as defined for purposes of
this
regulation, involve payment rates not subject to further adjustment
on
the basis of the actual costs of a particular provider of long-term
care
services. The Department believes that the inherent cost
containment
potential of such limits negates the need for an additional
ceiling.
* * *
In the case of retrospective payment systems (i.e., systems in
which
there is any retrospective determination of payment or settlement
of
costs), the use of a Medicare ceiling determination is continued.
41 Fed. Reg. 27302.
The Preamble stated specifically that "there is no single figure that
is
the reasonable cost, but rather a spectrum of figures within
an
acceptable range, any one of which is a reasonable cost." 41 Fed.
Reg.
27303.(8)
How OMRDD calculated the $120 per diem rate for ICF/MR services
in
State-operated facilities.
The New York State plan stated simply that ICF/MR services would
be
reimbursed based on a "fee schedule." State Plan, section 4.19B.
This
plan provision was effective in 1974 and contained for ICF/MRs
neither
cost finding methods nor methods and standards for the rate
calculation.
Indeed, there was no set, written methodology followed by OMRDD
in the
calculation of the $120 per day rate set for ICF/MR
services.
Reproduced as Figure 1 is the rate calculation made by an
Associate
Accountant with OMRDD. The only evidence we have of the
methodology is
the rate calculation itself. See Conference Tr. Vol. I,
pp. 32-35 and
pp. 53-65, and State Brief, Ex. 2, the Affidavit of the
Associate
Accountant.
Briefly, this is how the rate was calculated.
(1) Using actual costs incurred during a "base year" (1978-79)
to
operate its large State ICF/MRs called developmental centers (DCs),
the
State developed a ratio of Medicaid eligible inpatient costs
to
non-Medicaid eligible costs, 85% to 15%. (The actual cost amounts
were
provided by the New York State Office of Comptroller. Conference
Tr.
Vol. I, p. 54.)
(2) Using the State Executive Budget for 1980-81, OMRDD
projected the
rate year costs for the DCs and multiplied those budgeted costs
by the
base year 85% "residential percentage."
(3) The State then added to the residential DC costs certain
costs it
expected to incur during the 1980-81 rate year. Among those
costs were
$23,858,366 for 100 new SOICFs and $9,093,757 for 19 State
operated
community residences (SOCRs) to be converted to SOICFs. These
costs are
central to this dispute.
(4) The State then divided the total projected costs of
providing
ICF/MR services during the rate year by the projected patient days
to
arrive at a $120 per diem rate.
The Associate Accountant responsible for the rate explained at
the
conference how the separate entries for the 100 SOICFs and 19
converted
SOCRs had been calculated. These costs were added(9) in
separately
because they were planned new providers of ICF/MR services for
the
Medicaid program that did not exist in the base year. Conference
Tr.
Vol I, p. 95. There was no analysis done at the time of rate
setting to
evaluate the effect of the transfers of DC residents and staff
planned
to occur during the rate year on the amount of the separate entries
for
the SOICFs. Conference Tr. Vol. I, pp. 91-94.
For the SOCRs the rate-setter took
the number of clients (192) to be in those SOCRs to be
converted
times the staffing ratio (2.2) times the average salary ($
14,100).
To this, we added a projection by site of the costs of other
than
personal service, which would include such costs as food,
fuel,
supplies. These sites were projected to be certified at the
beginning
of the rate year.
So, they were included at 100% with no phase.
Conference Tr. Vol I, pp. 55-56, and State Appendix, Ex. 2.
For the 100 new SOICFs a similar calculation was made:
The cost of all SOICFs were calculated by taking the projected
number
of staff needed for the program, which was supplied by OMRDD
budget
office (2,147), times an average salary ($ 14,100), times 50%
which
represented a phase that assumed that the new SOICFs would not
operate
for six months of the year on the average.
Conference Tr. Vol I, pp. 61-62, and State Appendix, Ex. 1 and
Ex.
23. See Conference Tr. Vol I, p. 97.
(The SOICF calculation also included) the estimated "other
than
personal service" (OTPS) cost of operating each SOICF (for fuel,
food,
electricity, etc.). (The cost data necessary to calculate the
SOICF
amount) was included in an OMRDD Budget Office worksheet which
together
with the published 1980/81 Executive Budget document, were the
only
materials available to (the rate-setter) at the time the rate
was
calculated. . . .
State Brief, Ex. 2, p. 6.(10)
On February 7, 1980, the $120 per diem rate was approved by letter
from
the State of New York, Executive Department, Division of the
Budget.
State Appendix, Ex. 24.
The Audit of the rate-setting process for 1980-81.
The Agency auditors reviewed the rate setting process for the 1980-81
per
diem rate for ICF/MR services provided in State-operated facilities.
Audit
Report, Audit Control No. 02-30202, September 1, 1983, Agency
Appeal File,
Ex. C. As indicated above, the $120 rate was used to cover
services
provided in DCs as well as in other types of ICFs. New York
State
operated large DCs which "provided a sheltered residential setting
for
individuals who were severely and/or multiply disabled and had
health-related
problems." Audit Report, p. 1. During the late 1970's
and 80's New York
was implementing a Five-Year Plan, designed to
deinstitutionalize a large
number of DC residents and to improve
staffing levels. One impetus was
the Willowbrook Consent Decree (1975)
in which the State agreed to certain
client transfer and improved
staffing goals. Audit Report, p. 68, and
Conference Tr. Vol. I, pp.
37-42. The State's goal was to reduce
the 19,309 residents in 20 DCs
(1975) to 11,459 residents by the end of the
rate year in question. In
fact, as of March 1981 there were 13,600 DC
residents. The SOICFs which
are central to the dispute here were to
house a large number of
transferred DC patients. However, only 5 of the
planned 100 new SOICFs
actually opened and participated in Medicaid during
the rate year. /4/
(11)
We first discuss the auditors' general findings, which will set
the
context for analysis of the dispute over the $23,858,306 in SOICF
costs
and the $9,093,757 in converted SOCR costs. We then explain, in
detail,
the auditors' findings concerning the SOICF and converted SOCR
costs.
The auditors' general findings.
The auditors found that the New York State plan "fee
schedule"
reimbursement provision was not "an approved cost-related
reimbursement
methodology and that audited cost reports had not been used as
a basis
to set reimbursement rates." Audit Report, p. 16. The
auditors
identified three principal deficiencies in the rate setting
methodology:
(1) the use of budgeted data,
(2) the lack of written policies and procedures, and
(3) the absence of adequate supporting documentation.
See Audit Report, p. 8.
The auditors further concluded that as a result of these deficiencies,
the
rate calculation contained duplicated and unsubstantiated costs.
Figure 2
compares the auditors' calculation of the ICF/MR rate with the
State's
calculation. /5/ The State accepted all the Agency's findings
making downward
adjustments except the finding that the SOICF and
converted SOCR costs were
duplicated in the rate calculation by costs
included in the DC costs.
Compliance with the regulations governing ICF/MR reimbursement.
Although the State argued to the contrary, the Agency was adamant that
the
State's "fee schedule" reimbursement system was not consistent with
the
required reasonable cost-related reimbursement(12) methodologies.
/6/ On a
related point, the auditors had also concluded that the State
did not abide
by the regulations' audit requirements.
The auditors stated that
. . . Without a detailed description in the State plan
of
cost-finding techniques employed, together with a listing of
allowable
costs, there was no assurance that the methodology . . . was
consistent
with Federal regulations requiring rates to be reasonably
cost-related.
* * *
Since the State had not submitted a full description of
its
reimbursement methodology as required by the regulations, it used
an
unreviewed and unapproved methodology to establish ICF/MR rates
during
the period the cost-related rates were required. This, coupled
with the
fact that the State did not reasonably take into account actual
reported
costs, as verified by audits, would have cast serious doubt on
the
validity of the methodology used and resulted in a lack of
assurance
that rates were set in a manner consistent with the regulations
in
effect until October 1, 1980. /7/
Audit Report, pp. 17-19. (13)
A. The use of budget data.
The auditors found that the rate-setting process did not "reasonably
take
into account actual costs . . . verified by audits" (42 CFR
447.302) since,
with the exception of the development of the base year
residential
percentage, the rate-setting calculation was based primarily
on budgeted
costs. In this regard, the auditors noted the following:
(1) OMRDD's 1980/81 budget assumed it would meet the
1980/81
deinstitutionalization goals and that such goals were not actually
met.
(2) The budget was constantly adjusted during the year.
(3) The budget data came from the New York State Executive
Budget,
the executive branch's recommendation to the State Legislature.
Data
may not have represented actual amounts appropriated.
The auditors then concluded:
We believe that the factors discussed above illustrate the
problems
of a rate which is derived from budgeted data. Because of the
wide
variances between budget assumptions and actual conditions, which
the
ICF/MR program was particularly subject to as a result of the failure
to
meet the goals of the Five-Year Plan, the use of budget data
and
statistics should not have been considered the preferred method
to
establish reimbursement rates. In our opinion, the use of audited
cost
reports, reflecting actual costs, would have provided a more
reliable
basis for setting payment rates.
Audit Report, p. 25.
B. The absence of a formal written policy or procedure for
setting
the ICF/MR rate.
The auditors also faulted the State for lack of consistency between
the
methodology employed in different rate years and for having only
one
person ultimately responsible for taking information from
various
sources and calculating the rate. The auditors concluded
that
appropriate policies and procedures would have avoided an oversight
such
as the understatement of client days that occurred when the Secure
and
Autistic Unit client days were omitted initially. Audit Report,
p. 26.
See also, Figure 2, for estimated client days.(14)
C. OMRDD included costs which either lacked supporting
documentation
or were unsubstantiated estimates.
The auditors noted that $19.6 million in depreciation costs and
$19.1
million in salary increases and $1,463,000 in purchase of service
costs
were not supported by sufficient documentation. The auditors
found that
this precluded a "complete review and assessment of the
reasonableness
and accuracy of the rate-setting calculation in certain
areas." /8/
Audit Report, p. 28.
The auditors' findings concerning the duplication of the SOICF and
SOCR
costs as part of the DC costs in the rate-setting calculation.
SOICFs are residential facilities, having 15 beds or less, that
treat
individuals with severe and/or multiple disabilities who may have
health
related problems. The OMRDD portion of the State of New York
Executive
Budget for the Fiscal Year April 1, 1980 to March 31, 1981
(Budget)
provided for 100 new SOICFs to open during the rate year.
Supplement to
HCFA Appeal File, Ex. 1, Budget, p. 330. In fact, only 5
of the planned
facilities opened. Audit Report, p. 45. The rate
calculation included
$23,858,366 for the 100 new SOICFs.
SOCRs are facilities providing "a home-like environment, room, board,
and
supervision for the habilitation of developmentally disabled
persons." Audit
Report, pp. 52-53. The rate calculation included
$9,093,757 for
conversion of 19 SOCRs to SOICFs as of the beginning of
the rate year.
SOCRs were considered outpatient facilities so that SOCR
services were not
covered by the Medicaid ICF/MR per diem rate. SOCR
costs would be among
those costs excluded by the application of the 85%
residential
percentage. In fact, by the close of the rate year 14 SOCRs
had been
converted to SOICFs. Conference Tr. Vol. I, p. 46. (The
Budget
provided for 79 new SOCRs for the rate year. Budget, p.
330.)(15)
The $590,428,790 of "DC costs" to which the 85% was applied included
4
categories of costs related to the DCs and one category of
costs,
community services, that was exclusively outpatient. The four
DC
categories were: Administrative Direction, Direct Residential,
Indirect
Residential, and Maintenance and Operation of Facility.
Budget, pp. 328
and 329. The four DC categories included some
outpatient costs not
properly reflected in the Medicaid per diem rate.
Thus, the object
behind using the actual base year costs to calculate the
"residential
percentage" was to exclude unallowable outpatient costs from the
DC
costs used in the rate calculation.
During the rate year the costs for new SOICFs and for SOCRs was in
the
community services portion of the budget. According to the State,
there
was no separate mention in the budget for SOCR conversions, so that
this
expenditure would have been subsumed into the overall amount
budgeted
for SOCRs. The State also argued that the conversion of SOCRs
to SOICFs
was a program not a budget concern anyway.
100 SOICFs. The auditors recommended a downward adjustment in the
rate
of $4.93, resulting from the deletion of the $23.8 million for 100
new
SOICFs. The auditors concluded that the $23.8 million was
duplicated in
the rate calculation since monies to cover the cost of 100 new
SOICFs
would have been included in the DC costs remaining in the
rate
calculation after application of the 85%. The auditors reached
this
conclusion after analyzing the transfers, planned to occur during
the
rate year, for DC residents and staff. The State concurred in part
but
asserted that the costs were duplicated at 185% (due to the
application
of the residential percentage), so that the 85% should be
eliminated
from the DC costs and 100% of the new SOICFs left in the
rate
calculation as a separate entry. Audit Report, pp. 45-52.
19 Converted SOCRs. The auditors recommended a downward adjustment
of
$1.88, resulting from the deletion of the $9,093,757 for 19
converted
SOCRs. The auditors stated:
We recognize that in the base-year SOCR costs would have been
part of
the approximately 15 percent related to outpatient and
other
(unallowable for Medicaid) costs. Thus, the application of the base
year
residential percentage normally would have excluded SOCR costs
(from
which the conversions would have had to come) from the
rate-setting
calculation. However, because of the projected large
transfer of
residential staff to community(16) service functions, the costs
to
convert SOCRs would no longer be representative of those costs
which
were classified as outpatient during the base year. Rather, it is
our
opinion that, like the costs for the new SOICFs, these costs (or
costs
analogous to them) would have been classified as inpatient during
the
base year.
Audit Report, p. 54
The State did not concur initially that analogous costs were included
in
the DC costs after application of the residential percentage. Later
the
State decided, however, that certain costs related to 79 planned
new
SOCRs and other community services staff would not have been excluded
by
the 85%. The State proposed deleting those costs from the DC costs
and
keeping the separate entry for the converted SOCRs. See Figure
3.
In concluding that the costs for the 100 SOICFs and 19 converted
SOCRs
were duplicated in the rate calculation, the auditors made
various
findings concerning the costs and effects both of various staff
and
patient transfers and of use of new staff. To the extent these
findings
are germane to the issues ultimately presented, they are reflected
in
the analysis below.
The auditors' findings were as follows:
. . . the 1980/81 budget showed that there would be an increase
of
2,702 staff in the community services portion of the budget. There
were
to be 86 new employees with the remaining 2,616 individuals to
be
transferred from the residential staff of the DCs. The new SOICFs
were
to be staffed with 1,936 people (this is the Budget number).
According
to OMRDD's rate-setting calculations the SOICFs from converted
SOCRs
were to be staffed with 422 people. Thus, the 2,616 residential
staff
to be transferred from the DCs would be more than enough to
encompass
the individuals needed to staff the new SOICFs (1,936) and the
19
converted SOICFs (422), while still leaving a remainder of
258
individuals to staff other community service outpatient functions. .
.
. our analysis of staff transfers between 1978/79, 1979/80, and
1980/
81, indicated to us that the transferred DC residential staff
(2,616)
were classified as inpatient in the base(17) year and their
costs
contributed to the magnitude of the residential
percentage.
Accordingly, the costs of none of these transferred employees
could be
deleted from projected rate year costs without affecting the
validity of
the residential percentage. Thus, in our opinion, the
application of
the percentage would have at least accounted for the costs of
the
converted SOCRs (and the new SOICFs). Additionally, it would
have
accounted for the costs of the remainder of 258 inpatient staff
who
would have been transferred to outpatient activities in the rate
year.
. . . the bottom line is that to a large degree it did not
matter
where the transferred residential DC staff were to go in relation to
the
rate year community services budget (which was included in the rate
year
DC costs multiplied by the base year residential percentage). . .
. In
our opinion, our calculated reduction in the rate was conservative
and
we continue to recommend it.
Audit Report, p. 59.
Pertinent information from the Budget.
Both the parties and the auditors relied on various inferences
and
projections concerning staff and patient transfers and staff needed
to
operate the SOICFs and converted SOCRs that derive from data in
the
Budget. Accordingly, we will state here what from the Budget
is
necessary to analyze the duplication issue.
* The Budget references the Willowbrook Consent Decree and
general
federal requirements as the basis for a "comprehensive
multi-year
program plan which calls for both renovating existing facilities
and
providing alternative settings for clients inappropriately residing
in
State developmental centers." Budget, p. 325.
* During the rate year the State planned to place 2678 DC
residents
in "more appropriate settings" and thus achieve a DC census of
11,547 by
March 31, 1981. The State also budgeted for 1,157 clients
from "various
other settings" to receive "community residential services"
during the
rate year. The(18) relevant portion of the chart in the
Budget for
"1980-81 Projected Placements" showed as follows:
Source State
ICF/MRs
DCs
922 Community
69
Other
15 1006
TBudget, p. 326
* For the rate year, the Budget showed a planned increase of
2,702
institutional staff in community positions. This was to be
possible
because of the decreasing DC population. The Budget noted the
need for
a training effort to redeploy staff transferred from an
institutional
setting to community positions. Budget, p. 326.
* The Budget showed a planned decrease in DC staff of 2616
spread
among budget categories, as follows:
Administrative
Direction
- 95 Direct
Residential
-1951 Indirect Residential
- 570 Maintenance and Operation of
facility
0 -2616
TBudget, pp. 328-329.
* The "Community Based Function" portion of the Budget showed
an
additional 2,702 community service positions to be funded
by
"transferring existing institutional resources into community-based
care
programs." The Budget provided:
A summary of the recommended changes in resources dedicated to
the
community service function is as follows:
* * * *
2. Direct Community Residential Services:
2,508 additional staff for 79 new State-operated community
residences
and 100 new State-operated ICF/MR's. Staff to client (19)
ratios for
these programs are 0.75:1 and 2.2:1, respectively.
* * * *
The increase in Other Than Personal Service in the Community
Services
function will provide the resources necessary to:
1. Establish 79 new State-operated community residences;
2. Develop 100 State-operated ICF/MR's;
3. Support 2,702 additional staff in the community;
* * * *
Budget, p. 330.
* The ICF/MR portion of the Budget stated, in part, as follows:
INTERMEDIATE CARE FACILITIES FOR THE MENTALLY RETARDED (ICF/MR's):
The ICF/MR program provides a community residential setting
for
disabled clients who require programming within the context of
24-hour
care. ICF/MR's provide health-related services and are thus
funded by
Medicaid. During 1979-80, the Office (OMRDD) assumed
responsibility for
standards, certification, and rate setting for voluntary
and
State-operated ICF/MR's.
This program will significantly expand during 1980-81 to reflect:
1. The planned conversion of 1,550 existing community
residence beds
to ICF/MR beds;
2. The transfer of 1,292 clients from developmental
centers into
community ICF/MR's to comply with the Willowbrook Consent Decree
and the
HEW Five Year(20) Compliance Plan; (922 to SOICFs and 370 to
voluntary
(i.e., non-state-operated) ICFs).
3. The placement of 480 clients currently in the Karl D.
Warner
facility and 50 clients in the Flower and Fifth Avenue facility
in
voluntary and State operated ICF/MR's (mostly to voluntary
facilities).
4. A total of 210 ICF/MR placements of community clients
who require
ICF care, and out of State clients who will be returned to New
York
State.
* * * *
Budget, p. 334.
Summary of FFP on Appeal.
As indicated above, HCFA found that the $120 per diem rate was
overstated
by $8.29. The Agency calculated the "overcharge" for the
$5,193,775
billed patient days as $43,056,394 ($21,528,197 FFP). March
14, 1984
Disallowance Letter, Agency Appeal File, Ex. A.
The State agreed with the downward rate adjustments other than
the
delection of the separate entries for $23,858,366 for new SOICFs
and
$9,093,757 for converted SOCRs. The State proposed deleting
certain
costs it attributed to (1) new SOICFs ($10,595,301 FFP) and (2)
new
SOCRs and other new community services staff ($3,194,171 FFP) from
the
amount of DC costs remaining after application of the
residential
percentage. In addition, the State sought to include
certain
"countervailing" costs which had initially been omitted from the
rate
calculation. (One such cost is overhead related to the "Part B
and
Non-Employee" costs. "Part B and Non-Employee" costs were
initially
included in the rate calculation and recommended for downward
adjustment
by the auditors.) Reproduced as Figure 3 is Attachment 1 to the
State's
Brief. This Figure is a summary of the FFP amounts at issue which
has
been revised to reflect any changes made to particular amounts
during
the appeal proceeding.(21)
ANALYSIS
A. Whether the State can include as a separate entry in the
rate
calculation 100% of the projected costs for 100 new SOICFs and
19
converted SOCRs because the State reasonably expected to
provide
services in these facilities at the projected cost during the rate
year.
As explained further below, the parties dispute whether the State
may
reflect costs in its rate based on an alleged reasonable expectation
to
incur them. In deciding that the SOICF costs should be eliminated
from
the rate calculation, we conclude that (1) the State's rate
setting
methodology was seriously flawed, and (2) the State misconstrued
the
regulation it relied on in making its reasonable expectation
argument.
New York argued that HCFA was improperly measuring the validity of
its
prospective rate against actual rate year costs rather than against
its
reasonable expectations at the time the rate was developed. New
York
asserted that the projected costs for the 100 SOICFs were "derived
from
cost estimates and assumptions reflected in the State's
1980-81
Executive Budget" and for the 19 converted SOCRs were based on
an
"additional expectation that 19 SOCRs would convert to SOICFs status
in
the rate year . . . based on the knowledge that this number of
SOCRs
already met or nearly met SOICF criteria and soon would be
formally
certified as such." New York Reply Brief, pp. 2-3. New York
argued that
"(unrebutted) testimony at the informal conference demonstrated
that
OMRDD's expectations were, in fact, reasonable at the time the rate
was
established, and that the obstacles which thwarted meeting
those
projections was unforseen." New York Post-Conference Brief, p. 5.
The State relied on 42 CFR 450.30(a) (3) (IV) (A) (1977). /9/
This
regulation stated:
Payment rates shall not be set lower than the level which the
State
reasonably finds, or in the case of a prospectively determined rate,
the
level which the State reasonably expects, to be adequate to reimburse
in
full such actual allowable costs of a facility that is economically
and
efficiently operated. (Emphasis added)$F
n9 Note that this regulation had been reworded and recodified as
of
September of 1978. See page 7, above.$E(22)
While the State agreed that some costs should be deleted from the total
DC
costs then multiplied by the residential percentage, the State argued
that
the "full cost entry" should be retained. New York Brief, p. 8.
The
State asserted that this was the appropriate way to distinguish
services
provided in DCs from the services provided at SOICFs. New
York
argued:
No method of adjustment could be expected to achieve
scientific
precision where rates had to be set prospectively using
cost-allocation
data form a previous year in which the new facilities did not
exist.
New York Brief, p. 8.
The State argued that the Agency's disallowance was inconsistent with
the
rate-setting flexibility accorded the states under Medicaid and that
the
costs had been substantially incurred as projected.
The Agency, on the other hand, argued that it was not seeking to
measure
this rate against an actual cost standard but rather asserted that
the
separate entry of these costs at 100% "resulted in a claim for
SOICF
services that were never provided." Agency Post Conference Brief, p.
6.
The Agency reasoned that the State's "unapproved" rate
setting
methodology used both projected costs and projected patient days so
that
it is not, in the Agency's view, possible to distinguish between
a
determination that the rate itself is unreasonable and a
determination
that the rate embodied a claim for undelivered services at
non-existent
facilities. /10/ The Agency contended:
The State has claimed the cost of undelivered services once it
has
added the cost of unopened facilities to the(23) total pool of
ICF/MR
costs . . . these costs are passed on to the federal government
no
matter how many actual patient days are claimed. The clear and
simple
remedy is to remove from the calculation those plainly identified
cost
items -- $23 million for planned new SOICFs, $9 million for
converted
SOCRs -- the largest part of which represent no cost incurred by
the
State.
Agency's March 22, 1985 letter, p. 5.
The Agency also argued that the State erroneously relied on the
reasonable
expectation language in 42 CFR 450.30(a) (3) (IV) (A) (1977).
The Agency
contended that the State's claim was not one for expenditures
for "medical
assistance" under section 1903(a) (1) of the Act. Agency
Post
Conference Brief, pp. 6-7. The Agency pointed out that during the
rate
year only 5 of 100 SOICFs and 14 of 19 converted SOCRs actually
delivered
Medicaid services.(24)
In our opinion, it is an inescapable conclusion that the
rate-setting
methodology used by New York was seriously flawed. While
the auditors
and the Agency treated the rate as a prospective rate, i.e., one
set in
advance of the rate year without provision for adjustment to reflect
the
actual rate year costs, the resemblance between the
rate-setting
methodology here and prospective rate setting under the
reasonable
cost-related statutory and regulatory requirements is in name
only.
While the State argued that the rate setting methodology was
consistent
with the applicable rate year requirements, this argument is
merely a
hollow effort to justify its unapproved methodology. /11/ In light
of
the absence in the State plan "fee schedule" provision of cost
finding
methods and a stated methodology for the actual calculation, the
State's
rate cannot be regarded as a reasonable cost-related rate. 42
CFR
447.301. The projection of facility costs and patient days is
wholly
inconsistent with the actual cost methodologies envisioned by
section
1902(a) (13) (E). Under 42 CFR 447.301, prospective rate
setting must
bear a rational relationship to the actual costs of providing
the
services. This relationship is clearly distinguishable from
a
requirement to reconcile the rate to actual rate year costs, which
both
parties agree is not to occur here. A prospective rate is to be
based
on actual costs from a prior period trended forward in a
fashion
approved by the Agency so as to approximate the rate year costs of
an
economically and efficiently run facility. 42 CFR 447.303.
The
significance of the flawed rate-setting methodology is to underscore
the
reasonableness of our conclusion that the rate calculation may
not
properly include a separate entry for the projected costs and
patient
days at 100 new SOICFs and 19 converted SOCRs, most of which were not
in
operation during the rate year.
(25)
We note here that the Agency took no formal program compliance
action
against the State because of its non-complying rate methodology.
In any
event, the statutory and regulatory requirements governing ICF/MR
rates
have been changed since the rate year. This case arises because
of an
Agency determination to disallow FFP claimed by the State. The
issues
concerning the rate-setting methodology developed in this
decision
pertain only to whether the rate ultimately set was a reasonable
one.
/12/
The Board has found that "noncompliance issues and disallowance
issues
are not mutually exclusive." New Jersey, p. 18. Thus, contrary
to what
the State argued, it is proper for us to have examined the question
of
whether the State's rate setting methodology complied with
the
applicable requirements, in order to decide whether claims for FFP
are
properly paid. Oral Argument, Tr. p. 4.
Here the auditors reviewed only the rate calculation itself, taken as
a
given, without per se invalidating the State's basic approach.
Audit
Report, p. 6. Although the auditors did not distrub the
assumptions
implicit in the rate calculation itself, in general, SOICFs and
DCs
would be regarded as different class facilities which could not
be
combined in one rate-setting calculation. 42 CFR 447.305.
/13/
Moreover, new facilities(26) would not ordinarily be combined in
one
rate-setting calculation with existing facilities. Conference Tr.
Vol.
I, pp. 149-150.
In addition, we conclude that New York has miscontrued the
"reasonable
expectation" language in the regulation. A State official
said that the
State was under "intense and immense pressure" under the
Willowbrook
Consent decree and the Five Year Plan to open the planned SOICFs,
but
admitted that the State had experienced prior shortfalls in
achieving
other goals. Conference Tr. Vol. I, p. 116. There is
reason, then, to
question whether the State's "expectations" were
reasonable. In any
event, the legitimacy of the rate cannot be proved
by a reasonable
expectation that services would be provided as planned at a
projected
costs. Such an interpretation of 42 CFR 450.30(a)(3) (IV)(A)
(1977) is
illogical in the context of the emphasis in the statute and
regulations
on cost-finding methods and approval of rate calculation
methods. The
reasonable expectation can pertain only to the rate itself
in relation
to the actual costs to provide required services in an
efficiently and
economically run facility. /14/ The "reasonable expectation"
does not
provide a standard with which to measure particular items of
cost
included in the rate calculation. Thus, even if the State
reasonably
expected to open the projected facilities, this does not in and
of
itself prove that the rate was reasonable. /15/
Furthermore, State provided no evidence that it has a
reasonable
expectation that these projected facilities necessarily would lead
to an
increase in per-patient costs. The Budget planned for a large
number of
DC staff and patient transfers, but there was no analysis done at
the
time of rate setting to determine the impact of these transfers on
the
residential percentage, on staff(27) and patient placement, or
otherwise
on what rate could reasonably be expected to reimburse costs of
an
efficiently and economically run facility. Thus, a rate
calculation
leaving DC costs intact and eliminating costs for the projected
new
facilities, as the auditors did, would give a reasonable rate
for
reimbursement of ICF/MR services.
Under section 1903(a)(1) of the Act, FFP is available only in
expenditures
for medical assistance. The Agency relied on this
provision and the
meaning of the term "medical assistance," as payment
for the cost of ICF/MR
services, in arguing that it was required to take
this disallowance, "(since)
nearly all the SOICF services included in
the state's request for FFP were
never delivered. . . ." /16/ The Agency
further relied on the OMB Circular
A-87 grant principles and Board
decisions as stating a requirement that "a
state claim for FFP be based
on state payment for medical assistance
services." Agency
Post-Conference Brief, pp. 6-7.
In general, we regard a per diem rate as the measure of the cost to
the
State to provide Medicaid reimbursable services. However, under
the
particular circumstances presented here, we find that since the
rate
itself was based on projected services and costs at a particular type
of
facility, the failure to provide services at those facilities renders
a
portion of the per-diem rate inherently unreasonable.
/17/
Consequently,(28) the resulting claim, to the extent overstated,
does
not represent a necessary and reasonable cost to the Medicaid
program.
OMB Circular A-87, Part I.C.1.a. /18/
B. Whether the separate entry for 100 new SOICFs and
19 converted
SOCRs was duplicated in the rate calculation. /19/
100 New SOCIFs
The State argued that the auditors were incorrect when they concluded
that
the costs for the new SOICFs were duplicated at 200% in the
rate
calculation. The State agreed that these costs(29) were duplicated
but
asserted that the application of the 85% residential percentage to
the
DC costs resulted in the duplication being at 185% not 200. The
State
sought to remove 85% of the costs for the new SOICFs from the DC
costs
and keep the separate 100% entry.
The State asserted that the auditors used unreliable cost data to
support
the finding that the DC staff to be transferred to the new
SOICFs were nearly
all from the base year inpatient staff. The State
contended that the
transferred staff were largely administrative support
staff not residential
client care staff. /20/ The State tried to rebut
the auditors' finding by
pointing out that planned transfers were 44.86%
direct care and 55.14% other
DC employees. State Brief, pp. 10-16.
The State also argued that the transferred staff would reflect the
85%-
15% inpatient/outpatient ratio so that these costs could be deleted
from
the DC costs without affecting the validity of the
residential
percentage. /21/ State Reply Brief, p. 12.
(30)
The State agreed that the new SOICF staff were projected to come from
DC
base year staff. State Brief, p. 9. As explained above, the
State
disagreed, however, that the new SOICF staff would be from
largely
inpatient care staff. The State also argued that the DC staff
would at
most be 92% inpatient direct care. /22/
The State argued that the evidence showed "that a significant
percentage
of new SOICF costs had likely been allocated in the base year to
the
outpatient side of the 85/15 ratio." State's Post-Conference Brief,
p.
12, citing Conference Tr. Vol. I, p. 36. The State reasoned that it
was
likely that practical considerations and attrition would cause a
high
percentage of the transferred positions to come from
non-residential
inpatient care staff so that the validity of the residential
percentage
would not be affected by deletion of the SOICF costs from the DC
costs.
These arguments are merely speculation. The State presented no
concrete
evidence that the State had analyzed the DC positions and calculated
the
rate knowingly in light of the nature of the anticipated transfers.
The
State's arguments are insufficient to overcome the logical
consequences
of transferring 2616 positions from the DC residential
staff. Moreover,
a contemporaneous budget document refutes the State's
characterization
of the likely nature of the transferred positions. The
"Budget
Highlights" document stated, in part:
Expanding community services will require staff and other
resources
to follow clients to community program settings. To maintain
growth it
will require increasing participation of skilled State employees. .
. .
Agency Ex. 3. (31)
We see no reason to accept the State's rather strained explanation of
why
we should conclude that deletion of costs prior to the application
of the
residential percentage would not render that percentage invalid.
As the
Agency so aptly pointed out, the separate entry for the 100
SOICFs was an
"unknowing double entry," i.e., the duplication was an
inadvertent mistake,
not a considered evaluation of the effect of
anticipated changes. Oral
Argument Tr., pp. 28-29. The State attempted
to justify its rate
calculation with a rationale unknown to the
rate-setter and developed after
the auditors questioned this aspect of
the calculation. It is
interesting to note, moreover, that in the April
14, 1982 State response to
the draft audit report, the continued
validity of the 85/15 ratio after
deletion of the SOICF costs from the
DC costs is presented as a reasonable
assumption, necessary due to the
prospective nature of the rate, not a
factual occurrence based on the
actual consequences of the likely pattern of
staff transfers. State
Appendix, Ex. 7, p. 42.
We find the State's arguments unpersuasive. The State analyzed
the
evidence on the planned patient and staff transfers differently from
the
Agency, but did not ultimately demonstrate that the Agency's
rationale
is wrong. /23/ The State's analysis of the planned staff
transfers
ignores its own analysis that(32) these staff would be at most
92%
inpatient. If this were so, it makes it highly unlikely that
the
transfers would conform to the 85/15 ratio.
We agree that the DC costs remaining after application of
the
residential percentage were sufficient to cover the costs
associated
with the planned new SOICFs. In essence we find that the
conclusions
made by the auditors derive logically from the "known"
budget
information so that after-the-fact alternate approaches urged by
the
State present mere possibilities, not probabilities, and are
not
sufficient as evidence to overcome the Agency's reasonable
approach.
Given the flawed rate calculation methodology and the fact that
most of
the projected SOICF facilities did not open, the State must
provide
evidence, not merely a possible rationale, to prove that the
duplication
was 185%, not 200% as the auditors concluded.
19 Converted SOCRs
The State argued that the Agency misunderstood "the practical realities
of
the conversion process" for the 19 SOCRs. State Post-Conference
Brief,
p. 17. The State asserted that it anticipated a conversion
process
involving the clients and staff then in place at these
facilities and that
the 19 facilities housed 192 clients, an average of
10 clients per
facility. See State Appendix, Ex. 2. The State asserted
that the
auditors did not realize that the facilities would remain
basically the same
after conversion. The State described the conversion
process as
involving substantial paperwork, slightly increased staff,
and few physical
modifications to the facilities.
The State disputed initially the Agency's contention that the
residential
percentage would account for 2147 staff at the new SOICFs
and 422 staff at
the converted SOCRs. The State also disputed the
Agency's analysis of
the actual staffing pattern for the converted SOCRs
as showing a large number
of DC transfer positions. The Agency further
argued that the actual
staff projections were for "1936 DC transferees
to staff 100 new SOICFs and
572 DC transferees to staff 79 new SOCRs"
totaling 2,508 transferred DC
staff. The Agency relied on a New York
Division of Budget (DOB)
worksheet (HCFA Appeal File, Ex. 9). The State
asserted that the
separate entry for converted SOCRs should remain in
the calculation.
The State proposed to eliminate duplication in the
rate by deleting the
projected costs of 361 new SOCR staff and 194 other
new community service
positions at(33) a 50% phase. Figure 3, State
Post-Conference Brief,
pp. 28-32, and Revised Ex. 8. /24/
After reviewing the complete text of the Budget, the Agency
decided,
during the appeal process, that there was a "double duplication" in
the
rate because the 19 converted SOCRs were included in the 100 new
SOICFs
included in the Budget. While it is impossible to resolve this
question
with absolute certainty due to the lack of
contemporaneous
documentation, we find that the Agency's reading of the full
text of the
Budget is reasonable and conclude that the State has not
presented
sufficient evidence to rebut that view. See State's January
31, 1986
letter, p. 4. There is a little in the way of true factual
evidence
dating from the time period that the rate was set and OMRDD would
have
been involved in program planning. What we have, then, are the
various
speculations and logical deductions made by the parties based on
the
information in the Budget and the few pieces of relevant data
actually
available to the rate-setter.
The Agency reasoned as follows:
The net increase of 361 (in system-wide SOCR staffing) is less
than
the 572 staff to be added for 79 new SOCRs because, as the
state
asserted, it was planning to convert some SOCRs into SOICFs. The
staff
of these converted SOCR units would thus be deducted from the rate
year
SOCR system-wide total. If 572 staff are added to the SOCR system,
but
the net system (34) total only increased by 361, 211 SOCR staff in
the
converted units must have been removed and we would expect them to
be
added to the SOICF total. . . . the net increase in SOICF staff over
the
previous year total of zero is 2,147. Supplement to HCFA Appeal
File,
Ex. 13. The 2,147 total net staffing figure for new SOICFs is
indeed
the sum of 1,936 and 211.
Therefore, the correct staffing figures consist of 1,936
DC
transferees to the 100 new SOICFs and 572 DC transferees to the 79
new
SOCRs, comprising the total of 2,508 DC transferees for
these
facilities. As indicated above, these are the figures the state
itself
gave in its April, 1982 written reply to the draft audit report
and
which appear in DOB workpapers.
. . . The alternative staffing figures, of 2,147 staff for 100
new
SOICFs and 361 for 79 new SOCRs presented by the state as
its
prediction, are thus seen to be net increases in the SOICF and
SOCR
systems. The 2,147 figure, is the net staffing figure for the 100
new
SOICFs, inclusive of converted SOCR units, which brought with them
their
existing 211 staff. The rate-setter used the 2,147 figure to
calculate
the staffing costs of 100 new SOICFs. State Appeal File,
Ex. 1. Since
the 2,147 figure is inclusive of staff at converted
SOCRs, the clear
implication is that when the rate-setter made a separate
entry of the
cost ($9 million) of converted SOCR units he duplicated the cost
of
these converted units. . . .
Agency Post-Conference Brief, pp. 56 and 57.
It is noteworthy that the State submitted no contemporaneous
documentation
evidencing a plan to convert 19 SOCRs over and above the
100 new SOICFs to be
established, thus further bolstering the Agency's
reading of the Budget.
The following points confirm the finding that the separate entry
for
converted SOCRs was a double duplication in that the converted
SOCRs
were part of the planned 100 new SOICFs.
* Both parties agreed that the Budget was the "fundamental
guide" in
rate setting.(35)
* The Budget in fact refers to "(the) planned conversions of
1,550
existing community residence beds to ICF/MR beds." /25/
* Logically there is no reason to assume that the 100 new
SOICFs
discussed in the Budget would not subsume the planned SOCR
conversions.
* The SOICFs are residential facilities having 15 or fewer
beds. If
192 SOCR clients at 19 facilities were to comprise part of the
100
SOICFs then this would leave 81 facilities to house the anticipated
1006
new SOICF placements, an average of fewer than 13 clients per
facility.
There is no obvious rationale for having the excess capacity of
119
facilities to house an anticipated 1006 + 192 client load.
* There is no true inconsistency between the State's
assertions
regarding how the conversions would occur, i.e., in-place
residents and
staff, and the Agency's analysis showing 1936 DC staff + 211
SOCR staff
as the total 2147 staff for the new SOICFs including the
converted
SOCRs. The 211 figure attributed to the SOCRs derived from
the minimum
staffing ratios for SOCRs, which logically could have been used
in the
DOB calculations.
Furthermore, even if there was no "double duplication," the DC costs
would
contain analogous costs sufficient to cover the costs for the
converted
SOCRs. We see no merit in the State's attempt to exclude the
costs of
361 + 194 staff at a 50% phase in as justification for
retaining the
converted SOCR costs as a separate entry.
For the reasons explained above, we conclude that the separate entry
of
SOICF costs for the projected 100 new SOICFs and 19 converted SOCRs
was
duplicated in the rate calculation.(36)
C. Whether New York's "countervailing costs" should be
considered in
determining the disallowance amount.
After about ten months of field work, federal auditors sent New York
a
draft audit report in late 1981. In February, 1982, New York
first
informed the auditors that there were certain additional costs which
New
York wished to be considered in adjusting the rate. New York
provided
extensive comments on the draft audit report in a letter in April,
1982,
and included requests for adjustments reflecting costs initially
omitted
from the rate calculation. New York acknowledged that the
additional
costs had not been considered earlier because of New York's own
errors
or ommissions. Audit Report, p. 14; HCFA Appeal File, Ex.
D; State
Brief, pp. 3 and 24; Conference Tr. Vol. II, p.
210.
There were six categories of omitted costs, including administrative
fees,
certain staff expenses, staff housing costs, bond interest
expenses, general
salary increases, and certain overhead costs (the
latter were dealt with
separately in the record here). Audit Report, pp.
14, 61. New York
asserted that the costs generally were of types which
could be allowable
costs, although it has never been determined whether
the precise costs here
would be considered allowable. Tr. Vol. II, pp.
224-5, 228.
With one exception, /26/ the auditors refused to consider New York's
new
cost items in the final audit report issued in(37)
September, 1983. The auditors took the position that "the
audit
resolution process is not the proper vehicle for introducing new
costs"
and that New York should "submit a retroactive claim for such
costs
using the appropriate established mechanism. . . ." Audit Report,
pp.
15 and 61.
HCFA basically adopted the auditors' findings in its
disallowance
determination. With the exception of the "Part B and Non
Employee"
overhead costs (which New York asked us to find should reduce
the
disallowance /27)/), New York's requested relief is that we remand
its
"countervailing costs" to HCFA for possible further reduction of
the
disallowance based on further documentation to be supplied by the
State.
On its face, the dispute here concerns this: assuming the
disallowance
based on the rate reduction is otherwise upheld (as it has been
under
Part A and B above), should HHS examine documentation related to
New
York's subsequently-advanced costs, and reduce the disallowance
here
based on an adjusted rate which encompasses the new costs? Or,
must New
York first propose an upward adjustment on a Quarterly
Expenditure
Report, Form HCFA-64 (QER) submitted under 45 CFR 201.5, as it
generally
would have to for a retroactive adjustment to the rate?
Not before us for decision -- but nevertheless clearly the reason New
York
would prefer not to have to file a QER -- is the issue whether such
a
retroactive adjustment would be barred as an untimely claim under
section
1132 of the Act and implementing regulations (45 CFR 95.7).
Thus, the Board
is in the odd position of having to decide one issue
which is interrelated
with another issue not properly before us.
However, it is in part precisely
because that timeliness issue is an
important one that we have concluded, as
we discuss below, that New York
should pursue the regular QER process if it
wishes to recover an amount
attributable to the additional costs.
(38)
The five items omitted from the rate calculation.
As already stated, the record concerning the validity per se of these
cost
items has not been developed before this Board. For four of the
items,
New York alleged the costs were allowable, but asked the Board to
remand the
disallowance for further HCFA consideration of documentation
to be
provided. New York's Post-Conference Brief, pp. 42-43.
The
fifth was handled slightly differently (see (e) below). The costs are
as
follows:
(a) New York alleged that salaries of employees assigned to the Karl
D.
Warner Center "were incorrectly excluded a second time from the per
diem
rate when the base-year residential percentage was applied."
State
Brief, p. 29. New York alleged that the salaries had been treated
as
unallowable when the base-year residential percentage (85 percent)
was
developed, so that application of the residential percentage to
the
total rate-year cost eliminated the salaries from the rate-setting
base.
New York said it later found that the salaries had not been included
in
the projection of the total client-care costs before the latter
amount
was multiplied by the residential percentage, which, New York
says,
effectively duplicated the reduction, leading to an understatement
of
total residential costs and, therefore, a reduction in New
York's
recovery of federal funds.
(b) New York said that HCFA should accept an administrative fee of
the
Facilities Development Corporation (FDC) a public benefit
corporation
involved in building, financing and equiping ICFs/MR. FDC
charged the
state an administrative fee, which New York alleged was an
allowable
cost item inadvertently ignored in setting the rate. New York
said the
fee should have been set "using projections based on budget
documents
available before the rate year in conjunction with . . .
(the)
historical share of FDC fees. . . ." State Brief, p. 30.
(c) New York said it should have included interest expenses arising
from
certain short-term notes issued by New York which, in part, met
cash
flow requirements for inpatient services at State-operated ICFs/
MR.
State Brief, pp. 30-31.(39)
(d) New York said it should have included a portion of the costs of
staff
housing at certain large State ICFs/MR. The base-year
residential
percentage failed to reflect this cost, because "staff housing
costs
were not stepped down, but rather were allocated entirely to
the
category of outpatient and other non-allowable expenses." State
Brief,
pp. 31-32.
(e) New York concurred with the auditors' position that costs
of
state-employed physicians' services ("Part B and Non Employee"
services)
should not be fully reimbursed, but instead multiplied by
the
residential percentage. See Figure 2. However, New York
argued that
before applying the residential percentage, these costs should
be
adjusted to include "overhead which was unintentionally omitted from
the
computation of the 1980/81 rate." State Brief, p. 24. New York
also
alleged that the subsequent 1981/82 overhead rate had been reduced
for
excess reimbursement for overhead costs in 1980/81,
effectively
compounding the error. State Brief, p. 26.
New York did not ask for a remand on item (e), but (at least
initially)
sought to have the Board directly declare the item
allowable. In its
Post-Conference Brief, New York treated the "Part B
and Non Employee"
costs with the other four items. p. 38. We
agree with the Agency that
"this cost item is in precisely the same posture
as the four other cost
items. . . ." (Agency Brief, p. 41), in that whatever
other aspects
these costs have, they represent countervailing costs outside
the four
corners of the audited rate. Furthermore, if there is an
issue
concerning calculation of the 1981/82 rate, that issue is not raised
by
the disallowance here and not appropriate to deal with here.
The parties' positions.
Essentially, the State's argument centered on what it considers to be
an
important distinction between a "new" claim and the relief it
seeks
here: that the State seeks no higher rate and no more funds
than
originally claimed, in that the State seeks only to partially avoid
the
downward adjustment from the disallowance. The State accompanied
this
argument by emphasis on the fact that we are dealing with a rate,
rather
than the cost items directly, so that New York "merely wishes to
address
what was the correct rate to have used in computing those claims. . .
."
State Post-Conference Brief, p. 34.(40)
The Agency's position fundamentally is that New York would be subverting
a
claiming process well-established in regulation and guidelines -- a
process
well known to, and frequently used by, the State. The Agency
argued
that the cost items had never been reviewed for allowability and
therefore
never had been the subject of a disallowance; the Board,
argued the
Agency, should neither sidestep the disallowance process nor
effectively
pre-decide issues related to the timeliness or other
allowability of the
costs. The Agency also argued that the focus of the
audit was not to
develop a reasonable rate. The audit here was of the
rate setting
process used and, the Agency contended, did not function as
a collaborative
process in an effort to set a reasonable per diem rate.
The countervailing costs are not properly considered as part of
this
appeal.
We have determined that the Agency has made a reasonable decision that
the
State must make a separate adjustment on its QER seeking to recover
the
"countervailing costs."
As mentioned above, permitting the State to use the additional costs
to
offset the rate reduction required as a result of this
disallowance
would effectively decide in the State's favor the issue of
whether such
an offset constitutes an untimely claim -- an issue which the
Agency has
not yet determined and which we, therefore, consider to be an
issue not
properly before us. In addition, even if the Agency concludes
that the
offset is not barred as an untimely claim, the Agency may need time
to
examine the allowability of the costs and whether the State can
properly
include them retroactively in the rate calculation. The result
the
State advocated would, in effect, permit the State to retain the
amount
of the rate corresponding to the new costs pending this
determination.
The Agency is not unreasonable in seeking the option of itself
retaining
the offset amount during this period by requiring the State to make
the
downward adjustment on its QER to account fully for the costs
improperly
included in calculating the rate, and to propose an upward
adjustment
related to the new costs.
Indeed, but for the disallowance, it is clear the State could not
have
recovered these new costs through its rate calculation without making
an
adjustment on its QER; we do not think that the State should be in
a
better position procedurally simply by reason of its own failures
in
initially calculating the rate.
Most of the State's arguments about the fact that we are dealing with
a
rate, rather than with a direct claim for the underlying (41)
costs
themselves, go to the issue of whether the "countervailing costs"
should
be considered a new claim which is barred as untimely. That
issue is
not before us. We also note that the issue is not whether a
state can,
as part of its normal rate-setting process, use countervailing
costs to
substitute for provider costs disallowed in a state audit,
without
making both decreasing and increasing adjustments on a QER.
Here, there
is an absence of any written rate-setting methodology and any
prescribed
state process for how to handle potentially offsetting costs
raised
after an initial rate has been found to have been improperly
calculated.
Moreover, we are dealing with a federal audit of the State as
a
provider. The issue is whether the Agency is compelled to consider
the
"countervailing costs" as part of the same proceeding as the costs
found
by the auditors to have been improperly included by the State
in
calculating the rate. We conclude that the Agency should not
be
compelled to do so, but has reasonably determined that the State
must
instead treat any amounts reflecting the countervailing costs as
a
separate adjustments on the QER, subject to the Agency's usual
process
for examining such adjustments and determining whether the amounts
will
be paid or disallowed.
Conclusion
For the reasons stated and summarized above, we uphold the
disallowance
based on the deletion of the separate entry for SOICF costs in
the rate
calculation and conclude that there is no reasonable basis for
remanding
the "countervailing costs" to the Agency for review of
their
allowability.(42)
Figure 1
OMRDD Rate-Setting Calculation
Description
*2*Projected Costs Developmental Centers: Personnel
Service-Part
A
$488,770,920 OTPS (Excluding
Equipment)
66,704,277 n1 Depreciation
19,623,142 Bond
Interest
15,330,451
Subtotal:
$590,428,790 Residential
Cost
(85.259394777%)
$503,390,1 Part B Costs
11,048,7 Youth Opportunity
844,0
Purchase of Service
1,463,0 Deficiencies
6,565,2
Developmental Center Costs:
$523,311,0 Secure and Autistic Units:
Personal Service Parts A & B
$3,471,366 OTPS (Excluding
Equipment)
254,300 n1
Subtotal:
3,725,6
Discrete Mental Retardation Units: Personal Service Parts A
& B
$9,575,099 DMRU Support Costs
(OMH)
7,854,573
Subtotal:
$17,429,6
ICF/MRs: Community Residences
Converted
$9,093,757 State
Operated
(new)
23,858,366 Subtotal:
$32,952,1 Institute for Basic Research
$961,1 Projected Residential Cost
$578,379,6 Estimated Client
Days
4,820,1 Per Diem Rate
$119.
F
n1 Relates to other than Personal Service (OTPS) Costs
excluding
Equipment
n2 Results from the application of the residential percentage to
the
Developmental Center Sub-Total or ($590,428,790 x 85.258394777%
=
$503,390,109).
n3 Results from projected residential cost - estimated client
days or
($578,379,679 - 4,820,190 = $119.99). Rounded to $120 by
OMRDD.$E.
Audit Report, p. 21(43)
Figure 2
*4*COMPARATIVE SCHEDULE *4*OMRDD - AUDIT
AGENCY CALCULATION *4*OF
1980/81 ICF/MR PER DIEM
RATE
OMRDD HHS
AUDIT
Calculation Calculation
Differ
Developmental Center (DC) Costs Personal Services - Part
A
$488,770,920 $487,807,198 a Other Than Personal
Service
66,704,277 66,642,027
Depreciation
19,623,142 19,623,142 c Bond
Interest
15,330,451 25,330,451
Sub-Total
590,428,790 (OMRDD Applies 85.2584 Here)
d (x 85.2584) 503,390,109
Other DC Costs d
Part B and
Non-Employees
11,048,773
11,048,773 a Youth Opportunity Program
(YOP) 844,016
820,420
Purchase of Service
(POS)
1,463,000 -0-
(1
Budget Deficiency
Amount
6,565,200 6,565,200
Sub-Total
607,837,211 (AUDIT
Applies 85.2584 Here)
d
(x 85.2584) (2
Projected DC Residential
Costs: 523,311,098
518,232,249 (5
Secure and Autistic
Units: Personal Services-Parts A&B
3,471,366 3,471,366 a Other Than Personal
Services
254,300 254,300
Secure & Autistic Units Total
3,725,666
3,725,666 *2*Discrete Mental Regardation Units Personal
Services-Parts
A&B
9,575,099 9,575,099 a DMRU Support Costs
(OMH)
7,854,573 7,269,367 DMRU
Total
17,429,672 16,844,466 ICF/MRs New State
Operated ICF/MRs
23,858,366
-0- (23 Converted SOCRs to SOICFs
9,093,757
-0- (9 ICF/MR Total
32,952,123
-0- (32 Institute for Basic
Research
961,120 1,014,769 a Total
Projected Residential Costs
$578,379,679 $539,817,150
Estimated Client Days
4,820,190
4,839,900 Per Diem
Rate
$120.00
$111.53
(44)
Audit Report, pp. 103-104.
Note to Figure 2
The Agency did not adopt the recommended adjustment for court
ordered
expenses indicated by footnote b. This accounts for the
difference
between the Agency's determination that the rate was overstated by
$8.29
and the auditors recommendation that the rate was overstated by
8.47.
The State concurred with all the recommended adjustments except
the
deletion of the $32,952,123 in ICF/MR costs.(45)
Figure 3
HCFA Proposed State of New York FFP
Issue
Disallowance
Response On Appeal New
SOICFs
$12,802,655
$10,595,301 $ 2,207,354 Converted and New SOCRs
and Other
CS staff $ 4,882,148.50
$3,194,170 $ 1,687,978.50
Part B
Costs $ 882,941.50
$ 493,409 $ 389,532.50
Staff at Karl D. Warner Center $
--
($1,895,728) $
1,895,728 FDC
Fee $
--
($1,558,133) $
1,558,133 TRANS Interest
$
--
($2,674,794) $
2,674,794 Staff Housing
$
--
($ 363,565) $
363,565
TOTALS
$18,567,745
$7,167,409 $10,777,084
F
* This table is limited to amounts relating to the issues
under
appeal and does not reference amounts included in the
Agency's
disallowance where the State concurred.$E /1/ NYSDSS is the
State
Medicaid Agency.
Unless the context requires otherwise, we use
the term "State" to mean either
or both NYSDSS and OMRDD.
/2/
"'Cost finding' means the process of recasting the data derived from
the
accounts ordinarily kept by a provider to determine costs of each
type
of service by allocating direct costs and prorating indirect costs."
42
CFR 447.272. /3/ The
regulations were initially codified at 45
CFR 250.30(a)(3) and (b)( 6).
The regulations were later recodified at
42 CFR 450.30(a)(3) and (b)(6) by 42
Fed. Reg. 52826, September 30,
1977. These regulations were again
recodified with clarifying editorial
changes, but no policy changes, at 42
CFR 447.272 through 447.311 by 43
Fed. Reg. 45176, September 29, 1978. These
latter regulations were in
effect until September 30, 1981 when regulations
were issued
implementing a revised statutory provision governing
reimbursement rate
setting. 46 Fed. Reg. 47964, September 30,
1981. /4/ The
Medicaid
certification dates for the 5 SOICFs were: April 14, 1980
(2
facilities), June 30, 1980, October 28, 1980, and March 27, 1981.
State
Appendix, Ex. 20. The rate calculation included costs for both
100 new
SOICFs and 19 state-operated community residences (SOCRs) to
be
converted to SOICFs at the beginning of the rate year. 14 of
19
converted SOCRs operated in the Medicaid program during the rate
year.
Nine of the 14 were converted before the end of the first month of
the
rate year and the remaining five were converted at varying times
before
the end of the rate year. State Appendix, Ex. 21. During
this
proceeding, the Agency concluded that the New York State
Executive
Budget showed that the 19 converted SOCRs were in fact part of the
100
SOICFs so that the costs for the 100 SOICFs would have included
the
costs for the converted SOCRs. The Agency referred to this as a
double
duplication in the rate calculation. The State strongly
disagreed with
this conclusion. See Part B of the Analysis,
below. /5/ The
auditors
concluded that the rate was overstated by $8.47. The Agency
adopted all
but one of the auditors' findings recommending a downward
adjustment, so that
the disallowance at issue found that the rate was
overstated by $8.29.
See Figure 2. /6/ The Agency had
informed
the State in 1979 that its "fee schedule" methodology was not
an
approved cost-related reimbursement methodology and had requested,
on
several occasions, that the State submit a plan amendment. The
State
did not do so. Audit Report, pp. 4-5; and Conference Tr.
Vol I, pp.
145-146. This particular issue was rendered moot by a
statutory
amendment to the requirements for reimbursement as of October 1,
1980.
/7/ The auditors noted the State's view that "the State budget
system,
in conjunction with other types of audits being performed by the
State
Office of Audit and Control, was sufficient to adequately monitor
and
control costs." Nevertheless, the auditors concluded that "such a
system
did not meet the intent of the regulations which specifically
required
periodic audits of the costs of each provider to determine if such
costs
were allowable under Medicaid and if allowable, that such costs
were
reasonable." Audit Report, p.
18. /8/ Note that the
Agency
ultimately left intact in the rate calculation numbers such as the
19.6
for depreciation and the 19.1 million for salary increases for which
the
auditors were unable to express an opinion. The Agency adopted in
its
disallowance only concrete dollar adjustments recommended by
the
auditors. /10/ In a
footnote to this point, the Agency stated:
The State's rate-setting
calculation employed a figure of 4,820,190
estimated patient days.
Total ICF/MR system costs, as predicted by the
Executive Budget, were divided
by this figure (4,820,190) to yield the
$120 per diem. The State then
multiplied the per diem by 5,193,755
actual patient days rendered in order to
bill HCFA. The State's
unapproved rate-setting method thus begins with
two prospective
estimations as to the delivery of services -- (1) total
projected
facility costs for the year and (2) estimated patient days.
To the
degree that facility costs are overestimated, as by the inclusion
of
nonexistent facilities, and patient days underestimated (by 373,565
in
this case), the per diem rate is doubly inflated. A
typical
rate-setting methodology approved under the reasonably
cost-related
regulations makes no prediction about the quantity of services
to be
delivered. It takes a per diem rate as derived, not from
budgeted
costs, but from actual costs experience. It then simply
multiplies this
per diem by actual days to get total costs. The
regulations explicitly
forbid the use of budgeted costs, since these contain
predictions as to
the quantity and cost of service not related to actual cost
experience.
Agency's March 22, 1985 letter, p. 5. /11/ In New York
Department of
Social Services,
Decision No. 151, February 26, 1981, the Board
held that the State was
not precluded from promulgating an upward
adjustment to its ICF/MR fee
schedule rate. That case does not,
however, as the State maintained,
stand for the proposition that the
State had an approved rate-setting
methodology under 1902(a) (13) (E).
Decision No. 151 did not present that
issue and is better viewed, in
relation to the "countervailing costs" issue
discussed in Part C below,
as establishing that retroactive claiming is
consonant with the State's
fee schedule methodology. Agency
Post-Conference Brief, p. 79.
/12/ No plan conformity or program compliance
issues are raised in this
appeal. Plan conformity issues arise under
section 1116(a) of the Act
with regard to the approval of State plans or plan
amendments. Program
compliance issues arise when the Department seeks
to cut off
prospectively all or part of a state's FFP payments based on a
finding
that the plan no longer complies with the Act or that in
the
administration of the plan there is a failure to comply
substantially
with the Act. Section 1904. 45 CFR Part 213
hearings are provided for
both types of determinations and section 1116(a)(3)
of the Act provides
for U.S. Court of Appeals review of both types of
determinations. See
New Jersey Department of Human Services, Decision
No. 259, February 25,
1982, fn 6 and pp. 16-19. /13/ Section 447.305 of
42 CFR stated: Class
rate
determination. If payment rates are determined for a class
of facilities, the
plan must set forth reasonable criteria for the class
and the methods and
standards for determining the rate of payment for
the
class. /14/ Although it is
conceivable that the budget
numbers were somehow developed from actual prior
year facility costs,
the State did not attempt to give credibility to the
budget numbers by
making this argument. In any event, we do not know
either where the
budget numbers come from or what relationship the budget had
to actual
appropriated
monies. /15/ We recognize that
the concept of
prospective reimbursement is sufficiently flexible to permit a
State to
provide in its State plan for a rate-setting methodology that
would
reflect in the rate changed service requirements, anticipated
cost
increases, or actual circumstances during the rate year.
See
Massachusetts Department of Public Welfare, Decision No. 730, March
20,
1986, and Conference Tr. Vol I, pp. 149-150. Here there is no
express
State plan provision encompassing such adjustments. Moreover,
what the
State did is not the type of adjustment usually contemplated by
such
State plan provisions.
/16/ There is no dispute that the
State-operated facilities delivered
services for 5,193,775 ICF/MR
patient days, and that the State claimed FFP at
the $120 per diem rate
for the actual patient days. Nevertheless, of the
210,605 SOICF patient
days projected in the rate calculation, only 36,154 or
17% of the
projected patient days were actually delivered. The State's
analysis of
the SOICF services concluding that 53% of the projected services
were
delivered was a mathematically flawed calculation. State Reply
Brief,
p. 10, fn 2; Agency Post Conference Brief, p.
7. /17/ As we
have earlier
concluded, as such the rate was not truly a prospective
rate, which is
defined as follows: A payment rate set prospectively is
a rate set for
an accounting period entirely on the basis of cost
reports of provider
facilities and other cost data for earlier
accounting periods, and on
economic forecasts available before the
beginning of the accounting period
for which the rate is paid. 43 Fed.
Reg. 4862, February 6,
1978. /18/ Our overall
conclusion is
consistent with Missouri Department of Social Services,
Decision No.
676, July 31, 1985. In Missouri, the Agency disallowed a
portion of a
per diem rate reflecting a change in the accounting treatment of
unused
vacation leave. The Board upheld the disallowance reaching
several
conclusions of interest here: (1) That it was improper to
include in
the rate charges bearing no relationship to actual base year
expenses.
(2) That failure to adjust the rate would indefinitely skew
the
prospective rate setting system, (3) That there was reason to
question
whether the "Agency had any reasonable notice that the charge would
be
included," and (4) That the prospective rate reflecting these costs
were
not reasonable charges to the Medicaid program under OMB Circular
A-87,
Part I.C.1.a. /19/ We
consider the duplication issues relevant
to the overriding issue here of the
reasonableness of the $120 per diem
rate. The parties briefed the
duplication issues at length; we consider
in our analysis only the most
salient points. Moreover, since in large
part these facilities did not
open and provide services during the rate
year, the parties' dispute over
projected staff placement, etc., for the
100 new SOICFs and 19 converted
SOCRs takes on the air of the classic
debate over the number of angels that
can dance on the head of a pin.
Nevertheless, we examine the parties'
arguments at face value and reach
those conclusions we consider best
supported by the evidence.
/20/ The State used Exhibit 5 from its brief to
support this point. The
State used as one category 987 direct residential
services staff to be
transferred and as the other category 1213 other DC
employees scheduled
for transfer. (Administrative Direction was -
132; Indirect
Residential was - 1100; and Maintenance and
Operation was + 19. This
gives a net decrease of 1213 DC non-direct
care staff.) The total staff
reflected in this exhibit is 2200. This is
due to the State's
calculation that 2200 of the 2616 DC transfers actually
represented base
year DC
positions. /21/ During the
in-person conference the
Board asked whether, mathematically, the duplicated
SOICF costs could be
subtracted from the amount obtained after the DC costs
are multiplied by
the residential percentage. (This would arguably
leave the residential
percentage undisturbed yet permit a separate entry for
the 100 new SOICF
costs.) The State later proposed such a calculation, which
the Agency
did not choose to pursue. The Agency objected to certain
assumptions it
considered implicit in the State's calculation. (One of
the Agency's
points was that the State offered what was in fact a "split
the
difference" calculation.) State's February 26, 1985 letter and
Agency's
March 22, 1985 letter. We see no obligation on either party to
pursue
alternative ways to calculate the rate at
issue. /22/ The
State
asserted that the Agency had not factored in all costs that would
go
into the calculation of the residential percentage when it
concluded
that community services staff were 11% of staff services in the
base
year, thus making the DC-only employee categories 96-97%
residential
inpatient care. The State asserted that community services
was actually
8% so that at most the DC staff categories were 92% inpatient
care. As
we note below, this relates to the question of whether the
planned
transfer of DC staff would affect the residential percentage.
/23/ We
know that the staff
actually employed at the five new SOICFs
actually opened during the rate year
consisted of, in full time
equivalent positions: 33.9 new hires 52.5
former DC employees 3.8
former SOCR employees 10.6 from other Community
Services staff 100.8
employees We do not consider this information of real
use here. The
State did not actually track the transferred positions
and, given the
attrition and general movement between jobs that the State
asserted
existed for its employees, information about the persons employed in
the
few new SOICFs actually opened really tells us nothing about
the
anticipated transfer of DC positions and the resulting effect on
the
rate calculation. This same information is given for the
converted
SOCRs. For the reasons stated here, we do not consider it
significant
for our later discussion of the converted SOCRs. State
Appendix, Ex.
19. /24/ The
State ultimately did not disagree with the total
staff number for the new
SOCRs. Rather, the State said that 361 of the
staff needed for the new
SOCRs would come from new rate year community
service positions, with the
rest out of other existing community service
jobs. The dispute over whether
the new SOCRs required 361 or 572 staff
seems largely moot since State wanted
to delete 361 + 194 staff costs
from the DC costs albeit at a 50% phase in
(State Brief, Revised Ex. 8)
while the separate entry SOCR costs are
calculated based on the full
cost amount assuming SOCR facilities converted
at the beginning of the
rate year. Moreover, the Budget showed
projected new SOCR client
placements to be 787 and the SOCR average rates to
be .75 staff per
client. Budget, pp. 326 and 330. This results in
a projected staff of
590.25 which is at least close to the 572 number used by
the Agency.
Although the State argued that the staffing rate is an average
not a
minimum, we see no reason to accord this factor significance in
this
context. /25/ We
disagree with the State's contention that this
reference pertains only to
voluntary facilities. It occurs in the
section discussing ICF/MR
services which referred in general to both
voluntary and State operated
facilities. We see no reason, in context,
to read this reference as the
State does. State Post-Conference Brief,
p.
21. /26/ The auditors and HCFA
agreed to include bond
interest expenses, because they found this item had
been part of the
documentation originally developed to support the rate, but
that it had
been dropped when transferring numbers in schedules internal to
the
documentation. This was viewed as an "arithmetic error" related to
a
cost already claimed, as distinct from a claim of a new cost item.
Audit
Report, p. 15; Conference Tr. Vol. II, p. 210. New York
argued,
in effect, that HCFA was promoting a distinction without a
difference
supported in law or regulations. State Brief, p. 34. We
disagree for
two reasons. First, it is clear that the auditors themselves
discovered
the bond interest error, whereas they did not discover the
overhead
costs error (only New York did). Second, the record indicates
that the
bond interest error was obvious from the face of the documents
the
auditors were reviewing; the same cannot be said for the overhead
costs
error. While the two cost items arguably have a common characteristic
--
i.e., both might be viewed as involving errors related to costs
included
in the rate calculation -- that is a coincidence with no
meaning. In
reality, the overhead costs are simply another
countervailing cost item
which New York itself developed after-the-fact, and
so fall squarely
within our determination here that HCFA should be able to
review these
costs just as if New York were otherwise making an adjustment
based on
arithmetic error for the first
time. /27/ Overhead costs
were
dealt with separately by the State in briefing before the Board,
because
"we felt that was actually ripe for decision, but it doesn't make
much
difference either way." Conference Tr. Vol. II, p. 187. We discuss
this
particular cost item below. a Included in these amounts are
$19,092,671
of general salary increases for which we cannot render an
opinion. b
Difference involves unallowable court ordered expenses of
$1,025,972
(Personal Service $963,722 and OTPS $62,250). c We were unable to
render
an opinion as to the accuracy of reasonableness of the
depreciation
costs. d Represents DC costs sub-total multiplied by the
residential
percentage of 85.258394777. Other DC costs were included in
OMRDD's
computation of residential costs at 100 percent rather than
multiplied
by the residential percentage. It is OMRDD's opinion that
these costs
are 100 percent inpatient. However, we disagree and have
multiplied the
residential percentage times all DC costs. e This figure
($2,566,281) is
not the exact difference between 100 percent and 85.2584
percent because
we have excluded parts of certain DC costs as unallowable. f
For the
1980-81 period, OMRDD claimed Medicaid reimbursement for
5,193,775
client days. Therefore, the overstated rate resulted in a
Medicaid
overcharge of $43,991,274 ($8.47 x 5,193,775) of which the Federal
share
was $21,995,637.