DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: Texas Dept. of Human Services
Docket No. 88-53
Decision No. 981
DATE: August 31, 1988
DECISION
The Texas Department of Human Services (State) appealed a determination
by
the Health Care Financing Administration (HCFA, Agency)
disallowing
$17,391,217 in federal financial participation claimed by the
State
under title XIX (Medicaid) of the Social Security Act (Act).
HCFA
disallowed the costs of adjustments made in 1987 which
retroactively
increased the per diem rates used to reimburse State-owned
intermediate
care facilities for the mentally retarded (ICFs/MR) for
services
provided during calendar years 1985 and 1986. The disallowance
was
based on HCFA's determination that the retroactive rate increases
were
not made in accordance with the approved State title XIX plan
provisions
applicable to the 1985 and 1986 rates. Section 1902 of the
Act and
implementing regulations require that a state include in its
Medicaid
plan methods and standards for determining rates of
reimbursement.
Federal funding for ICF/MR services is available under section
1903(a)
only for amounts expended "under the State plan. . . ."
For the reasons discussed below, we find that there was no authority
for
the rate increases in the provisions of either State plan.
Accordingly,
we uphold the disallowance.
An additional basis for the disallowance of costs pertaining to
the
quarter ending March 31, 1985 was that the State's claim was not
filed
within two years after the end of the quarter in which the costs
were
incurred, as required by section 1132 of the Act. The State
conceded
that the claim was not timely. Letter from Leche to Kaufman
dated
August 3, 1988. Accordingly, we uphold the disallowance of the
first
quarter costs on this basis as well.
Applicable Requirements
The calculation of per diem rates for ICFs/MR is governed by
section
1902(a)(13) of the Act, which requires a state plan to provide--
(A) for payment . . . of the . . .
intermediate care facility
services provided under
the plan through the use of rates
(determined in
accordance with methods and standards developed by
the State. . .) which the State finds . . . are reasonable
and
adequate to meet the costs which must be
incurred by efficiently
and economically operated
facilities. . . .
Section 1902(a)(30) requires the state plan to--
provide such methods and procedures relating to . .
. the payment
for . . . care and services
available under the plan . . . as may
be necessary .
. . to assure that payments are consistent with
efficiency, economy, and quality of care.
Implementing this provision, 42 C.F.R. 447.252 (1983-86) requires that
the
state plan specify comprehensively the methods and standards used by
the
state agency to set payment rates. The regulations also require a
state
Medicaid agency to pay for services "using rates determined in
accordance
with methods and standards specified in an approved State
plan." 42
C.F.R. 447.253(g) (1983-86).
The methods for calculating the 1985 and 1986 rates were governed
by
different versions of the State plan. The plan in effect
through
December 31, 1984 governed the calculation of the 1985 rate.
Attachment
4.19-D of that plan established a prospective rate-setting
methodology
for ICFs/MR based on financial and statistical information
submitted in
facility cost reports. Section 4 of the Attachment,
captioned "Rate
Setting Methodology," specifically provided for--
selecting the projected per diem expense times
1.07 from each
cost area within each
class of services which corresponds
with
the median Medicaid day of
service, and summing the cost area
amounts
to determine the per diem reimbursement.
Respondent's appeal file, Ex. B.
The calculation of the 1986 rates was governed by the State plan
as
amended effective January 1, 1985. That plan required the
same
calculation described above, but indicated that the per diem
rate
determined in this manner was a "reference point" for the Department
of
Human Services Board, which would--
evaluate financial and statistical
information derived
from
the cost report and determine
a reimbursement rate which
will
reasonably reimburse the cost
of an economic and efficient
provider.
Respondent's appeal file, Ex. C.
Background
Prior to (or at the beginning of) each rate year in question here,
rates
for the ICFs/MR were calculated using costs and patient days from a
base
year two years before the year to which the rate applied. The base
year
costs for each facility were divided into several cost areas,
adjusted
for inflation and other "trending factors," and divided by base
year
patient days. The State then selected the projected per diem
expense,
in each cost area, which was the median amount for all facilities
in
each ICF/MR class, multiplied the median amount by an
appropriate
percentage (specified as 1.07 in the first State plan), and
summed up
the resulting amounts for each cost area to arrive at a per diem
rate
for all facilities in that class.
On March 26, 1987, the Texas Board of Human Services approved
retroactive
rate adjustments for 1985 and 1986 requested by the Texas
Department of
Mental Health and Mental Retardation (TDMHMR), the State
agency which
operated the ICFs/MR in question here. In recalculating
the rates in
1987, the State substituted rate year (i.e., 1985 and 1986)
patient days for
base year patient days in the rate calculations.
The Board of Human Services approved the rate increases on the
ground
that, in originally setting the rates, it had failed to take
into
account the impact of a federal district court order dated June 5,
1985.
That order required the State to "deinstitutionalize" a
significant
number of residents of the ICFs/MR (i.e., move them out of the
large
State facilities) while requiring increased staff-to-client ratios
for
the remaining residents. The State contended that patient
days
decreased from the base years to 1985 and 1986 as a result of the
court
order. The State also contended that, since there was no
corresponding
decrease in ICF/MR costs, the effect of the decrease in patient
days was
that the facilities were reimbursed for less than their actual
costs.
The rate increases closed the gap between actual costs and
reimbursement
to some extent, but there was still a substantial deficit,
according to
the State.
Parties' Arguments
HCFA took the position that the State could not properly revise its
per
diem rates absent specific authority in the State plan, which
HCFA
asserted was lacking. It argued, moreover, that the amended State
plan
in fact prohibited revision of the 1986 rate, citing the statement
in
that plan that "[s]ince this is a prospective reimbursement
system
without a provision for reconciliation, amended cost reports filed
after
the actual rate determination have no effect on the rate and will not
be
accepted." Respondent's appeal file, Ex. C, Attachment 4.19-D,
section
3 (emphasis added). It also contended that, by definition, the
per diem
rate "must be the result of a mathematical calculation which uses
not
only the costs of the base year, but also the patient days of the
base
year." Respondent's brief, p. 13.
The State argued that its State plans were "purposefully silent
regarding
the derivation of the patient day statistic [in order] to
provide DHS with
sufficient discretion in establishing reasonable rates.
. . ." Appellant's
reply brief, p. 8. The State argued further that its
customary practice
was to use an estimate of patient days which "closely
reflected" the
anticipated patient days for the rate year. Id. The
State
contended that, inasmuch as a good estimate would have taken into
account the
deinstitutionalization required by the court order, the rate
increases merely
represented the correction of an administrative error,
for which there was
some precedent. The State maintained that, despite
this "correction,"
it still had a prospective reimbursement system as
required by the State
plans since its methodology included various
limits on costs and the
facilities were not in fact reimbursed for their
actual costs. Finally,
the State argued that if the rate increases were
not permitted, it would be
in violation of section 1902(a)(13) of the
Act since the providers would not
be reimbursed their reasonable costs.
Discussion
We are not persuaded that the State plans can reasonably be read to
permit
the use of a figure other than base year patient days in
calculating the
ICF/MR per diem rates. While a state's interpretation
of its own state
plan is entitled to some deference, closer scrutiny is
required where, as
here, the interpretation increases the rate paid to
public providers, since
that increases FFP to the state without its
incurring any additional
expense. See Massachusetts Dept. of Public
Welfare, DGAB No. 730
(1986); DGAB No. 867 (1987).
The fact that neither State plan specifically states how the patient
day
figure used in calculating the per diem rate is to be derived does
not
mean that the State may use any figure it chooses. The costs used
in
the rate determination process come from provider cost reports for
the
year designated as the base year. Patient days from the base year
must
also be reported. The reported information is subject to audit and
the
data is recast "to determine per diem allowed expense."
Respondent's
appeal file, Exs. B, C. The logical means of determining
this is to
divide actual allowed expenses from the base year by the patient
days of
service actually provided that year, for each facility.
In addition, there are explicit provisions in both State plans
for
projecting anticipated increases in costs, from the base year to
the
rate year, prior to including them in the rate calculation. There
is no
mechanism in the plans, however, for projecting any anticipated
change
in patient days from the base year to the rate year. This
indicates
that the use of the base year patient day figure throughout the
rate
calculation was contemplated. Moreover, the use of other than base
year
patient days is inconsistent with the provision in the plans for
taking
the median per diem expense from each cost area to determine the
overall
rate. If the rates for individual facilities were calculated
in
different ways--using a figure lower than base year patient days
for
those facilities experiencing a decline in patient days and a
higher
figure for facilities in which patient days were increasing--there
would
be no true median rate because the figures used for the facilities
would
not be comparable and would not truly reflect how efficiently
each
facility had operated in the base year.
Accordingly, we conclude that the operation of the State plan
rate
provisions as a whole required the use of base year patient days
in
calculating the rate.
Furthermore, the interpretation of the plan provisions which the
State
advanced here is suspect since there is no evidence that the
State
previously interpreted them in this manner. An official of the
Texas
Department of Human Services testified at the hearing in this case
that,
to his knowledge, the State had never, except in this instance, used
a
patient day figure other than base year patient days as reported
or
actually billed. Transcript of July 20, 1988 hearing (Tr.), pp.
59-60.
In addition, the State acknowledged that there were no
written
interpretations of the plan provisions which might have supported
its
view. State's brief dated July 6, 1988, p. 11. The State also
failed
to provide any testimony from individuals involved in drafting the
plan
provisions to show that their intent was to allow the use of other
than
base year patient days. Accordingly, we find that the
State's
"interpretation" of the plan provisions is nothing more than
an
after-the-fact attempt to justify increased payments to the ICFs/MR.
In view of our conclusion that the State plan provisions did not
permit
the use of other than base year patient days in calculating the per
diem
rates, we do not reach the question whether a per diem rate
by
definition equals base year costs divided by base year patient days,
as
contended by HCFA. We note, however, that the use of base year
patient
days is at least consistent with the concept of a
prospective
rate-setting system, discussed further below, as one which sets
rates in
advance.
Even if the State had been free to use other than base year patient
days
in calculating the rates, we further find that it was not proper for
the
State to recalculate the rates after they had been set, by
substituting
rate year patient days for base year patient days. The
purpose of the
prospective rate-setting methodology which the State used is
to set a
rate in advance which gives providers an incentive to keep costs
down.
As the Board stated in Massachusetts Dept. of Public Welfare, DGAB
No.
830 (1986), that purpose "is defeated if adjustments to reflect
actual
costs are available in any case where the prospective rate does
not
reimburse the provider for all costs incurred. . . ." (p. 5)
Thus, in
that decision, the Board narrowly construed State plan provisions
which
permitted rate adjustments. Here, where there were no provisions
in the
State plans which addressed the adjustment of rates, the better view
is
that no adjustments were permitted, since that view is more
consistent
with a prospective rate system than the State's view that it
had
complete discretion to make adjustments.
That the providers in this case may not have been fully reimbursed
for
actual costs even after the rate increases does not change the fact
that
unbridled discretion to adjust rates undermines the purpose of
a
prospective reimbursement system. In any event, although the
statute
provides for reasonable and adequate rates, it does not
guarantee
reimbursement of actual costs. Moreover, the State cannot
complain that
its rate-setting methodology did not provide for full
reimbursement
under the circumstances here since it could have adopted a
system which
provided for reconciling estimated costs with actual
costs. See
Arkansas v. United States, No. 150-85C (Ct. Cl. February 20,
1986).
Finally, we note that the Agency's position that the language in
the
amended plan to the effect that "this is a prospective
reimbursement
system without a provision for reconciliation. . . ."
prohibits
subsequent rate adjustments is not unreasonable in view of
the
concession of a State official that this language was "a little
bit
ambiguous." Tr., p. 37.
The State took the position, however, that it was merely correcting
an
administrative error in the calculation of the rate, comparable
to
changing the inflation factor from 1% to 11% where a digit
had
originally been dropped. It is arguable that no explicit authority
is
required for the correction of an essentially clerical error such
as
this. The failure to take into account the effect
of
deinstitutionalization was not a clerical error with an obvious
remedy,
however. Instead, the State sought to take into account a new
factor
which could not be readily quantified. Accordingly, we reject
the
State's argument that it was merely correcting an administrative
error,
and find that its substantive revision of its prospective per diem
rates
was not authorized by either State plan.
The State also cited as precedent for its action the revision of a
nursing
home rate (which was established pursuant to State plan
provisions comparable
to those in question here) to utilize a lower
inflation factor, following the
Agency's determination that the factor
originally used was
unreasonable. The State argued that
deinstitutionalization was, like
inflation, a "trending factor." The
actual practice followed by a
state in rate-making may be evidence of
its interpretation of relevant state
plan provisions. See South Dakota
Dept. of Social Services, DGAB No.
934 (1988). However, it is not clear
that an action taken by the State
at the Agency's behest is evidence of
the State's interpretation of its own
plan. In any event, we are not
persuaded that the nursing home rate
revision, which was based on
objective cost measurements such as the Consumer
Price Index, is a
precedent for the rate increases here.
The disallowance can also be supported on the ground that the record
does
not clearly establish that there was a factual basis for the
rate
increases. The Agency questioned whether there was a net decrease
in
1985 and 1986 patient days over base year patient days. While the
State
denied the Agency's suggestion that deinstitutionalized patients
from
the ICFs/MR affected by the order entered other ICFs/MR, it failed
to
document that there was a net decrease taking into account all
ICFs/MR.
In addition, the State did not explain why it was unable to reduce
any
ICF/MR costs prior to 1985 to take into account the decreased
patient
population. Thus, the rate increases might not have been
necessary to
pay the "costs which must be incurred by efficiently and
economically
operated facilities. . . ." See Massachusetts Dept. of
Public Welfare,
DGAB No. 853 (1987).
Finally, even assuming that the State was authorized to adjust
its
rates once set, we find that the State did not in fact adjust the
1986
rate in accordance with the methods specified in the amended State
plan.
That plan required that the Human Services Board provide a process
for
considering a proposed rate, evaluate the reported costs and
statistics,
and approve "a reimbursement rate which will reasonably reimburse
the
cost of an economic and efficient provider." An official from the
Texas
Department of Human Services testified that the rates were
recalculated
using actual patient day figures provided by TDMHMR, and that
there was
no analysis of what reimbursement would result. Tr., pp. 54,
76-77.
Accordingly, even if recalculation of an already established rate
were
permitted, we would be required to sustain the disallowance of the
costs
relating to the 1986 rate on the ground that the State did not
comply
with the method for determining the rate specified in the amended
plan.
Conclusion
For the reasons discussed above, we sustain the disallowance in the
amount
of $17,391,217.
________________________________ Cecilia Sparks Ford
________________________________ Alexander G. Teitz
________________________________ Judith A. Ballard
Presiding
Board