GAB Decision 400
Docket Nos. 82-151-MD-HD, 82-210
March 29, 1983
Maryland Department of Health and Mental Hygiene;
Ford, Cecilia; Settle, Norval Teitz, Alexander
The Maryland Department of Health and Mental Hygiene (State) appealed
from two determinations by the Health Care Financing Administration
(Agency), disallowing certain of the State's claims for federal
financial participation (FFP) under Title XIX of the Social Security Act
(the Medicaid program).One disallowance involved claims for the quarter
ended March 31, 1981, and represented prior period adjustments for
fiscal years (FY) 1978, 1979, and 1980. These adjustments reflected the
value of a 2% discount in the cost of inpatient hospital services;
participating hospitals offered the discount in return for advances of
working capital made to the hospitals by the State. The claims amounted
to $3,329,278 in FFP. The second disallowance involved claims for the
quarters ended September 30, 1981 and December 31, 1981, and represented
FFP in working capital advances which were provided to hospitals during
those quarters. The claims amounted to $8,379,248 and $2,222,822
respectively.
The parties requested that the Board consider the two appeals jointly
because the questions were integrally related. The Board agreed to do
so, and the parties filed consolidated briefing.
The Agency disallowed the claim for the value of the 2% discount on
the grounds that (1) it did not represent expenditures of funds under
the Social Security Act, and, therefore, could not qualify for FFP; and
(2) that it represented an applicable credit under federal cost
principles and must be deducted from allowable costs. The Agency
disallowed the claim for FFP in the working capital advances on the
grounds that (1) the State plan did not provide for the working capital
advances or the 2% discount received as a result; and (2) the working
capital advances were not reimbursement for medical assistance under the
Social Security Act, but loans to assist providers in their daily
operations.
(2) The State asserted that the Agency had approved the use of
working capital advances and the 2% discount in costs of inpatient
services when the Agency approved the waiver which allows the State to
conduct a rate setting experiment for reimbursing hospitals for the
costs of services to Medicaid recipients. The State appealed these
disallowances on the grounds that the discounts in the cost of Medicaid
services were offered in return for the working capital advances, and,
therefore, the working capital advances were related to Medicaid and
were eligible for FFP under the Social Security Act. The State argued
that providing the working capital advances cost the State approximately
2% in lost interest which the State would have earned on the funds
advanced, and that the Agency must either share in the costs
attributable to the working capital advances or forego the discounts
attributable to the advances.
We conclude that the State cannot claim the value of the 2% discount
as "medical assistance payments" under the Social Security Act because
that amount is not actually expended by the State for "medical
assistance." We further conclude that the Agency never specifically
agreed to participate in the working capital advances and that the
working capital advances themselves, although the prerequisite to
receipt of the 2% discount in cost of services, were not specifically
expenditures for "medical assistance," and therefore, the Agency is
not
bound to participate in them. Our decision to uphold these
disallowances is based on review of the Agency determinations and the
issues placed before this Board.
The State has indicated, however, that the waiver contract under
which the State provided the working capital advances and obtained a 2%
discount in the cost of Medicaid services was entered into voluntarily
and that the State would be reluctant to continue a practice which
caused it to operate at a loss. It appears that there may be some
alternatives to the financing remedies proposed in this appeal and it is
possible that the parties could benefit from further exploration of
those alternatives. Our decision here does not preclude the parties
from entering into further discussions about alternative methods of
financing the State's administration of Medicaid. /1/
(3) This decision is based on the written record, and a telephone
conference call, held March 18, 1983, in which the parties made oral
arguments and responded to questions raised by the Board.
Statutory and Regulatory Background
Title XIX of the Social Security Act (the Act), 42 U.S.C. 1396 et
seq., 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 of the
Act. 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).
A state thereupon becomes entitled to federal funds reimbursing a
percentage of the expenditures which the state has made in providing
medical assistance to eligible individuals under the State plan, in
accordance with federal conditions. Section 1903(a)(1). The term
"medical assistance" is defined by Section 1905(a) as payment for
part
or all of the costs of care and services itemized in the provision.
(4) The Agency's regulations implement these statutory provisions at
42 CFR Part 435, Subpart K (1980). The applicable regulation says, in
part:
... FFP is available in expenditures for Medicaid services for all
recipients whose coverage is required or allowed under this part.
42 CFR 435.1002(a).
Facts
The Stateh Medicaid program operates under a waiver of Medicaid
reimbursement principles which the Agency first granted in 1977. This
waiver allows the State to participate in a "hospital prospective rate
setting experiment." (Exhibit 5) That experiment involves reimbursing
costs of inpatient hospital services by means of prospective rates
reviewed and approved by the Maryland Health Services Cost Review
Commission (HSCRC), rather than using rates developed under federal and
State regulations which normally control reimbursement to hospitals for
Medicare and Medicaid services. The Agency renewed the waiver on a
yearly basis until 1980, when it granted a waiver for a three-year
period (Exhibit 5). The waiver took the form of a contract (No.
600-76-0140), issued by the Agency and agreed to by the State. A 1978
amendment to that contract (Exhibit 1) contained the amended rules of
the HSCRC. These HSCRC rules were also promulgated as State
regulations.
All hospitals participating in the Medicaid program and this
experiment submit data on base and budgeted years, using a uniform
accounting and reporting system. The HSCRC then approves rates which
are based on this data. The rates are prospective and are periodically
adjusted for inflation, volume changes and other factors. (See State
plan, revised 1981, Exhibit 7) the HSCRC's rules include provisions for
"payor differentials." The rules on differentials include a section
entitled Working Capital Differentials -- Payment of Charges (Code of
Maryland Regulations, 10.37.10.26.B). That section states:
(5) (1) A third-party payor may obtain at any time a 2 percent
discount in the rates established by the Commission if it provides
current financing monies in an amount equal to the sum of the following
items:
(a) the amount of outstanding charges due from the payor accrued as
of the date of billing.
(b) the average daily charge made to the payor multiplied by one half
of the average length of stay of the patients underwritten by the payor
at the particular hospital.
Thus, a particular payor may obtain a 2% discount in the amount it
pays for services to its patients by providing a working capital advance
in an amount determined according to the above formula. In the case of
Medicaid, the State agency provides the working capital advances /2/
and, in return, receives a 2% discount in the cost of the services the
hospitals provide to Medicaid patients.
(6) The State agency provided working capital advances to
participating hospitals during the quarters for which the claims were
made. In return, the State received a 2% discount on the cost of
services provided to Medicaid recipients by those hospitals. The State
then billed the Agency for the amount it paid to the hospitals, in order
to claim FFP. Subsequently, the State filed a claim for the value of
the 2% discount it had not previously claimed; it also filed claims for
the working capital advances. The Agency disallowed those claims.
Statement of the Issues
The State argued that the working capital advances were expended
pursuant to the State plan, which the State alleged incorporates the
waiver contract regarding the State's rate setting experiment.
Furthermore, the State alleged that the experiment and the waiver
contract itself specifically provide for working capital advances and
corresponding discounts. Therefore, the State argued, FFP should be
available in the working capital advances. The State further argued
that if the Agency does not participate in those advances, it should not
receive the benefit of the 2% discount. Finally, the State alleged that
the 2% discount it receives closely approximates the amount of interest
lost by the State when it advances the funds to hospitals.
The Agency argued that the working capital advances do not represent
payments to the hospitals related to services to Medicaid beneficiaries
because the payments are loans, and that FFP is limited to "medical
assistance" for services to eligible recipients. Furthermore, the
Agency argued that regardless of whether it participates in the working
capital advances, it must receive the benefit of the 2% discount because
the Social Security Act provides that the Agency participate in the
amount "expended" and that the State did (7) not expend the 2% which
it
received as a discount. The Agency also pointed out that such a
discount would be considered an applicable credit, as defined in Federal
Management Circular (FMC) 74-4 (now Office of Management and Budget
(OMB) Circular A-87), and therefore, must be deducted from costs
claimed, under the same FMC.
Thus, the issues presented in these appeals are:
whether the State may claim the cost of inpatient hospital services
provided to Medicaid recipients without deducting the 2% discount
provided to the State by the hospitals.
whether the Agency must participate in the working capital advances.
The Relationship Between the 2% Discount and the Working Capital
Advances and Its Relevancy to the Issues Presented Here
The parties agreed to consolidate these appeals because the questions
concerning the 2% discount and the working capital advances are
integrally related. We agreed to consider the appeals jointly, not only
because the State has argued that the Agency cannot refuse to
participate in one and then benefit from the other, but because the
waiver contract sets up an integral relationship between the advances
and the discount, and because a proposal the State submitted to the
Agency, concerning certain aspects of the rate setting experiment, also
set out specifically the relationship between the two.
The rate setting experiment was the subject of the waiver contract.
A 1978 amendment to the contract contained the amended rules of the
HSCRC, which include specific descriptions of payor differentials,
including working capital differentials (discounts). The Maryland Code
of Regulations also includes such provisions, and, therefore, we infer
that the State plan, as approved, would include references to the
working capital differentials by incorporating the Maryland Code and the
waiver contract. Furthermore, the State submitted a proposal to the
Agency in January 1980 which specifically addressed the discounts
(Exhibit 3). That proposal explained that a 6% discount from the
charges approved by the HSCRC was available to the Medicare and Medicaid
programs in the State, and that 2% of the discount was in (8) return for
the State providing working capital advances to the hospitals. The
State's request for an extension of the waiver, made by letter in June
1980, referred the Agency to the January proposal for a description of
the rate setting experiment (Exhibit 4). Finally, the Agency's 1980
approval of the waiver for three years included a condition which stated
that the present payor differential for Medicaid contained in the
contract would remain in effect until a revised differential is
submitted and approved (Exhibit 5).
The Agency has admitted that the HSCRC rules were part of the 1978
amendment to the waiver contract; those rules refer specifically to a
2% discount to be provided in exchange for capital advances.
Furthermore, the Agency has not denied knowledge of the proposal
submitted by the State and the State's letter referring to the proposal
and requesting an extension of the waiver. Although the Agency did
question, during the telephone conference call held March 18, 1983,
whether the payor differential provisions referred to Medicaid, the
Agency's letter approving the extension of the waiver for three years
specifically refers to the payor differentials contained in the contract
as applicable to Medicaid. Therefore, we can conclude that the
provisions referring to working capital differentials and the 2%
discount, which were incorporated into the 1978 amendment to the waiver
contract, were approved in the Agency's 1980 letter extending the waiver
for three additional years.
Thus, we believe that the Agency was incorrect when it asserted that
the State plan did not provide for working capital advances and a 2%
discount, because the waiver contract and the Maryland Code specifically
refer to them. Furthermore, we do not believe that the intent of the
Agency with regard to the meaning of the payor differential provisions
included in the waiver contract is relevant here, since that provision
is unambiguous. The Medicaid program is a "payor," and it is receiving
the benefit of the 2% discount. Thus, we think that the issues here do
not concern whether there was a relationship between the advances and
the discount, or whether the State could use such a method, but rather,
whether the existence of the relationship between the working capital
advances and the 2% discount, and the specific provision in the waiver
contract referring to them, make the State's claims allowable as
reimbursable expenditures under the Medicaid program.
(9) Thus, in summary, a working capital advance does bear a
relationship to Medicaid services in some respects. The Medicaid
program receives a 2% discount only if working capital advances are
provided to the participating hospitals. The amount of the advances are
figured from a formula which includes the amount of outstanding charges
due from the Medicaid program and the average daily charge times
one-half the average length of stay of Medicaid patients. The advance
is not directly related to the total amount of costs and services billed
by the hospital for Medicaid patients, and it is not based on estimated
costs for the year. Finally, there is no offset of the advance against
the charges for Medicaid patients.
The 2% Discount
The State argued that if the Agency refuses to participate in the
working capital advances, then it should not be able to benefit from the
2% discount which the State receives. The State argued that the
discount bears a direct relation to the amount of money it costs the
State to provide the working capital advance in the first place and that
the Agency benefits from that scheme.
The Agency argued that the State did not actually expend the 2% on
medical assistance and, therefore, cannot claim FFP in that 2% and cited
section 1903(a)(1) and 42 CFR 435.1002(a) as support for its position.
Furthermore, the Agency asserted that the 2% discount is a credit and
must be deducted from the costs; therefore, it could not be claimed.
The Agency has incorporated general federal cost principles at 45 CFR
74.171 (1981), which refers to FMC 74-4 (now OMB Circular A-87).
Section C.3.a. provides:
a. Applicable credits refer to those receipts or reduction of
expenditure-type transactions which offset or reduce expense items
allocable to grants as direct or indirect costs. Examples of such
transactions are: purchase discounts....
Section C.1.g. provides:
(10) To be allowable under a grant program, costs must meet the
following general criteria:
* * *
g. Be net of all applicable credits.
Although the State questioned whether the waiver contract waived only
Medicaid reimbursement principles or all cost principles, the State did
not claim that it actually expended the 2% for medical assistance. /3/
Therefore, with regard to the amount claimed by the State as the value
of the 2% discount, we must find that the amounts are not expenditures
for medical assistance under the applicable law, and, therefore, cannot
be claimed under the Act.
The Working Capital Advances
The State argued that the working capital advances are based directly
on services provided to Medicaid recipients and that the hospital gets
2% worth of benefit by avoiding cash flow problems associated with
billing and payment for services rendered. Furthermore, the advances
trigger the 2% discount from which the Agency receives a benefit.
Finally, the State argued that the Agency has aproved the working
capital advances because they were incorporated in the waiver contract
and in the State plan (see above).
The Agency argued that State expenditures must be related to
beneficiary services by being included within the items defined as
medical assistance in section 1905(a) of the Act. Therefore, the Agency
asserted, in order to qualify as medical assistance, allowable state
payments to hospitals must represent reimbursement for rendering
services to Medicaid patients. The Agency argued that the advances are
(11) loans intended to alleviate cash flow problems, and do not bear any
other relationship to services for recipients. The Agency also argued
that even if the waiver contract and State plan provided for working
capital advances, the Agency was unconcerned with that aspect of the
experiment, because nothing in the waiver contract or elsewhere required
the Agency to participate in providing the advances or otherwise
participate in their cost.
The State admitted that there is no direct relationship between the
advances and billing for Medicaid services, and that no offset is made
of the advances against the amounts billed for Medicaid. There is a
relationship between the amount hospitals receive as advances and
Medicaid charges, as a result of the formula set out in the payor
differentials. We conclude, however, that the provision of working
capital advances in return for a 2% discount, and the use of a formula
which takes into account the Medicaid charges incurred at particular
hospitals, is not enough to transform these advances into expenditures
for "medical assistance." We can find no direct connection between
the
amounts paid to hospitals through rates approved by the HSCRC and the
working capital advances. The advances truly seem to be monies provided
to ease the hospitals' administration of Medicaid services. The
hospitals may retain the advances for several years at a time, under the
rollover technique used by the State. Therefore, we cannot conclude
that the advances are "medical assistance," as defined by section
1905(a) of the Act.
The waiver contract does specifically refer to the working capital
advances and the 2% discount. However, nothing in the waiver contract
or State plan requires the Agency to participate in providing the
working capital advances or to participate otherwise in their cost.
Therefore, we cannot find that the Agency must participate in the
working capital advances as "medical assistance."
Conclusion
We conclude that the above disallowances should be sustained as
follows: Docket No. 82-151-MD-HC: $3,329,278, Docket No. 82-210:
$10,602,070. This does not preclude the (12) parties from entering into
further discussions about alternative methods of financing the working
capital advances. /1/ The State reminded the Board during oral argument
that it was flexible with regard to how the Agency participated
in the working capital advances, and that it would consider other
remedies besides the ones specifically requested. We think that a
possible solution to the problem raised by the State might be available
if the State could offer documentation of the amount of interest it
loses by providing the advances. The Agency indicated in the course of
this appeal that such a cost might be considered an allowable
administrative cost; however, the cost to the State of providing the
advances needs to be more clearly identified and quantified before it
could be claimed as an allowable administrative cost under the Act. The
State has not yet proposed this or other possibilities to the Agency,
and, therefore, the issue is not before this Board. Thus, we will not
address it further. As stated above, this does not preclude the parties
from pursuing discussions of that option. /2/ The monies used to
fund these working capital advances are appropriated to the State agency
(Department of Health and Mental Hygiene) by the General Assembly (State
legislature) at the beginning of a fiscal year. The State agency pays
out the money to participating hospitals, based on the formula set out
above, and then rolls over the advances from year to year. This means
that, to the extent that a hospital is entitled to a working advance in
subsequent years, it would retain the money either until such time as it
ceased participating in the program, or if certain other special
circumstances not relevant here occurred. A hospital is not necessarily
entitled to the same amount of money each year because the amount
advanced is based on a formula. If it is due to receive an amount
different from the previous year, an adjustment is made. The total
adjustments made to hospitals are also reflected in the amounts
appropriated to the State agency each fiscal year. However, to the
extent that a hospital is still entitled to a particular portion of the
original advance, it does not refund that money, but rolls it over to
the following year. At the end of a fiscal year, the money appropriated
to the State agency for this purpose is technically returned to the
General Assembly, and then the adjusted sum is reappropriated the
following fiscal year. This is only a bookkeeping adjustment for
accounting purposes; the money actually remains in the hands of the
participating hospitals. /3/ There is no question that the 2%
discount would fall within the definition set forth in section C.3.a.,
if it is applicable. The letter approving the waiver specifically
refers to Medicaid reimbursement principles, and we think it is unlikely
that generally applicable cost principles would be waived unless also
specifically mentioned.
SEPTEMBER 22, 1983