Michigan Department of Health and Human Services, DAB No. 3138 (2024)

DECISION

This consolidated case arose from two 2018 decisions by the Centers for Medicare & Medicaid Services (CMS) disallowing $195,662,968 in federal financial participation (FFP) for Medicaid disproportionate share hospital (DSH) payments, which supplement what hospitals receive for covered medical services furnished to low-income patients in accordance with a state’s standard Medicaid rates, made by the state of Michigan to two state-owned psychiatric hospitals:  the Center for Forensic Psychiatry (CFP); and a now-defunct psychiatric hospital located within Huron Valley Center (HVC Hospital), a Michigan Department of Corrections (MDOC) facility.  When the DSH payments at issue were made, Michigan Department of Community Health (DCH) – the state agency responsible for administering Michigan’s Medicaid program and which was later merged into the Michigan Department of Health & Human Services (MDHHS) – operated both hospitals.

CMS disallowed $177,262,968 in FFP for DSH payments made to CFP during federal fiscal years (FFYs) 2001 through 2009, and $18,400,000 in FFP for DSH payments made to HVC Hospital during FFY 2001.  As grounds for disallowing FFP, CMS asserted, chiefly, that the hospitals were ineligible for Medicaid DSH payments during the relevant years because neither hospital:  (1) had a provider agreement with Michigan’s Medicaid agency showing that the hospital met all applicable conditions of participation; (2) was certified as meeting Medicare conditions of participation applicable to psychiatric hospitals; and (3) had a “Medicaid inpatient utilization rate” (MIUR) of at least one percent to be eligible to receive Medicaid DSH payments.

MDHHS, the state Medicaid agency (State), timely appealed both disallowance decisions.  In general, the State contends that CMS has no lawful basis for the disallowance decisions or relied on an interpretation of the Medicaid statute and regulations about which the State lacked timely and adequate notice, and that the State relied upon its own reasonable interpretation of applicable authorities in making the DSH payments to the hospitals.  The parties disagree about, among other things:  whether CMS could lawfully take disallowances in 2018 on DSH payments made in FFYs 2001-2009; whether the hospitals were required to have a Medicaid provider agreement with the state

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Medicaid agency; whether the lack of Medicare certification as psychiatric hospitals rendered them ineligible for the disallowed payments; whether the hospitals had a minimum one percent MIUR during the relevant year(s); and whether HVC Hospital exceeded its annual hospital-specific DSH limit.

We conclude that CMS’s disallowance decisions are lawful.  The State improperly made DSH payments to state-owned psychiatric hospitals that did not meet federal requirements to receive Medicaid payment for services under the state plan and thus were also not entitled to receive Medicaid DSH payments.  And the State’s DSH payments to HVC Hospital contravened Congress’s intent to have local or state governments, not the federal government, bear the costs of health care furnished by public institutions to inmate-patients who are, essentially, wards of the state.  Accordingly, we uphold the disallowance of $195,662,968, which represents the federal share of the DSH payments the State improperly made to the hospitals during  the FFYs under review.¹

Legal Background

The federal Medicaid statute, title XIX of the Social Security Act (Act), authorizes federal grants to states that provide “medical assistance” (health insurance benefits) to low-income persons and families.  Act §§ 1901, 1903; 42 C.F.R. § 430.0.  Each state administers its own Medicaid program subject to broad federal requirements in title XIX and its “plan for medical assistance,” commonly referred to as the “State plan.”  Act § 1902; 42 C.F.R. §§ 430.10-430.16.  A state must designate a “single State agency” to administer the State plan.  Act § 1902(a)(5).

Section 1902 of the Act specifies what a State plan must provide for or require.²  The State plan must, for example, specify the types of health insurance benefits available under the state’s Medicaid program.  See, e.g., Act § 1902(a)(10).  The State plan also must describe how the state will set payment rates for covered items and services, such as the rates for inpatient hospital services.  Id. § 1902(a)(13); see also 42 C.F.R. § 447.201(b).  In addition, a State plan must –

provide for agreements with every person or institution providing services under the State plan under which such person or institution agrees (A) to

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keep such records as are necessary fully to disclose the extent of the services provided to individuals receiving assistance under the State plan, and (B) to furnish the State [Medicaid] agency or the Secretary [of Health and Human Services] with such information, regarding any payments claimed by such person or institution for providing services under the State plan, as the State agency or the Secretary may from time to time request[.]

Act § 1902(a)(27).

Implementing that statutory requirement, 42 C.F.R. § 431.107(b) requires a State plan to “provide for an agreement between the Medicaid agency and each provider or organization furnishing services under the plan in which the provider or organization agrees to” –

(1) Keep any records necessary to disclose the extent of services the provider furnishes to beneficiaries; 

(2) On request, furnish to the Medicaid agency, the Secretary, or the State Medicaid fraud control unit . . . any information maintained under paragraph (b)(1) of this section and any information regarding payments claimed by the provider for furnishing services under the plan; 

(3) Comply with the disclosure requirements specified in part 455, subpart B of this chapter [relating to ownership and control of the provider]; . . . 

(4) Comply with the advance directives requirements for hospitals [and other provider types] specified in part 489, subpart I, and § 417.436(d) of this chapter[;] 

(5) (i) Furnish to the State agency its National Provider Identifier (NPI) (if eligible for an NPI); and

(ii) Include its NPI on all claims submitted under the Medicaid program.

42 C.F.R. § 431.107(b).

A state with a federally approved Medicaid plan becomes entitled to federal matching funds, known as FFP, for a percentage of the expenditures it makes for “medical assistance” and associated administrative costs under the State plan.  Act § 1903(a); 42 C.F.R. §§ 430.0, 430.10-430.15, 430.30. 

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1. Medical assistance

Section 1905(a) of the Act defines “medical assistance” as “payment [by the state Medicaid program] of part or all of the cost” of specified categories of “care and services,” or the “care and services themselves,” that must or may be provided to Medicaid-eligible individuals under the State plan.  See also N.J. Dep’t of Hum. Servs., DAB No. 2780, at 2 (2017).  Such care and services include, for example, inpatient hospital services, physicians’ services, and nursing facility services.  Act § 1905(a)(1), (4), (5).

2. Medical assistance exclusions:  inmate exclusion and institution for mental diseases (IMD) exclusion

Paragraph 30 of section 1905(a) of the Act states that, “except as otherwise provided in paragraph (16),” the term “medical assistance” does not include:

• “payments with respect to care or services for any individual who is an inmate of a public institution (except as a patient in a medical institution)”; and
• “payments with respect to care or services for any individual who has not attained 65 years of age and who is a patient in an institution for mental diseases [IMD³] . . . .”

Act § 1905(a)(30) (italics added).⁴  The parties refer to these provisions as the “inmate exclusion” and “IMD exclusion,”⁵ respectively.  Regulations implementing the inmate and IMD exclusions were in effect when the State made the DSH payments at issue in this case.  See 42 C.F.R. § 435.1008(a) (Oct. 1, 1999) (implementing the inmate and IMD exclusions); id. § 435.1009(a) (Oct. 1, 2008) (same). 

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Congress enacted the inmate and IMD exclusions to prevent the use of federal Medicaid funds to pay for services that have traditionally been the responsibility of state and local governments.  See 50 Fed. Reg. 13,196 (April 3, 1985) (inmates); Ohio Dep’t of Medicaid v. Price, 864 F.3d 469, 472 (6th Cir. 2017) (inmates); Conn. Dep’t of Income Maintenance v. Heckler, 471 U.S. 524, 533 (1985) (persons with mental diseases); N.J. Dep’t of Hum. Servs., DAB No. 1549, at 9 (1995) (noting that one purpose of the IMD exclusion is “to ensure that Medicaid funds are not used to finance care that has traditionally been the responsibility of state governments”), aff’d, N.J. Dep’t of Hum. Servs. v. United States, No. 96-441 (AET) (D. N.J., Feb. 11, 1997); Pa. Dep’t of Pub. Welfare, DAB No. 1042, at 7 (1989) (stating that the IMD exclusion was enacted “based on a general congressional belief that care in mental institutions was a traditional state responsibility and on a general distrust of the effectiveness and efficiency of care in
IMDs”).

1. Scope of the inmate exclusion

For purposes of the inmate exclusion – the prohibition on federal Medicaid funding of services furnished to “an inmate of a public institution (except as a patient in a medical institution)” – Medicaid program regulations define “inmate of a public institution” as “a person who is living in a public institution”; “public institution” as “an institution that is the responsibility of a governmental unit or over which a governmental unit exercises administrative control” but that does not include (among other things) a “medical institution”; and a “medical institution” as “an institution that”:

(a) Is organized to provide medical care, including nursing and convalescent care;

(b) Has the necessary professional personnel, equipment, and facilities to manage the medical, nursing, and other health needs of patients on a continuing basis in accordance with accepted standards;

(c) Is authorized under State law to provide medical care; and

(d) Is staffed by professional personnel who are responsible to the institution for professional medical and nursing services. . . .

42 C.F.R. § 435.1009 (Oct. 1, 1999); id. § 435.1010 (Oct. 1, 2008).⁶

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On December 12, 1997, the Health Care Financing Administration (HCFA), CMS’s predecessor agency, issued a memorandum regarding the inmate exclusion (1997 Memorandum).  AF at 123.⁷  The 1997 memorandum states that the inmate exclusion “refers only to FFP not being available” for services to inmates of a public institution; that the exclusion “does not specify, nor imply, that Medicaid eligibility is precluded” for such inmates; and that such persons “may be eligible for Medicaid if the appropriate eligibility criteria are met.”  Id.  The memorandum further states that:

• “[a]n individual is an inmate when serving time for a criminal offense or confined involuntarily” (emphasis in original) in a state or federal prison, jail, or detention or “other penal” facility;
• an “inmate becomes a patient in a medical institution . . . when the inmate is admitted as an inpatient in a hospital, nursing, facility, juvenile psychiatric facility, or intermediate care facility”; and
• “FFP is available for any Medicaid covered services provided to an ‘inmate’ while an inpatient in these facilities provided the services are included under a State’s Medicaid plan and the ‘inmate’ is Medicaid-eligible”; and
• an inmate is not considered to be a patient of a “medical institution” when “taken to a prison hospital or dispensary.”

AF at 123-25.

On April 10, 1998, HCFA issued additional guidance concerning the inmate exclusion in its Medicaid Regional Information Letter (RIL) 98-22.  AF at 118.  RIL 98-22, which HCFA addressed to State Medicaid Directors, reiterates that the inmate exclusion “precludes FFP but not Medicaid eligibility”; that “[w]hen an inmate is an inpatient in [a medical institution], FFP is available for Medicaid covered services provided to the individual, even though the person is still considered to be an inmate”; and that FFP is unavailable for services furnished to inmates in a “prison hospital” or otherwise “on the premises of a prison, jail, detention center, or other penal setting.”  AF at 118, 119-20, 121.

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2. Scope of, and exceptions to, the IMD exclusion

(i) The 65-and-older benefit (Act § 1905(a)(14))

On its face the IMD exclusion in section 1905(a)(30) of the Act does not apply to the care and services furnished to IMD patients who are 65 years of age or older.  The Act elsewhere provides, in section 1905(a)(14), that the term “medical assistance” includes “inpatient hospital services . . . for individuals 65 years of age or over in an institution for mental diseases” (emphasis added).  The 65-and-older benefit is further defined in 42 C.F.R. § 440.140(a) to mean “services provided under the direction of a physician . . . in an institution for mental diseases that meets the requirements” in 42 C.F.R. § 482.60 for that institution to participate in the Medicare program as a “psychiatric hospital” (and which meets other conditions not relevant to this case).

Section 482.60 – the provisions of which are incorporated by the regulatory definition of the 65-and-older benefit – provides that a “psychiatric hospital” must meet the conditions of Medicare participation in 42 C.F.R. §§ 482.1-482.57 (except section 482.24) that are applicable to all hospitals, as well as the “special” conditions in 42 C.F.R. §§ 482.61 (relating to medical records) and 482.62 (relating to staffing).  The special conditions were adopted to help ensure that psychiatric hospitals provide “active treatment” (and not merely custodial care) to their Medicare and Medicaid patients.  51 Fed. Reg. 22,010, 22,031, 22,033 (June 17, 1986).  In summary, the availability of FFP for inpatient hospital services furnished in an IMD to patients 65 years or older “is conditioned on the facility meeting the special Medicare conditions of participation for psychiatric hospitals specified in 42 C.F.R. § 482.60.”  N.Y. State Dep’t of Soc. Servs., DAB No. 1051, at 2 n.1 (1989). 

(ii) The under-21 benefit (Act § 1905(a)(16))

By operation of the “except-as-otherwise-provided” clause in section 1905(a)(30), an exception to the IMD exclusion exists for “inpatient psychiatric hospital services for individuals under age 21” – a category of medical assistance specified in section 1905(a)(16)(A), further defined in section 1905(h), and implemented by 42 C.F.R. §§ 440.160 and 441.151.  See also 42 C.F.R. § 435.1009(a)(2).

Section 1905(h) of the Act defines “inpatient psychiatric hospital services for individuals under age 21” in relevant part as “inpatient services which are provided in an institution (or distinct part thereof) which is a psychiatric hospital as defined in section [1861(f) of the Medicare statute] or in another inpatient setting that the Secretary has specified in regulations.”  Act § 1905(h)(1)(A) (emphasis added).  Section 1861(f) of the Act (Medicare statute) requires, inter alia, that an institution designated as a psychiatric hospital meet Medicare conditions of participation for hospitals in section 1861(e)(3)

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through (9), as well as requirements for clinical records and staffing specified in section 1861(f)(3) and (4).

During the relevant fiscal years, 42 C.F.R. § 440.160 stated:

“Inpatient psychiatric services for individuals under age 21” means services that –

(a) Are provided under the direction of a physician;

(b) Are provided by –

(1) A psychiatric hospital or an inpatient psychiatric program in a hospital, accredited by the Joint Commission on Accreditation of Healthcare Organizations, or

(2) A psychiatric facility which is accredited by the Joint Commission on Accreditation of Healthcare Organizations, the Council on Accreditation of Services for Families and Children, the Commission on Accreditation of Rehabilitation Facilities, or by any other accrediting organization, with comparable standards, that is recognized by the State.

(c) Meet the requirements in § 441.151 of this subchapter.

42 C.F.R. § 440.160(a) (Oct. 1, 1999 and Oct. 1, 2008); see also 42 C.F.R. § 441.151(a)(2)(i) (providing that inpatient psychiatric services for individuals under age 21 must be provided by, among other types of facilities or programs, “[a] psychiatric hospital that undergoes a State survey to determine whether the hospital meets the requirements for participation in Medicare as a psychiatric hospital as specified in § 482.60 . . ., or is accredited by a national organization whose psychiatric hospital accrediting program has been approved by CMS”).⁸

In short, a state may not use federal Medicaid dollars to pay for services furnished to an inpatient of an IMD who is 21 to 64 years old.  Mo. Dep’t of Soc. Servs., DAB No. 2677, at 2 (2016).  Under the 65-and-older benefit, a state Medicaid program may cover, as medical assistance, inpatient hospital services furnished in an IMD that meets, among

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other requirements, Medicare conditions of participation applicable to psychiatric hospitals.  New York, DAB No. 1051, at 2 n.1 (noting that “FFP under Medicaid for inpatient psychiatric hospital services for individuals over the age of 65 is conditioned on the facility meeting the special Medicare conditions of participation for psychiatric hospitals specified in 42 C.F.R. § 482.60”).  A state Medicaid program may also cover, as medical assistance, inpatient psychiatric hospital services furnished to an individual under 21 years old in a facility that meets the Medicare statute’s definition of a “psychiatric hospital” (or in “another inpatient setting that the Secretary has specified in regulations” (Act § 1905(h)(1)(A)).⁹

3. Certification to participate in Medicaid

Section 1905(a) of the Act provides that payments for “medical assistance” (Medicaid) may be applied to various hospital services.  See Act § 1905(a)(1), (2), (14), (16).  Regulations implementing section 1905(a) specify that hospitals receiving payment under Medicaid must meet the requirements for participation in Medicare (except in the case of medical supervision of nurse-midwife services).  See 42 C.F.R. §§ 440.10(a)(3)(iii), 440.165, and 482.1(a)(5).

Under Medicare, a hospital may be certified as a “hospital” or a “psychiatric hospital.”  See Act § 1861(e) and 1861(f) (defining the terms “hospital” and “psychiatric hospital,” respectively); 42 C.F.R. §§ 482.11-.57 (hospital conditions of participation), 482.60-.62 (psychiatric hospital conditions of participation), 488.1 (defining “certification”).  To be certified as a psychiatric hospital, a facility must meet the conditions of participation applicable to hospitals as well as the special requirements relating to medical record-keeping and staffing.  Id. §§ 482.60-.62.  For facilities that participate in both Medicare and Medicaid, certification of compliance with participation requirements based on surveys performed by state health agencies serves as a recommendation to the CMS Regional Office.  Id. § 488.12.

Thus, a hospital’s certification status in the Medicare program determines its certification status in the Medicaid program.  Medicare/Medicaid certification is ordinarily a two-step process involving both the state health agencies and CMS.  Generally, certification of a provider’s compliance with Medicare participation requirements is based on state agency

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surveys.  See 42 C.F.R. §§ 488.1 (defining the term “certification”), 488.11, 488.12.  First, the state agency responsible for the health facility licensure collects an extensive range of information concerning the facility’s staff, physical plant, and services.  The certification review is conducted pursuant to detailed federal forms which require the state survey agency to examine virtually every aspect of how the facility conducts its business.  See id. § 488.26.  The CMS Regional Office has the final authority to determine whether a facility should be certified.  Id. §§ 488.11-.12.

Alternatively, a provider may demonstrate such compliance based on the survey and recommendation of a national accrediting organization, such as The Joint Commission (formerly known as the Joint Commission on Accreditation of Healthcare Organizations), whose accreditation program is approved by CMS.  See 42 C.F.R. §§ 488.4, 488.5.  If the provider “demonstrates full compliance with all of the accreditation program requirements of the accrediting organization’s CMS-approved accreditation program,” then CMS may grant “deemed status” to the provider – that is, deem the provider to have met the Medicare requirements based on the accrediting organization’s recommendation for participation.  Id. §§ 488.4, 488.1 (defining “deemed status”); see also Act § 1865(a)(1).  In summary, a hospital or other health care institution meets applicable program participation requirements when it is surveyed for, and certified as complying with, the requirements.  See 42 C.F.R. §§ 482.1, 488.1, 488.10 and 488.12.

4. Medicaid payment for hospital services and DSH “payment adjustments”

A state Medicaid program pays for hospital services based on payment rates determined in accordance with the State plan.  Act § 1902(a)(13); 42 C.F.R. §§ 447.252(b), 447.253(i).  Section 1902(a)(13)(A)(iv) of the Act requires a state, in setting payment rates for hospitals, to “take into account” the “situation of hospitals which serve a disproportionate number of low-income patients with special needs[.]”  Congress enacted that requirement in 1981 in response to a “finding that ‘public hospitals and teaching hospitals which serve a large Medicaid and low income populations are particularly dependent on Medicaid reimbursement,’ have high levels of uncompensated care costs, and therefore need additional financial support in order to continue providing care to the needy.”  Va. Dep’t of Med. Assistance Servs., DAB No. 2084, at 3 (2007) (quoting H.R. Conf. Rep. 97-208, at 962 (1981), reprinted in 1981 U.S.C.C.A.N. 1010, 1324), aff’d, 609 F. Supp. 2d 1 (D.D.C. 2009).

To comply with section 1902(a)(13)(A)(iv) of the Act, a state’s Medicaid plan must provide for “appropriate increase[s] in the rate or amount of payment” for hospital services – also known as DSH “payment adjustments” or “DSH payments” – to hospitals that meet the definition of a disproportionate share hospital.  Act § 1923(a)(1)(B).  DSH payments supplement the payments that a state Medicaid program makes (based on the rates established under the State plan) to a hospital for covered inpatient hospital services furnished to Medicaid recipients.  Id.; Missouri, DAB No. 2677, at 2.  DSH payments

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“serve to offset a hospital’s uncompensated costs of caring for the low-income population [including Medicaid recipients and the uninsured] and ensure that Medicaid recipients will continue to have access to care.”  Me. Dep’t of Health & Hum. Servs., DAB No. 2931, at 3 (2019) (citing Act § 1923(a)-(c)); see also N.Y. State Dep’t of Health, DAB No. 2037, at 8 (2006) (stating that “[t]he basic scheme described for DSH payments is to assist those hospitals that are serving Medicaid patients and that are also serving a substantial number of other poor patients who lack insurance or other third party assistance” in order to ensure that “uncompensated care [does] not drain the hospital’s ability to provide quality care to Medicaid patients”).  The federal government reimburses (or provides FFP to) a state for a share of its allowable DSH payments.  Maine, DAB No. 2931, at 3 (citing authorities).

1. Statutory requirements for, or limitations on, DSH designation

Section 1923 of the Act specifies two requirements that a hospital must meet to be designated a disproportionate share hospital under a State plan.  First, the hospital must have a “[M]edicaid inpatient utilization rate” (MIUR) of at least one percent.  Act § 1923(d)(3).  Second, the hospital (with certain exceptions not relevant here) must have at least two obstetricians who have staff privileges at the hospital and who have agreed to provide obstetric services to Medicaid beneficiaries.  Act § 1923(d)(1)-(2).  In addition, the statute “deems” a hospital to be a disproportionate share hospital if (1) its MIUR is at least one standard deviation above the mean MIUR for hospitals receiving Medicaid payments in the state or (2) it has a “low-income utilization rate” exceeding 25 percent.  Act § 1923(b)(1).  Section 1923 provides that a State plan must “specifically define[ ]” the hospitals eligible for DSH payments (consistent with the statute’s limitations or requirements), and the “Secretary may not restrict a State’s authority to designate hospitals as disproportionate share hospitals under this section.”  Act § 1923(a)(1)(A), 1923(b)(4).  A state may designate a psychiatric hospital as a disproportionate share hospital, but FFP for DSH payments to such hospitals are subject to an annual state-specific limit (discussed below).

2. Hospital-specific limit on DSH payments

The Act imposes a cap on the amount of DSH payments that a state may make to a disproportionate share hospital in a fiscal year.  Act § 1923(g)(1)(A).  This annual limit is equal to the hospital’s “uncompensated” (unreimbursed) costs of furnishing “hospital services” to persons who are either “eligible for medical assistance under the State plan” or “who have no health insurance (or other source of third-party coverage) for services provided during the year.”  Id. § 1923(g)(1)(A), 1923(g)(1)(B), and 1923(j)(2)(C) (providing that “[o]nly the uncompensated care costs of providing inpatient hospital and outpatient hospital services to [Medicaid recipients or the uninsured] are included in the calculation of the hospital-specific limits under [section 1923(g)]”).

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In an August 17, 1994 State Medicaid Director Letter (1994 SMDL), CMS provided state Medicaid agencies with a summary and “interpretation” of the statutory provisions establishing the hospital-specific limit, as enacted in section 13621 of the 1993 Omnibus Reconciliation Act (OBRA), Pub. L. No. 103-66, § 13621(b), 107 Stat. 312, 630.  AF at 203, 205-06.  (The 1994 SMDL also addressed the one percent MIUR requirement, which was also part of the 1993 OBRA.  AF at 204-05.)

On August 16, 2002, CMS issued State Medicaid Director Letter 02-013 (2002 SMDL), whose stated purpose was to “clarify policy” about various matters, including the extent to which a hospital’s costs of furnishing medical care to inmates of correctional institutions could be counted in determining the hospital’s annual DSH payment limit (that is, the amount of uncompensated costs for which DSH payments may be made).  AF at 128-29.  In general, the letter informed state Medicaid agencies that inmates of correctional facilities are “not uninsured” because they have a “source of third party coverage” – that being the state’s constitutional obligation to meet prisoners’ medical needs – and thus state Medicaid programs may not make DSH payments to cover costs of their care.  Id.

3. State-specific cap on FFP for DSH payments and the IMD DSH limit

The amount of federal reimbursement that a state may receive for DSH payments is subject to an annual, state-specific cap known as the “DSH allotment.”  Act § 1923(f).  In 1997, Congress established an annual limit within each state’s DSH allotment on the amount of federal reimbursement for the state’s DSH payments to IMDs and other mental health facilities.  Pub. L. No. 105-33, § 4721(b), 111 Stat. 251, 513, codified in Act § 1923(h).  The reimbursement limit for DSH payments to IMDs responded to concerns “that extensive use of the DSH payment authority could allow states to do what the IMD exclusion was intended to prevent” – namely, “shift the cost of operating mental health facilities from states to the federal government.”  Missouri, DAB No. 2677, at 2.

Case Background

As noted, the parties dispute whether the State properly made Medicaid DSH payments to two state-owned psychiatric hospitals, CFP and HVC Hospital.  It is undisputed that, from FFY 2001 through FFY 2009, CFP provided inpatient psychiatric treatment to criminal defendants who had been adjudicated incompetent to stand trial or acquitted by reason of insanity; during that period, CFP’s patients were not in the custody of the Michigan Department of Corrections (MDOC).  Michigan DHHS Brief (MI Br.) at 1, 2; CMS Response Br. at 9.  During FFY 2001, HVC Hospital, a MDOC facility, served “chronically mentally ill prisoner patients who [had] serious impairments in their behavior and judgment and who [were] unable to return to a general prison setting immediately following acute care treatment.”  AF at 221-22; MI Br. at 2.

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The parties do not dispute that, during the relevant years, CFP and HVC Hospital: 

• were operated by DCH (HVC Hospital, under a contract with MDOC¹⁰);
• were accredited as hospitals by The Joint Commission, and were not certified as meeting the special conditions (in 42 C.F.R. §§ 482.61-.62) for participating in Medicare as psychiatric hospitals;
• did not have Medicaid provider agreements with the state Medicaid agency; and
• did not bill Medicaid for their services.

AF at 4-5, 221-22, 239, 268; MI Br. at 12, 14 (stating that the State “reasonably believed that a provider agreement was unnecessary”); CMS Response Br. at 9, 17.

In February 2007, the Michigan Office of the Auditor General (State Auditor) issued a report of a biennial audit of DCH conducted pursuant to the Single Audit Act for FFYs 2004 and 2005 (October 1, 2003 to September 30, 2005).  AF at 7, 9.  In reviewing DCH’s administration of Michigan’s Medicaid program, the State Auditor found that DCH made $95.8 million in “Medicaid-funded” DSH payments to CFP during FFYs 2004 and 2005, and $68.7 million in such payments to CFP during FFYs 2001 through 2003.  AF at 13.  The audit report stated that the “federal portion” of the DSH payments made to CFP during FFYs 2001-2005 was $92.5 million.  Id.  The State Auditor questioned the eligibility of these payments for federal reimbursement on the grounds that CFP had not “entered into a written provider agreement with DCH,” and that CFP had not been certified by CMS as meeting the conditions of Medicare participation applicable to a psychiatric hospital.  Id.  As legal authority for these findings, the State Auditor cited 42 C.F.R. § 431.107(b), which provides that a “State plan must provide for an agreement between the Medicaid agency and each provider or organization furnishing services under the plan” under which the provider agrees to meet certain record-keeping and disclosure requirements; and 42 C.F.R. § 482.1(a)(5), which states that federal regulations “interpreting” section 1905(a) – the section of the Medicaid statute specifying items and services that may or must be covered as “medical assistance” under a State plan – “specify that hospitals receiving payment under Medicaid must [with one irrelevant exception] meet requirements for participation in Medicare.”  Id.  In addition to questioning the State’s DSH payments to CFP, the State Auditor questioned $32.7

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million in DSH payments made to HVC Hospital in FFY 2001, indicating that the payments were prohibited by the inmate exclusion.  AF at 13-14 (stating that the payments for “psychiatric services to Department of Corrections’ inmates” do not constitute “an allowable charge to the Medicaid Program” and, accordingly, questioning “the federal portion” of $18.4 million).

The State disagreed with the State Auditor’s findings.  Regarding the questioned DSH payments to CFP, the State contended that CFP was not required to have a Medicaid provider agreement to receive DSH payments because it was owned and operated by DCH, the state Medicaid agency.  AF at 17.  The State further contended that section 1923 of the Act does not require a hospital to be certified as meeting Medicare conditions of participation to receive DSH payments, and that section 1923 affords states “substantial discretion in establishing criteria for DSH eligibility.”  AF at 16.  In addition, the State contended that although 42 C.F.R. § 482.1(a)(5) specifies conditions for federal reimbursement of a state’s Medicaid payments for covered hospital services, that regulation does not purport to govern DSH payments.  Id.  The State also noted that CFP (and HVC Hospital as well) had Joint Commission accreditation and thereby satisfied safety and other requirements for participation in Medicare.  Id.

Concerning the DSH payment(s) to HVC Hospital in FFY 2001, the State took the position that the inmate exclusion was inapplicable because:  patients of HVC Hospital were not “inmates” but rather “victims of serious mental illness requiring inpatient hospital treatment”; HVC Hospital was operated by DCH, not MDOC; and “[a]ll employees of [HVC Hospital] worked for DCH, except for perimeter security” provided by MDOC.  AF at 17-18.  The State also noted that it had stopped claiming FFP for DSH payments to HVC Hospital by August 2002, when CMS issued the State Medicaid Director Letter clarifying that states could not treat, as uncompensated, the costs of furnishing care to inmates of correctional facilities in calculating a hospital-specific DSH limit.  Id. at 18.

More generally, the State argued that the Medicaid statute affords states substantial latitude in determining a hospital’s eligibility for DSH payments and that its decision to make such payments to CFP and HVC Hospital were based on a reasonable interpretation of the statute and applicable program regulations.  AF at 17, 18.  Notwithstanding its belief in the propriety of the questioned DSH payments, the State informed the State Auditor that it would ask CMS to clarify whether those payments were eligible for FFP and take necessary corrective action based on its consultation with CMS.  Id. at 18.

In October 2008, the State Auditor issued a report of a biennial audit of DCH for FFYs 2006 and 2007 (October 1, 2005 to September 30, 2007).  AF at 21, 23.  The State Auditor found that the State made $67.5 million in “Medicaid-funded” DSH payments to CFP during those two fiscal years but questioned the payments’ eligibility for federal reimbursement for reasons cited in the February 2007 Audit Report – namely, that CFP

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did not have a provider agreement with Michigan’s Medicaid program and had not obtained “CMS certification” of its compliance with Medicare conditions of participation for psychiatric hospitals.  Id. at 25-26.  According to the audit report, the “federal portion” of the $67.5 million in DSH payments was $38,134,427.  Id. at 26.  The State Auditor called upon the State to “obtain clarification and resolution from the federal government regarding eligibility for Medicaid funded DSH payments for CFP.”  Id. at 26, 27.  According to the October 2008 Audit Report, the State maintained its view that the DSH payments to CFP were permissible under federal Medicaid law and eligible for FFP but that it had nonetheless “enrolled CFP as a Medicaid provider retroactive to October 1, 2000” and was “seeking CMS certification of the facility.”  AF at 26, 28, 29 (asserting that CMS had “incorrectly interpreted federal laws and regulations applicable to the hospital DSH program,” and that states “have substantial discretion in establishing criteria for DSH eligibility”), 30.  The report also noted that DCH had reportedly “provided a copy of the [February 2007 Audit Report] to CMS and that CMS, despite being “fully aware of the [State Auditor’s] previous DSH finding, . . . ha[d] again approved DCH’s plan to make DSH payments to CFP.”  Id. at 29.

In June 2010, the State Auditor issued a report of its biennial audit of DCH for FFYs 2008 and 2009 (October 1, 2007 to September 30, 2009).  AF at 44, 46.  The State Auditor found that the State had made approximately $77.9 million in “Medicaid-funded” DSH payments to CFP during those two years and questioned the eligibility of those payments for federal reimbursement on the ground that “CFP had not received the required CMS certification” of compliance with Medicare conditions of participation for psychiatric hospitals.  Id. at 49-50.  The “federal portion” of the $77.9 million in DSH payments totaled $46,044,900.  Id. at 49.  The June 2010 Audit Report indicates that the State continued to believe that the DSH payments to CFP were allowable but was nonetheless “working toward obtaining CMS certification” of CFP for participation in Medicare.  Id. at 52-53.

The State asserts, and CMS does not dispute, that the February 2007 and October 2008 audit reports were uploaded to the Federal Audit Clearinghouse in the months they were issued; that CMS did not immediately respond to the audit findings concerning the DSH payments to CFP; and that CMS continued to provide FFP for DSH payments to CFP through FFY 2009 and did not defer approval of claims for FFP on the DSH payments to CFP as authorized by 42 C.F.R. § 430.40.  See MI Br. at 3-5; AF at 34 (¶ 4).

According to the State, CMS “began to raise questions” about the DSH payments to CFP and HVC Hospital in 2009.  AF at 34 (¶ 5).  The questions purportedly led to DCH’s submission on September 28, 2009, and CMS’s approval in June 2010, of Medicaid state plan amendment (SPA) 09-16 governing DSH payments to certain named state-owned psychiatric hospitals, including CFP.  Id. at 34 (¶¶ 5-6), 36-38.  SPA 09-16, which took effect on September 30, 2009 (end of FFY 2009), provides that DSH payments are available to a named psychiatric hospital only if, or to the extent, the hospital:

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• meets the “requirements for participation as a hospital under 42 C.F.R. § 482.1(a)(5)”;
• has “a valid [Medicaid] provider agreement under 42 C.F.R. § 431.107”;
• has at least a one percent MIUR “based on active participation in the Medicaid program as required under section 1923(d) of the Social Security Act”; and
• when calculating the hospital-specific DSH limit in section 1923(g) of the Act, excludes “uncompensated costs incurred in providing inpatient and outpatient hospital services to Medicaid and uninsured patients who are considered prisoners . . . .”

AF at 62.  SPA 09-16 also identifies CFP as of one several “stand-alone psychiatric hospitals operated by the state” that are eligible for DSH payments if all conditions are met.  Id.

In November 2010, after a certification survey, CMS determined that CFP was compliant with Medicare conditions of participation for psychiatric hospitals, and in December 2010, CMS notified CFP that its request for participation in the Medicare program as a psychiatric hospital had been approved, effective November 17, 2010.  AF at 55, 58.

Disallowance Decisions

By letter dated June 26, 2018, CMS notified the State that it was disallowing $177,262,968 in FFP for the State’s DSH payments to CFP for FFYs 2001 through 2009 (October 1, 2000 to September 30, 2009).  AF at 64.¹¹  CMS stated that it was disallowing FFP because, during those years, CFP did not have a provider agreement with the state Medicaid agency and lacked the “required CMS certification,” rendering it ineligible to participate in, and receive DSH payments under, Michigan’s Medicaid program.  AF at 65.  CMS also determined that CFP was ineligible for DSH payments because it did not have a minimum one percent MIUR.  Id.

By another letter, also dated June 26, 2018, CMS disallowed $18,400,000 in FFP for the State’s DSH payments to HVC Hospital in FFY 2001.  AF at 69.¹²  CMS stated that those

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payments were ineligible for FFP because:  (1) HVC Hospital did not have a provider agreement with the state Medicaid agency, making it ineligible to participate in, and receive DSH payments under, Michigan’s Medicaid program; (2) HVC Hospital was ineligible to receive DSH payments because it did not have a MIUR of at least one percent during FFY 2001; and (3) HVC Hospital’s FFY 2001 DSH payments exceeded its annual DSH payment limit, as specified in section 1923(g) of the Act, because none of the hospital’s costs of providing services could be considered “uncompensated” (and thus eligible for DSH payments) given that the hospital served only prison inmates who, being “wards of the [s]tate,” were not uninsured or lacking a “source of third-party coverage and are not considered uninsured or indigent.”  AF at 70 (noting that “HVC’s patient population consist[ed] only of inmates”).

The State asked CMS to reconsider both disallowances.  AF at 74-81.  CMS denied the requests on October 23, 2018, affirming the disallowances for the reasons stated in its June 26, 2018 letters.  Id. at 83-87.  The State then timely appealed the disallowance decisions to the Board.  Act § 1116(e)(2)(A); 42 C.F.R. § 430.42(e)(3), (f).

Standard of Review

The Board is authorized to review, and reviews de novo, specified “final written decisions,” including “disallowances” under title XIX of the Act (Medicaid).  45 C.F.R. Part 16, App. A, ¶ B(a)(1); see also 42 C.F.R. § 430.42(g); Minn. Dep’t of Hum. Servs., DAB No. 2122, at 25 (2007).  The Board must sustain a disallowance “if it is supported by the evidence submitted and is consistent with the applicable statutes and regulations.”  W. Va. Dep’t of Health & Hum. Res., DAB No. 2185, at 20 (2008) (citing 45 C.F.R. §§ 16.14, 16.21), aff’d, 172 F. Supp. 3d 904 (S.D. W.Va. 2016).  In decisions reviewing disputed disallowances, the Board has determined that a state must bear the burden to prove that the claimed FFP is allowable once CMS has provided “sufficient detail about the basis for its disallowance determination.”  Mass. Exec. Office of Health and Hum. Servs., DAB No. 2218, at 11 (2008); see also N.J. Dep’t of Hum. Servs., DAB No. 2328, at 4-5 (2010).

Analysis

In general, the parties agree about the factual background as described above.  Essentially, their dispute is about whether CFP and HVC Hospital were eligible to receive federally financed DSH payments that supplement regular Medicaid rates.

In sum, in defending its disallowances, CMS asserts that, during the fiscal years under review, the hospitals were ineligible to receive federally financed DSH payments, for multiple reasons.  First, CMS asserts that the hospitals did not have provider agreements with the state Medicaid agency, to show that the hospitals met all applicable conditions of participation.  CMS Response Br. at 12-15.  CMS also maintains that HVC Hospital was

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ineligible for FFP for any payments, including DSH payments, with respect to its inpatient services during FFY 2001 because its patients were inmates of a public institution, not patients of a medical institution.  Id. at 22-25.  And, CMS says, both hospitals met the definition of an IMD, and neither was qualified to receive Medicaid payments under either the 65-and-older “exception” or the under-21 exception to the IMD exclusion.  Id. at 15-18, 22-23.  CMS also contends that the DSH payments to HVC Hospital exceeded its hospital-specific limit for FFY 2001.  Id. at 25-27.  Finally, CMS asserts that the disallowed DSH payments were ineligible for FFP because neither hospital had the required minimum one percent MIUR during the relevant fiscal years.  Id. at 27-29.

The State, however, asserts, among other things, that it reasonably interpreted applicable legal authorities as permitting the disputed payments where, as here, CMS did not timely notify the State that its payments were not made in accordance with applicable authorities, or that the State’s contrary interpretation underlying its payments was not in accordance with the authorities or was unreasonable.  MI Br. at 1, 8-9, 11-14; MI Reply Br. at 1-2.  The State asserts that CMS may not disallow a state’s FFP claim if that claim is founded on a reasonable interpretation of an ambiguous statute or regulation, and CMS did not timely provide the State with notice of a contrary interpretation.  MI Br. at 9-11.  The State further contends that CMS’s “delay and inaction” following notice of the audit findings and its release of FFP after the audit findings became available, and its taking of disallowances in 2018 on DSH payments made many years earlier belie any suggestion that the payments were “clearly contrary” to contemporaneous law or agency policy and are incompatible with CMS’s assertion that the State should have known that its payments were impermissible.  Id. at 1-2, 18-20.  The State also raises numerous arguments about CMS’s allegation that neither hospital met the required minimum MIUR and asserts that its evidence shows that CFP’s MIUR was at least one percent for the fiscal years in question.  MI Br. at 20-22; MI Reply Br. at 9-10.

Below, we first address, and reject, the State’s arguments that CMS may not lawfully disallow, in 2018, DSH payments made in FFY 2001 through FFY 2009.  We then address the parties’ competing arguments about the bases for the disallowances in detail and explain why we uphold the disallowance of $195,662,968.  We conclude that the State improperly made DSH payments to state-owned psychiatric hospitals that did not meet federal eligibility requirements for federal Medicaid funding and thus were also not entitled to receive DSH payments that supplement regular Medicaid payments.  Furthermore, the State’s DSH payments to HVC Hospital contravened Congress’s intent to have local or state governments, not the federal government, bear the costs of health care furnished by public institutions to inmate-patients who are, essentially, wards of the state. 

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1. CMS lawfully took the disallowances in 2018.
   1. The disallowance decisions are not time-barred.

The State raises arguments about CMS’s failure to act timely on the audit findings and the delayed issuance of the disallowance decisions in June 2018.  See MI Br. at 1-2, 4, 6, 8-9, 18-20.  The State’s arguments raise an issue of whether the disallowance decisions could be time-barred.

We are not aware of any law or regulation that precluded CMS from taking the disallowances in 2018, and the State identifies none.  There is “no statute of limitations or other time limit on the issuance of Medicaid disallowances.”  Ca. Dep’t of Health Care Servs., DAB No. 2204, at 10 (2008); see also Maine, DAB No. 2931, at 23; Ill. Dep’t of Healthcare and Family Servs., DAB No. 2863, at 17 (2018), vacated and remanded on other grounds, 489 F. Supp. 3d 801 (N.D. Ill. 2020); Ca. Dep’t of Health Servs., DAB No. 1007, at 7 (1989) (“[HCFA] is not limited by statute or regulations in the amount of time it may take in issuing a disallowance.”).  The Board moreover has stated that “[n]o statute of limitations applies to the federal government except where Congress expressly provides otherwise . . . .”  Md. Dep’t of Hum. Res., DAB No. 519, at 3 (1984) (citation omitted).  “‘The reason for this is the public policy of preserving the public rights, revenues, and property from injury and loss by the negligence of public officers.’”  Id. (quoting Guaranty Trust Co. v. United States, 304 U.S. 126, 132 (1938)).

The State also writes:  “The facts of this case – where an issue was raised for the first time 18 years after the payment was made [referring to FFY 2001, the earliest year in question], and long after a provider [HVC Hospital] has closed – support . . . a finding of prejudice here.”  MI Br. at 22.  To the extent the State suggests that the lengthy gap in time between when the payments were made and the disallowances, a period during which negative audit findings were made,¹³ by itself, supports a finding of prejudice to the State that warrants a reversal of the disallowances, we have repeatedly rejected similar arguments.  See Illinois, DAB No. 2863, at 17 (upholding Medicaid disallowance where CMS issued disallowance notice 12 years after an Inspector General audit and 20 years after the audit period began); see also California, DAB No. 2204, at 10-11 (finding that 10-year period between agency deferral and Medicaid disallowance had no legal significance and that applicable regulations did not contain a statute of limitations or other time limit on the issuance of disallowances).  Thus, the gap in time presented here,

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which we acknowledge was not insignificant, did not bar CMS from taking disallowances in 2018.¹⁴

In sum, the Act and regulations “contain no statute of limitations or other time limit on the issuance of Medicaid disallowances.”  California, DAB No. 2204, at 10.  The Board must uphold a disallowance if it is supported by the evidence and is consistent with the applicable authorities.  45 C.F.R. § 16.14 (“The Board shall be bound by all applicable laws and regulations.”).  Thus, the fact that CMS took disallowances in 2018 is of no legal consequence if, as we discuss below, the disallowances are supported by the evidence and are consistent with applicable authorities.

2. CMS’s inaction in not issuing a management decision pursuant to OMB Circular A-133 did not preclude CMS from taking disallowances in 2018.

The State raises another argument concerning CMS’s delay.  The State asserts that CMS failed to promptly address the 2007 and 2008 audit findings in accordance with OMB Circular A-133, “Audits of States, Local Governments, and Non-Profit Organizations”¹⁵ (issued pursuant to the Single Audit Act), which required CMS to issue a management decision within six months after receiving an audit report; and that the State continued to claim, and CMS provided, FFP for DSH payments made (to CFP) through FFY 2009 instead of deferring action on a FFP claim under 42 C.F.R. § 430.40(a) as CMS could have done had it “question[ed]” the claim.  MI Br. at 4-5, 8, 18-20; AF at 34 (¶ 4); MI Reply Br. at 14-15.  In so asserting, the State avers that these circumstances support a conclusion that CMS “agreed with DCH that the DSH payments to CFP were allowable.”  MI Br. at 19.  Moreover, according to the State, CMS’s inaction on the audit findings for a lengthy period indicates that CMS was aware that the statute and regulations did not “clearly prohibit[ ] DCH’s DSH payments.”  Id. at 18.  The State thus argues that, having failed to timely issue a management decision and having paid the FFP for the DSH

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payments, as claimed, without questioning the payments or deferring payment on the claimed FFP for the DSH payments, CMS is or ought to be precluded from disallowing the FFP.

The term “[m]anagement decision” is defined as “the evaluation by the Federal awarding agency . . . of the audit findings and corrective action plan and the issuance of a written decision to the auditee as to what corrective action is necessary.”  OMB Circular A-133,¹⁶ § 105; see also 2 C.F.R. § 200.1 (defining “management decision” as “the Federal awarding agency’s . . . written determination, provided to the auditee, of the adequacy of the auditee’s proposed corrective actions to address the findings, based on its evaluation of the audit findings and proposed corrective actions”).

OMB Circular A-133, § 405, captioned “Management decision,” states in part:

(a)  General.  The management decision shall clearly state whether or not the audit finding is sustained, the reasons for the decision, and the expected auditee action to repay disallowed costs, make financial adjustments, or take other action.  If the auditee has not completed corrective action, a timetable for follow-up should be given.  Prior to issuing the management decision, the Federal agency . . . may request additional information or documentation from the auditee, including a request for auditor assurance related to the documentation, as a way of mitigating disallowed costs.  The management decision should describe any appeal process available to the auditee.

*  *  *

(d)  Time requirements.  The entity responsible for making the management decision shall do so within six months of receipt of the audit report.  Corrective action should be initiated within six months after receipt of the audit report and proceed as rapidly as possible.

AF at 135-36; see also 2 C.F.R. § 200.521(a) (substantially similar language); 31 U.S.C. § 7502(f)(1)(B) (providing that a grantor agency must review single audit findings and determine whether prompt and appropriate action has been taken to correct the problems identified in audit).  “Corrective action” is “action taken by the auditee that: 

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(1) Corrects identified deficiencies; (2) Produces recommended improvements; or (3) Demonstrates that audit findings are either invalid or do not warrant auditee action.”

OMB Circular A-133, § 105; see also 2 C.F.R. § 200.1 (defining “corrective action” similarly).

The fact that CMS did not issue management decision(s) within six months in this case – which CMS does not dispute – did not preclude CMS from later taking disallowances under 42 C.F.R. § 430.42.  The language in the OMB Circular and 2 C.F.R. § 200.521 concerning management decisions is reasonably read to contemplate a process designed to enable identification, assessment, and correction of problems discovered on audit.  Timely communicating the results of evaluation of any negative audit findings to the auditee via a management decision could enable the auditee to make appropriate adjustments or improvements, or complete appropriate corrective actions.  Such action in response to a management decision presumably could result in the federal agency disallowing a lower amount than it otherwise could or might have disallowed absent corrective action or determining not to issue a disallowance.

Thus, a management decision is reasonably understood as a part of a preliminary agency review process and is distinguishable from a disallowance of costs that could be appealed as CMS’s 2018 disallowance decisions are.  See 42 C.F.R. § 430.42; 2 C.F.R. § 200.1 (defining “disallowed costs” to mean “those charges to a Federal award that the Federal awarding agency . . . determines to be unallowable, in accordance with the applicable Federal statutes, regulations, or the terms and conditions of the Federal award”); 45 C.F.R. Part 16, App. A, ¶ B(a)(1) (stating, in part, that “[t]he Board reviews . . . final written decisions in disputes arising in HHS programs authorizing the award of mandatory grants” such as “[d]isallowances under Title[ ] . . . XIX . . . .”).

The State does not argue, or show, that CMS’s inaction within the six-month time frame precludes or constrains CMS’s lawful exercise of authority to later disallow the federal share of DSH payments if CMS determines, as it did here, that the State wrongly made DSH payments to the hospitals and was not entitled to a federal share of those payments.  The State, moreover, has not identified any authority barring altogether, or limiting CMS’s authority to issue, a disallowance after the expiration of a certain time period after an audit pursuant to the Single Audit Act, even where, as here, CMS did not issue a management decision in accordance with OMB Circular A-133.  The regulations in 42 C.F.R. § 430.42 impose no conditions or limitations on CMS’s authority to issue a disallowance based on CMS’s inaction as to a management decision.

The State asserts that CMS must comply with the six-month provision in OMB Circular A-133, which was later codified in 2 C.F.R. § 200.521, with respect to audit findings with which the State has disagreed from the outset.  MI Br. at 19; MI Reply Br. at 14.

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Accordingly, the State disagrees with the Board’s “conclusion” in Michigan Department of Health and Human Resources, Office of Child Support, DAB No. 2868 (2018), that the six-month provision merely set out a “goal” for issuing a management decision.  MI Br. at 19 (stating that, in DAB No. 2868, “the Board held that the six-month language in Circular A-133 was a ‘goal’ and not a ‘requirement’ that precluded a federal agency from taking a disallowance outside that timeframe”); MI Reply Br. at 14-15 (similar argument).  The State’s misreads DAB No. 2868.  In DAB No. 2868, the Board did not state or conclude that OMB Circular A-133’s time frame for issuing a “management decision” was merely a “goal.”  There, the Board quoted a part of the federal agency’s response to the state’s argument that the federal agency’s delay in acting on the audit findings put the state at a disadvantage, such that the state was unable to produce certain documents substantiating the disallowed costs.  DAB No. 2868, at 7 (“ACF says, ‘[OMB Circular A-133’s management decision] time frame serves as an administrative goal, not a statute of limitations for disallowances.’”).  The Board went on to note that the state did not respond to the federal agency’s argument and did not file a reply brief or address how OMB Circular A-133’s “management decision” provision precluded the federal agency from taking the disallowance when it had not previously issued a “management decision,” or identify any law or regulation that limited the time frame within which the federal agency must disallow costs following an audit.  Id.  Thus, the Board determined that the federal agency’s disallowance was not time-barred.  Ultimately, the Board upheld the disallowance, rejecting as unconvincing the state’s argument that the blame for its alleged inability to substantiate costs lay with the federal agency’s delay, noting that the documents allegedly responsive to the audit findings, with which the state had agreed earlier, apparently “never existed.”  Id. at 2, 7-8.  The State’s apparent attempt to factually distinguish its case from DAB No. 2868 is to no avail.  Regardless of whether a state disputed audit findings at the outset, we are not aware of, and the State has not identified, any statute or regulation that precludes or limits CMS’s authority to take a disallowance if it did not first issue a timely management decision on Single Audit Act audit findings.

The State, moreover, does not point to evidence that, at any point during the relevant fiscal years, CMS reviewed the FFP claims questioned by the State Auditor and determined that the claims were eligible for FFP for the disputed DSH payments, thereby giving the State reasonable assurance that it could continue claiming and taking FFP going forward.  Furthermore, an appealable disallowance decision is a post-payment decision in which CMS has determined that the claimant was not entitled to FFP for the payments.  Accordingly, CMS’s earlier payment without having questioned the costs (through a management decision, for instance) cannot reasonably be understood as meaning or implying that CMS had approved those costs or determined that the claimant met all requirements for entitlement to FFP.  And, even had CMS deferred payment of claims because it questioned the allowability of costs or decided it needed more information to resolve the question but then paid the deferred claims, the payment of

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deferred claims would not have precluded CMS from later taking a disallowance based on audit findings or financial review.  See 42 C.F.R. § 430.40(d), (e).

The State also takes issue with CMS’s reliance on three Board decisions – Illinois, DAB No. 2863; Maryland, DAB No. 519; and California, DAB No. 1007 – in its response brief, at 29-30.  MI Reply Br. at 14.  We have discussed these three decisions above.  According to the state, none of these decisions supports the proposition for which CMS relies on them – that there is no statute of limitations for Medicaid disallowances – because, unlike the audits in those cases, the audits here were “based on state audits” governed by “different rules,” namely, OMB Circular A-133 provisions.  MI Reply Br. at 14.  We understand the State to be asserting that the three Board decisions are inapposite because the disallowances in those cases did not arise from audits performed pursuant to the Single Audit Act (and thus did not present the specific question of the failure to timely issue a management decision in accordance with OMB Circular A-133). 

The State correctly states that the disallowances in Illinois, Maryland, and California did not arise from “state audits.”  However, nowhere in those decisions was the Board equivocal about whether the federal agency could pursue legally authorized action in accordance with federal law and regulations, nor did the Board draw distinctions based on who reviewed the state’s costs or claims, or the authority pursuant to which the review was conducted.  And, in California, which arose from a Medicaid disallowance, the Board expressly stated that HCFA, CMS’s predecessor agency, was “not limited by statute or regulations in the amount of time it may take in issuing a disallowance” and “there is no evidence in the record that HCFA formally waived its right to disallow for the years in question.”  DAB No. 1007, at 7, 11.  The same could be said of CMS’s 2018 disallowances here.  Also, in the instant Medicaid disallowance case, as in Illinois, the Board “must uphold a disallowance if it is supported by the evidence and is consistent with the applicable statutes and regulations.”  DAB No. 2863, at 17 (citing 45 C.F.R. §§ 16.14, 16.21).  Accordingly, the Board’s conclusion in Illinois that “even the extensive delay in issuing the disallowances has no legal significance” (id.) is equally apt here, even though this case arose from “state audits” whereas Illinois arose from an Inspector General’s audit.  In short, the State’s attempt to distinguish its case from the three Board decisions is of no moment.

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2. Neither hospital was eligible for federally financed Medicaid payments for services provided under the State plan and thus neither was eligible for DSH supplemental payments.
   1. Neither hospital had a provider agreement with the state Medicaid agency.
      1. The statute and regulations mandate a provider agreement.

In disallowing $177,262,968 in DSH payments made to CFP, CMS stated, in part:

Section 1903(a)(1) of the [Act] states that the Secretary will only pay for a share of State expenditures for medical assistance under an approved State plan.  Section 1902(a)(27) [of the Act] requires that the State plan provide for agreements with every institution providing services under the State plan.  See also 42 C.F.R. § 431.107(b)[.]  The Michigan State plan, Section 4.13, also provided for a written agreement between the Medicaid agency and each provider furnishing services under the plan.  The audit found that CFP did not have a provider agreement, nor did they have the required CMS certification and consequently, was unable to participate in the Medicaid program;  . . . therefore, we cannot consider them to reflect expenditures for medical assistance under the State plan for purposes of section 1903(a)(1) [of the Act].

AF at 65.  Citing similar reasons, CMS disallowed $18,400,000 in DSH payments made to HVC Hospital.  Id. at 70.  Before the Board, CMS maintains, as it did in its disallowance decisions, that during the relevant fiscal years, neither hospital was eligible for federally financed DSH payments because neither had a provider agreement with the state Medicaid agency.  CMS Response Br. at 12-15; id. at 13 (citing State plan incorporating 42 C.F.R. § 431.107 by reference, AF at 847).

The State acknowledges that in accordance with section 1902(a)(27) of the Act and 42 C.F.R. § 431.107(b), a state Medicaid agency must have in place a Medicaid provider agreement with every institution providing services under the State plan.  MI Br. at 14.  The State does not claim that the hospitals had a Medicaid provider agreement during the relevant fiscal years.  The State asserts, however, that the fact that the hospitals did not have a provider agreement is not a valid basis for disallowance because neither section 1902(a)(27) of the Act nor 42 C.F.R. § 431.107(b) expressly states that such an agreement is necessary for a hospital to receive DSH payments.  Id.  Those authorities, the State says, “do not require provider agreements for ‘Medicaid funding’ generally, but rather require provider agreements only for services ‘provided under’ or ‘furnished under’ the state plan, which can reasonably be understood to refer to services provided to

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a Medicaid beneficiary for which a claim is submitted for payment to the Medicaid agency, and not to DSH payments.”  MI Reply Br. at 2-3.

Neither section 1902(a)(27) of the Act nor 42 C.F.R. § 431.107(b) expressly states that a provider agreement with the state Medicaid agency must be in place for a state to later claim and receive federal Medicaid funding or federally financed Medicaid DSH payments.  But we see no reasonable or rational justification or basis grounded in authority for reading section 1902(a)(27) and 42 C.F.R. § 431.107(b) without considering section 1903(a)(1) of the Act, which governs the federal obligation to pay a share of state expenditures for medical assistance under an approved State plan, and section 1902(a)(27) of the Act, which provides that the required State plan must in turn provide for a Medicaid provider agreement with an institution providing services under the State plan.  See also Act § 1902(a)(5) (requiring a state to designate a “single State agency” to administer the State plan).  States must follow their approved State plans in the operation of a title XIX Medicaid program.  See, e.g., La. Dep’t of Health and Hum. Res., DAB No. 804 (1986); California, DAB No. 1007; Ca. Dep’t of Health Servs., DAB No. 1474 (1994); N.H. Dep’t of Health and Hum. Servs., DAB No. 1862 (2003).  Together, the above-cited statutory and regulatory provisions mandate a provider agreement between the provider and the state Medicaid agency for the state to be eligible to receive FFP for the provider’s services.  However, even where, as here, the State plan itself, as in effect before 2005, apparently did not expressly require the hospitals to enter into provider agreements with the state Medicaid agency (DCH),¹⁷ CMS may question whether a state has in fact met a federal requirement (which the provider agreement requirement is) and withhold payment for failure to comply with the requirement.  See 42 C.F.R. § 430.35 (captioned “Withholding of payment for failure to comply with Federal requirements”); id. § 430.35(c) (“A question of noncompliance in practice may arise from the [s]tate’s failure to actually comply with a Federal requirement, regardless of whether the plan itself complies with that requirement” (emphasis added).).  While this case arises from post-payment disallowances, we cannot disregard regulations that clearly empower CMS to act as appropriate or necessary so that the federal government does not pay states that do not comply with federal requirements.

It stands to reason that if a Medicaid provider agreement in accordance with a State plan is required for an institution to be eligible to receive federal Medicaid assistance, then any such institution that does not have a provider agreement in place would not be eligible to receive an “adjustment” or supplement to such payments in the form of DSH payments made to hospitals that serve disproportionately high numbers of Medicaid and low-income patients.  CMS makes just such an argument.  CMS Response Br. at 14 (stating that “[p]rovider agreements are required for all FFP – both for DSH and for

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reimbursement for individual services,” and reasoning that if a hospital is ineligible to receive regular Medicaid payments because it lacks a provider agreement, then it is also ineligible to receive any “adjustment” to payment for hospital services under authorization for DSH payments in section 1923 of the Act).  It is highly persuasive.

In Virginia Department of Medical Assistance Services, DAB No. 2084 (2007), aff’d, 609 F. Supp. 2d 1 (D.D.C. 2009), the Board held in part that DSH payments represent an adjustment in Medicaid payment for inpatient hospital services (Act § 1923(a)(1)(B)), covered and paid for in accordance with the State plan as “hospital services” within the meaning of section 1923(g)(1)(A) of the Act, which imposes a cap or limit on the DSH payments that may be made to a hospital that is equal to the hospital’s uncompensated (unreimbursed) costs of furnishing “hospital services” to individuals who are Medicaid-eligible or have no health insurance or other source of third-party coverage.  DAB No. 2084, at 9-10.  Virginia presented the issue of whether uncompensated (unreimbursed) physician costs incurred by two state-owned teaching hospitals were properly included in the calculation of the teaching hospitals’ annual DSH payment limit.  Virginia maintained that the physician costs met the statutory criteria for inclusion; CMS asserted that the costs were properly excluded because they were not costs of “hospital services” in accordance with section 1923(g)(1)(A).  Id. at 2.  The Board stated that, in accordance with section 1923(g)(1)(A), “[a] cost may not be included in the calculation of the DSH payment limit unless it is the cost of a service that is covered and paid for under the state plan as a ‘hospital service.’”  Id. at 10; see also id. at 13 (stating that “Medicaid payments for covered hospital services operate as a baseline for calculating the DSH payment limit” and that “the ostensible purpose of DSH payments is to supplement what DSHs receive for covered hospital services based on Medicaid’s standard payment rates for those services”).  Because DSH payments are intended to supplement standard Medicaid payments for uncompensated costs of providing hospital services under the State plan, a hospital that is not eligible for standard Medicaid payments for lack of a provider agreement is not eligible to receive DSH supplemental payments.  We cannot accept the State’s proposition that despite not having complied with federal Medicaid authorities, it nevertheless may take federal assistance in the form of FFP for DSH payments.

We also consider Maine Department of Health and Human Services, DAB No. 2931 (2019).  In Maine, the Board sustained a disallowance of FFP for Medicaid DSH payments Maine had made to Riverview Psychiatric Center, a state-owned psychiatric hospital, after CMS terminated the hospital’s Medicare participation – an event the Board held required the state to exclude the hospital from Medicaid participation and to deny it all payments, including DSH payments, made under the State plan.  The Board held that CMS was “authorized to disallow Medicaid FFP in DSH payments and payments for services rendered after CMS terminated Riverview’s Medicare participation agreement because both federal law and Maine’s Medicaid state plan limit[ed] Medicaid FFP for hospital services to claims for hospitals participating in the Medicare program.”  DAB No. 2931, at 8-9.  In so holding, the Board relied in part on section 1902(a)(39) of the

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Act, which requires a state to “exclude any individual or entity from participation in the program under the State plan for the period specified by the Secretary, when . . . participation of such individual or entity is terminated under title XVIII [Medicare] . . . , and provide that no payment may be made under the plan with respect to any item or service furnished by such individual or entity during such period . . . .”  This statutory language, the Board stated, is “plainly mandatory,” meaning that the State plan “must provide for what the state shall do to remove the terminated Medicare provider and stop Medicaid payments” and, accordingly, “a Medicaid provider that has lost its Medicare agreement must be excluded from all participation in and payment under Medicaid.”  DAB No. 2931, at 9.  The Board stated, “CMS thus rightly concluded that Maine was not entitled to FFP in any Medicaid payments to Riverview once CMS terminated its Medicare provider agreement because that termination triggered Maine’s obligation to timely terminate Riverview’s Medicaid agreement and stop Medicaid payments to it.”  Id.

The Board also explained:

Congress plainly intended for DSH payments to alleviate the burden on hospitals that “are particularly dependent on Medicaid reimbursement.”  H.R. Conf. Rep. 97-208, 962, 1981 U.S.C.C.A.N. 1010, 1324.  Given the purpose and context of the DSH program, . . . it would make no sense to allow a state to be reimbursed for DSH payments to an entity unqualified to receive any Medicaid payments.  Once Riverview was terminated from Medicare, Maine was obliged to timely remove it from Medicaid . . . .  If no Medicaid payments could properly be made to Riverview for services to recipients, no supplemental [DSH] payments could properly be added to such payments.

Id. at 16; see also id. at 21 (concluding that “Medicaid law has consistently permitted states to designate as DSH recipients only hospitals that participate in Medicaid and are eligible to receive Medicaid payments” (emphasis in original)).

The State argues that Maine is not on all fours with its case because Maine was “decided in the context of whether a [s]tate may continue to make Medicaid payments to a psychiatric hospital after it has been terminated from Medicare for noncompliance with Medicare’s general conditions of participation, and the Board based much of its reasoning on provisions requiring termination of a Medicaid provider agreement upon termination of a Medicare provider agreement, which have no relevance here.”  MI Reply Br. at 12.

Although the State identifies a factual difference between its case and Maine, that factual difference ultimately is of no consequence on the essential question that is common to Maine and this case:  whether the fact that a hospital was ineligible for participation in Medicaid rendered it ineligible for DSH payments.  In Maine, Riverview became

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ineligible to participate in Medicaid because, once CMS terminated Riverview from Medicare, the state had to remove Riverview from Medicaid participation.  Here, CFP and HVC Hospital were ineligible to participate in Medicaid because neither had the required provider agreement with the state Medicaid agency.  Although CFP and HVC Hospital were ineligible to participate in Medicaid during the relevant years for a reason different from that which rendered Riverview ineligible, all three hospitals were ineligible for DSH supplemental payments because they were ineligible for participation in Medicaid.  Thus, from our perspective, the distinction the State draws between its case and Maine does not undermine Maine’s conclusion that an institution must meet program participation requirements for federal Medicaid funding to also be able to receive DSH payments.  The State’s argument offers no rational, meaningful basis for differentiating Riverview in Maine from CFP and HVC Hospital where none of the three hospitals were eligible for Medicaid and thus not entitled to DSH payments.

The State also suggests that the Board cannot or should not rely on Maine because Maine was issued in 2019, after the events from which this case arose and after CMS issued the disallowances in 2018.  See MI Reply Br. at 7.  According to the State, Maine is different from its case because CMS notified the state of Maine that it was not in substantial compliance with Medicare participation requirements before CMS terminated Riverview’s provider agreement, whereas the State “was unaware that CMS interpreted the Medicaid services requirements as applying to DSH payments” because CMS did not inform the State about that interpretation.  Id. at 12-13.  The implication is that it would be improper or unfair to apply against the State any conclusion or rationale in Maine of which the State could not have been expected to be aware before making the disallowed DSH payments.¹⁸  However, it bears repeating that a provider agreement with the state Medicaid agency must be in place for the state to participate in Medicaid and thus be entitled to FFP.  That requirement is a long-standing one rooted in the Medicaid statute, which Board decisions issued long before 2019 recognized.  See, e.g., Mo. Dep’t of Soc. Servs., DAB No. 233, at 2 (1981) (stating that section 1902(a)(27) of the Act and implementing regulations require a state to have a provider agreement with a facility serving Medicaid recipients to claim FFP for the cost of the facility’s services); Mo. Dep’t of Soc. Servs., DAB No. 247, at 1-2 (1982); Okla. Dep’t of Hum. Servs., DAB No. 1043, at 3 (1989) (citing section 1902(a)(27) and stating that “states must enter into a provider agreement with every provider of services under Medicaid”); Tex. Dep’t of Hum. Servs., DAB No. 1344, at 4 (1992) (stating that FFP is not available for the period during which a facility lacked a valid provider agreement with the state Medicaid agency).  Furthermore, legislative history long pre-dating the relevant fiscal years at issue and discussed in Maine indicates that Congress intended DSH supplemental payments to alleviate the burden on hospitals that serve low-income populations, and which are particularly dependent on federal Medicaid funding.  See DAB No. 2931, at 16.  Maine’s

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rationale is consistent with both the purpose of DSH funding and the long-standing statutory requirement of a Medicaid provider agreement of which the State would and should have been well aware.

In short, since neither hospital had a Medicaid provider agreement with the state Medicaid agency, neither was compliant with section 1902(a)(27) of the Act or 42 C.F.R. § 431.107(b), and neither was entitled to DSH payments.

2. The hospitals’ status as state-operated institutions did not exempt either hospital from the provider agreement requirement.

The parties’ dispute extends to whether a provider agreement was a condition precedent for entitlement to the disallowed FFP if, as here, the hospitals were state-operated hospitals.  The State maintains that neither hospital was required to have a provider agreement in place, that such an agreement was unnecessary under the circumstances, and that the State reasonably believed an agreement was unnecessary.  CMS argues otherwise.

The nub of the question presented is whether there exists any authority relieving CFP and HVC Hospital from the provider agreement requirement.  We are not aware of any.  As discussed earlier, the Board has repeatedly stated that, to be eligible for Medicaid payments, a provider must have in place a provider agreement with the state Medicaid agency as required by section 1902(a)(27) of the Act.  The State does not identify any law, regulation, or other relevant authority that would relieve either hospital from the requirement.

The Board’s decision in Missouri Department of Social Services, DAB No. 175 (1981), on which CMS relies (CMS Response Br. at 13), however, is instructive.  In Missouri, a Medicaid-Medicare compliance survey found that a nursing facility had certain “deficiencies” (failures to meet nursing facility and intermediate care facility (ICF) certification requirements).  DAB No. 175, at 10.  Based on the survey findings, the Missouri Medicaid agency notified the facility that its Medicaid certification and provider agreement, which expired on June 30, 1978, would not be renewed.  Id.  A local court assumed control over the facility in late July 1978 and appointed the state Medicaid agency to manage the facility.  Id.  The court terminated its jurisdiction over the facility and released the state agency Director as its agent effective October 31, 1978.  Id.  Later, HCFA disallowed Medicaid FFP for services performed by the facility from July 1, 1978 through April 30, 1979 “on grounds that the [s]tate did not have in effect the appropriate certifications and provider agreements to support its claims for FFP[.]”  Id. at 11 & 11 n.3.  The state admitted that there was no certification or provider agreement with the facility for the period July 1, 1978 through November 31, 1978 but contended that “it was not sensible for the [s]tate to do what amounted to certifying itself and entering into a provider agreement with itself” while the facility was under state control.  Id. at 11.  The

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state further contended that although the facility did not have the requisite certification and provider agreement, the facility complied with Medicaid participation requirements during the entire period it was operated by the state.  Id.

The regulations the Board cited as governing Missouri included the provisions of 42 C.F.R. Part 442.  In general, Part 442 “states requirements for provider agreements for facility certification relating to the provision of services furnished by nursing facilities and intermediate care facilities for individuals with intellectual disabilities.”  42 C.F.R. § 442.1(a).  Section 442.12(a) provides that a state Medicaid agency may not execute a provider agreement with a facility for nursing facility services or make Medicaid payments to a facility for such services unless the Secretary of Health and Human Services or the state survey agency certifies the facility to provide those services.  See DAB No. 175, at 11 (referencing section 442.12).  Section 442.30(a) provides that FFP is available for a state’s expenditures for nursing facility or intermediate care facility services “only if the facility has been certified as meeting the requirements for Medicaid participation, as evidenced by a provider agreement executed under this part.”  See also DAB No. 175, at 11 (referencing section 442.30(a)).  (Section 442.30(a) goes on to specify circumstances in which a provider agreement is “not valid evidence that a facility has met” the requirements for Medicaid participation.)

In Missouri, the Board stated that “the primary question presented” was “whether the operation of a facility by a [s]tate agency as agent for a [s]tate court overrides Medicaid regulations such that the [s]tate is eligible for FFP without having certified, or entered into a provider agreement with the facility.”  DAB No. 175, at 10.  In upholding the disallowance, the Board addressed the framed issue as follows:

The [s]tate argues that compliance with Federal standards is necessarily implied by [s]tate operation of the facility.  Such an implication alone falls short of meeting the regulatory requirements, and there is no exception in the regulation to the above stated requirements for a facility operated by the head of a [s]tate agency as agent for a [s]tate court.  The facility was decertified initially due to deficiencies and there is no evidence that, during the period the facility was operated by the [s]tate (July 27 – October 31), a proper plan of correction was implemented or that the deficiencies were corrected.  Accordingly, the Board upholds the disallowance for the period July 27 through October 31, 1978.

The [s]tate did not operate the facility during the period July 1 through July 27, 1978 or the period November 1, 1978 through November 31, 1978.  The [s]tate admits that there were no certifications or provider agreements for those periods.  Since certifications and provider agreements are prerequisites to FFP, the disallowances for services provided during these periods was appropriate.

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DAB No. 175, at 12 (footnote omitted; emphasis added here).

The State contends that Missouri is inapposite here because the provider agreement requirement in section 1902(a)(27) of the Act and 42 C.F.R. § 431.107 was not specifically at issue in Missouri.  See MI Reply Br. at 4-5.  The State also attempts to distinguish its case from Missouri by suggesting that the provider agreement issue in Missouri is different from the issue presented here.  According to the State, “[w]hile [Missouri] refers to the need for provider agreements, the discussion was entirely in the context of the specific regulations [namely, 42 C.F.R. §§ 442.30 and 442.12] which require provider agreements as evidence of certification with nursing facility conditions of participation, and not the general provider agreement rule (42 C.F.R. § 431.107) that CMS relies upon here.”  Id. at 5.  “The key question before the Board in Missouri,” says the State, “was not whether the state agency had to execute a provider agreement with itself, but whether ‘compliance with [the] Federal standards’ referred to in these regulations ‘[was] necessarily implied by State operation of the facility’ and whether there was an exception to the requirements for certification ‘for a facility operated by the head of a State agency as agent for a State court.’”  Id. (quoting Missouri, DAB No. 175, at 12).

We disagree with the State that Missouri is altogether inapposite here.  Missouri is analogous to this case in a meaningful way.  The provider at issue in Missouri was not a hospital as CFP and HVC Hospital were.  Although Missouri’s discussion involved certain regulations pertinent to types of facilities that are not specifically applicable to the State’s case pertaining to hospitals, the essential underlying question in Missouri as instructive here was whether a provider agreement was required during the period when the facility was under a state’s operational control.  Missouri and this case present a similar question of whether a state-operated or state-owned provider may be excepted from the provider-agreement requirement yet remain eligible to receive Medicaid payments.  Just as a provider agreement with the facility was a requirement for certification for participation in Medicaid for purposes of entitlement to FFP in Missouri, provider agreements with CFP and HVC Hospital, as required by section 1902(a)(27) of the Act and 42 C.F.R. § 431.107, were requirements for certification for participation in Medicaid for purposes of entitlement to federal Medicaid funding, which DSH payments supplement.  Importantly, we do not find, and the State does not identify, any authority that would warrant distinguishing one type of institution from another to permit CFP and HVC Hospital to be exempt from the provider agreement requirement in section 1902(a)(27) and 42 C.F.R. § 431.107.  In short, we find the factual distinction the State attempts to draw between its case and Missouri inconsequential, and the State fails to persuade us otherwise.

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3. We reject the State’s argument that, during the FFYs under review, it reasonably believed the hospitals did not need to have provider agreements.

The State claims it “reasonably believed” during the relevant fiscal years that Medicaid provider agreements were not required for the State to make DSH payments to the hospitals because neither hospital was “‘providing services under the state plan.’”  MI Br. at 14 (quoting Act § 1902(a)(27)).  According to the State, “specific requirements that must be included in a Medicaid provider agreement do not generally apply in the DSH context.”¹⁹  MI Reply Br. at 3.  “[B]ecause CFP and HVC hospital did not submit claims for individual services,” the State says, “it would not have made sense for them to agree to give DCH information ‘regarding any payments claimed . . . for providing services under the State plan,’ which is the primary purpose of the provider agreement.”  MI Br. at 14 (quoting Act § 1902(a)(27)).  The State thus claims that it reasonably read or understood section 1902(a)(27) as not precluding DSH payments and that provider agreements were not required or necessary since neither hospital was providing services under a State plan.

When the language of a controlling statute or regulation is clear, the Board applies the terms of the statute or regulation.  New Jersey, DAB No 2780, at 5.  When the language of a controlling statute or regulation is ambiguous or subject to more than one interpretation, the Board generally will defer to the federal agency’s interpretation, so long as it is reasonable and the non-federal party had adequate notice of that interpretation or, in the absence of actual and timely notice, did not rely to its detriment on another reasonable interpretation.  See id.; Wash. State Health Care Auth., et al., DAB No. 3037, at 18 (2021) (citing La. Dep’t of Health & Hosps., DAB No. 1772, at 4-5 (2001)); Alaska Dep’t of Health & Soc. Servs., DAB No. 1919, at 14 (2004)); N.J. Dep’t of Hum. Servs., DAB No. 1773, at 5 (2001).  In determining whether the non-federal party had actual and timely notice, the Board considers, among other things, whether the federal agency’s interpretation predates a disallowance or represents a position first articulated in litigation that the agency seeks to enforce retroactively.  New Jersey, DAB No. 2780, at 5-6.

According to the State, Medicaid provider agreements are not required for a state to make DSH payments to hospitals that are not “providing services under the State plan” (Act § 1902(a)(27)).  Neither section 1902(a)(27) nor 42 C.F.R. § 431.107(b) addresses this question.  Neither party indicates that CMS addressed this specific question or provided

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its interpretation of the statute or regulation as relevant to the question before or during the relevant fiscal years under review.

However, the State offered a declaration of an MDHHS employee who has served in various roles within MDHHS or DCH since 2004 and states that, in 2009, CMS “began to raise questions” about the DSH payments to CFP and HVC Hospital (AF at 34 (¶ 5)), which led to DCH’s submission on September 28, 2009, and CMS’s approval in June 2010, of State Plan Amendment (SPA) 09-16 governing DSH payments to certain named state-owned psychiatric hospitals, and which took effect on September 30, 2009.  AF at 34, 36-38.  The declaration states that it “became clear” during the “negotiations” following the submission of the proposed amendment to the State plan that “CMS would require state-owned psychiatric hospitals to be certified as compliant” with Medicare’s special conditions of participation (for psychiatric hospitals), have a provider agreement, and meet other requirements to receive DSH payments.  AF at 34, ¶ 6.

The declarant does not specifically address the circumstances surrounding the claim that CMS “began to raise questions” about the DSH payments in 2009.  The declarant does not state what CMS said or asked questions about or whether the State itself had questions for CMS, before or during the 2009 “negotiations.”  Nevertheless, in the absence of any assertion or evidence that CMS notified the State of its interpretation of the law and regulations as requiring provider agreements (and any additional requirements that must be met) for the State to later claim a federal share of any DSH payments earlier than the effective date of SPA 09-16, we will accept that CMS did not give specific, express notice of that interpretation until it approved SPA 09-16.  The question, then, is whether, during the fiscal years under review, the State reasonably understood section 1902(a)(27) as not precluding DSH payments due to the lack of provider agreement.

We find it difficult to see how the State reasonably could have concluded that no Medicaid provider agreement need be in place since neither hospital was “providing services under the state plan.”  Essentially, the rationale underlying the State’s argument appears to be that no provider agreement was required or necessary since the hospitals themselves were not billing for and receiving Medicaid reimbursement, but instead were receiving Medicaid DSH payments from the state Medicaid agency.  A state Medicaid program directly pays the providers that serve Medicaid beneficiaries and claim reimbursement for the services.  See 42 C.F.R. § 430.0 (stating, in part, that “[p]ayments for services are made directly by the [s]tate to the individuals or entities that furnish the services”).  However, the State cites no authority that would relieve a provider from the provider agreement requirement if it is receiving only DSH payments from the state.

For a state to be entitled to FFP for a portion of expenditures a state makes for “medical assistance,” it must have an approved State plan (which, in accordance with 42 C.F.R. § 430.10, “giv[es] assurance” that the state Medicaid program “will be administered in

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conformity with the specific requirements of title XIX” of the Act), which in turn contemplates the existence of a provider agreement with a person or institution furnishing the services.  See Act §§ 1902(a)(27), 1903(a); 42 C.F.R. §§ 430.0, 430.10-.15, 430.30, 431.107(b).  Reimbursable “medical assistance” is Medicaid “payment of part or all of the cost” of specified categories of “care and services” that must or may be provided to Medicaid-eligible individuals under the State plan (Act § 1905(a)), which must provide for a Medicaid provider agreement.  To be entitled to FFP for Medicaid expenditures, which may be supplemented with DSH payments, a provider agreement must be in place.  See Maine, DAB No. 2931, at 17 (“Pursuant to both statute and regulation, . . . the federal government may only issue Medicaid payments to providers with Medicaid [provider] agreements in place.  42 U.S.C. § 1902(a)(27); 42 C.F.R. § 431.107.”)  The State cannot evade these statutory and regulatory requirements because, the State maintains, the hospitals were not themselves directly providing services under the State plan and billing for those services themselves.  CFP and HVC Hospital might not have needed to have provider agreements with the state Medicaid agency to operate and provide services.  However, for the State to be able to later claim entitlement to federal Medicaid funding, which, as discussed, DSH payments supplement, the hospitals must have had provider agreements in place.

The State alternatively contends that provider agreements were unnecessary because the hospitals were “controlled and operated by DCH” (the state Medicaid agency):

Entering an agreement with CFP or HVC hospital would have meant that DCH was making an agreement with itself, which would make no sense and is not expressly required by anything in the Medicaid statute or CMS regulations.  Furthermore, it would have been illogical for CFP or HVC hospital to agree to take steps “to disclose the extent of the services provided” to the state Medicaid agency, § 1902(a)(27), since CFP and HVC hospital were controlled by DCH, which would have already had all necessary information regarding the extent of services provided.

MI Br. at 15.  In reply, the State clarifies that it –

is not arguing that all state-operated providers are exempt from the provider agreement requirements; rather, [its] position is that providers operated by the single state Medicaid agency itself are not required to enter into a provider agreement, because it makes no sense for an agency to enter into an agreement with itself.  In contrast, state agencies can, and often do, enter into agreements and memoranda of understanding with their sister state agencies.  At the very least, in the absence of CMS guidance, it was not unreasonable for DCH, at the time, to read the federal statute and regulations as not requiring it to enter a formal provider agreement with itself.

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MI Reply Br. at 4.

From our perspective, the State’s clarified argument is not much different from the State’s earlier argument, which we have rejected, that no provider agreement is required if the provider is operated by the state.  The State identifies no statute or regulation that excepts a provider run by a “single state Medicaid agency” – which is required under section 1902(a)(5) of the Act – from the requirement.

Furthermore, the State’s assertion that “it would have been illogical for” the hospitals to “‘disclose the extent of the services provided’” to DCH under section 1902(a)(27) of the Act since DCH, which “controlled” both hospitals, “would have already had all necessary information” about the hospitals (MI Br. at 15), disregards 42 C.F.R. § 431.107’s record-keeping and documentation requirements.  In accordance with 42 C.F.R. § 431.107(b)(1) and (b)(2) in effect during the relevant years, the State plan must provide for an agreement between the state Medicaid agency and each provider in which the provider agrees to “[k]eep any records necessary to disclose the extent of services the provider furnishes to recipients”²⁰ and to provide, “[o]n request,” such information to the state Medicaid agency, the Secretary of Health and Human Services, or the State Medicaid fraud control unit.  Section 431.107 does not limit the provider’s obligation to maintain and produce such records only to instances in which the provider directly claimed reimbursement from the state Medicaid agency for services rendered.  Nor does it exempt a provider from such record-keeping and documentation requirements to which a provider must commit under the required provider agreement if the provider was owned, operated, or controlled by the state or any division or instrumentality of the state.

The State identifies no authority that relieves a provider-hospital that is owned, operated, or controlled by the state from those requirements.  The operational control a “single state agency” (DCH here) had over a provider itself would not ensure that a provider’s claim-related records would be retained for any subsequent review by the state Medicaid agency, the Secretary, or the state’s Medicaid fraud control authority in accordance with the regulatory requirements.  Relieving providers from such requirements that must be made a part of the required provider agreement because the state operates or controls the provider would not serve the state’s own interests as it could leave the state unable to fully substantiate underlying claims and payments, or at least unable to be fully responsive to questioned-cost findings on subsequent audit or review.  Given these regulatory mandates, the noncompliance with which clearly would be contrary to the State’s interests, we reject the State’s superficially plausible claim that it reasonably determined that the hospitals did not need to enter into provider agreements under the circumstances.

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We are inclined to accept the notion that operating and using resources efficiently and avoiding redundancy are legitimate state government concerns.  MI Br. at 3 (stating that it would have been “inefficient, inappropriate, and redundant for DCH” to have “enter[ed] into a contract with itself” (internal quotation marks omitted)).  We note, however, record evidence of inter-division agreements made before the relevant fiscal years.  See, e.g., AF at 839-42.  Such evidence tends to undermine the State’s position because it suggests that divisions of the state government have entered into agreements if, apparently, such agreements were determined to have been appropriate or necessary in furtherance of effectuating State plan objectives.  Also, of note, it is undisputed that DCH made an agreement with MDOC to have DCH operate HVC Hospital.  And, the State has not specifically asserted or shown that anything in fact impeded or prohibited the state Medicaid agency from entering into a provider agreement with either hospital at any time during the relevant years.

Those considerations aside, and even accepting that the State might have had legitimate concerns about efficient operation and optimal use of state resources, we reject the implication that a state government’s interests in avoiding inefficiency and redundancy could or should excuse the failure to comply with federal law and regulations for establishing eligibility to receive federal Medicaid funding.  Moreover, it would be reasonable for a state to have the hospitals enter into provider agreements with the state Medicaid agency where the statute and regulations do not specifically except state-owned or state-operated hospitals from the provider agreement requirement.  Having the required provider agreements in place for both hospitals would have served the State’s interests in terms of future claiming and establishing entitlement to what could amount to hundreds of millions of dollars of federal Medicaid assistance, which could include FFP for DSH payments.  The choice not to comply with the provider agreement requirement posed a real risk that would have, and has, put the State in a position of having to attempt to explain, years later, why it did not have the hospitals enter into provider agreements despite the apparent absence of legal or other impediments precluding or preventing them.  The State’s inability to now articulate convincingly that it acted reasonably in not having the hospitals enter into provider agreements is a problem of its own making that the State could have avoided by complying with the requirement.

The State’s arguments also fail to appreciate the meaning and import of a provider agreement with the state Medicaid agency.  A state may not simply disregard the provider agreement requirement because, as the State suggests, it would make no sense for the state Medicaid agency to enter into an agreement with itself.  The existence, or not, of a provider agreement is important because, “[o]rdinarily,” a provider agreement “constitutes evidence that the facility has met the certification requirements” and, absent evidence that certification requirements were in fact met, the payment of FFP is not available for the period the provider did not have a valid provider agreement.  Tex. Dep’t of Hum. Servs., DAB No. 1344, at 4 (1992); see also La. Dep’t of Health and Hospitals, DAB No. 1116, at 1 (1989).  As the Board stated in Texas, DAB No. 1344, at 4, “[w]here

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a state has not followed the applicable rules and procedures for certification, a provider agreement is not valid evidence that a facility met certification requirements.”  As discussed later, neither hospital met the certification requirements for psychiatric hospitals.  Given the importance of a provider agreement, which, absent evidence to the contrary, indicates compliance with all applicable certification requirements, we are unable to see how the State could have reasonably concluded that it nevertheless may properly give the hospitals without Medicaid provider agreements DSH payments that Congress had intended to supplement federal Medicaid funding.  To conclude that no provider agreement need be in place against this backdrop is not reasonable because the State essentially determined it would not comply with applicable federal authorities yet take federal funding.

Furthermore, even were we to accept for the moment that the State reasonably believed, “at the time,” that DCH need not enter into provider agreements with “itself,” the State presumably could have asked HCFA (or its successor, CMS) for clarification on, or questions about, the matter.  The State offers no evidence of any such inquiry.  Nor does the State offer any evidence that DCH or any state official in fact concluded or believed, “at the time,” that no provider agreement is required or necessary under the circumstances.  While we would scrutinize evidence of any such request for clarification, or conclusion or belief, to determine whether the after-the-fact claim of reasonableness is indeed credible, persuasive, and substantiated, the State offers no such evidence for us to examine.²¹  The State declares “at the time” it reasonably concluded that the absence of a provider agreement would not preclude it from giving the hospitals DSH payments a portion of which the State would later claim for federal reimbursement, but offers no concrete explanation, or evidence, as to why and on what basis it determined, “at the time,” it would be reasonable to give the non-certified psychiatric hospitals DSH payments intended to supplement Medicaid funding and expect the federal government to later pay a share of those payments.

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4. We reject the State’s argument that the lack of a provider agreement between CFP and the state Medicaid agency during FFYs 2001-2009 is merely a “technical violation” that could be cured retroactively.

The State also asserts that “[e]ven if CMS regulations are clear that a provider agreement is necessary for a hospital that is not billing for services (but is receiving DSH payments), and that is operated by the single state agency, at most that is a technical violation that can be cured retroactively and should not bar the ability to claim FFP” with respect to CFP.  MI Reply Br. at 5.²²  This contention appears to rest on the State’s characterization of the Medicaid provider agreement that CFP entered into on April 24, 2008, as being “retroactive” to October 1, 2000.  See MI Br. at 15; AF at 100-116.  The June 5, 2008 cover letter from Michigan Department of Community Health, Bureau of Hospital, Center and Forensic Mental Health Services, to Michigan Department of Community Health referred to a “recently submitted” “application to enroll CFP as a Medicaid provider” and asked that “CFP’s enrollment be made retroactive to October 1, 2000” (apparently intended to remedy the lack of a provider agreement for FFYs 2001-2009).  AF at 102.  However, it is undisputed that CMS determined, by notice dated December 1, 2010, that CFP was certified as meeting the special conditions of Medicare participation applicable to psychiatric hospitals effective November 17, 2010.  See AF at 55 (“Your effective date of participation is November 17, 2010.”), 57-58; MI Br. at 5.  This date falls after the years at issue for CFP, FFYs 2001-2009.

The parties’ dispute extends to how to interpret the regulations that govern the effective date of Medicaid provider agreements with providers that, as a basis for participation in Medicaid, are subject to survey and certification by CMS or the state survey agency or are deemed to meet federal requirements based on accreditation by an accrediting organization whose program CMS has approved at the time of the accreditation survey and accreditation decision.  See 42 C.F.R. § 431.108(a).  CMS acknowledges that CFP was an “accredited” provider, urging us to look to section 431.108(d).  CMS Response Br. at 15.  Section 431.108(d), as in effect throughout the federal fiscal years at issue and on December 1, 2010, when CMS determined that CFP met the participation requirements, states:

(d) Accredited provider requests participation in the Medicaid program – 

(1) General rule.  If a provider is currently accredited by a national accrediting organization whose program had CMS approval at the time of accreditation survey and accreditation decision, and on the basis of 

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accreditation, CMS has deemed the provider to meet Federal requirements, the effective date depends on whether the provider is subject to requirements in addition to those included in the accrediting organization’s approved program.

(i) Provider subject to additional requirements.  For a provider that is subject to additional requirements, Federal or State, or both, the effective date is the date on which the provider meets all requirements, including the additional requirements.

(ii) Provider not subject to additional requirements.  For a provider that is not subject to additional requirements, the effective date is the date of the provider’s initial request for participation if on that date the provider met all Federal requirements.

(2) Special rule:  Retroactive effective date.  If the provider meets the requirements of paragraphs (d)(1) and (d)(1)(i) or (d)(1)(ii) of this section, the effective date may be retroactive for up to one year, to encompass dates on which the provider furnished, to a Medicaid recipient,[²³] covered services for which it has not been paid.

According to CMS, if section 431.108(d)(2)’s one-year retroactive effective date rule is applied to CFP (an accredited provider subject to “additional requirements” under section 431.108(d)(1)(i), meaning the special conditions of participation for psychiatric hospitals), CFP’s provider agreement would be effective on November 17, 2009, which falls shortly after the FFYs at issue.  CMS Response Br. at 15.  However, according to CMS, the retroactive date rule “‘encompass[es] dates on which the provider furnished, to a Medicaid recipient, covered services for which it has not been paid,’” but CFP did not qualify for even one year of retroactivity because it “was not participating in Medicaid during the relevant time” (apparently meaning that CFP was not eligible to participate in Medicaid during the relevant fiscal years).  Id. (quoting 42 C.F.R. § 431.108(d)(2) (2009)).

The State, however, argues that section 431.108(d)(2) presents no impediment at all, seeking to rescue CFP from the confines of the regulation’s one-year limitation.  The State asserts that the rule applies only to providers furnishing “covered services” to a “Medicaid beneficiary” (apparently meaning that CFP was receiving DSH payments and did not provide services for which it billed for Medicaid reimbursement); that CMS chose the one-year period to be “‘consistent with Medicare and Medicaid regulations which

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generally require that claims be submitted for payment within one year from the date of service’”; and that “[i]f anything,” the rule “confirms that provider agreements are required only when billing for services.”  MI Reply Br. at 6 (quoting Final Rule, 62 Fed. Reg. 43,931, 43,933 (Aug. 18, 1997) (eff. Sept. 17, 1997)).

We find the State’s arguments wanting and inherently contradictory.  First, the State’s argument that CFP did not furnish covered services to any Medicaid recipient (or beneficiary) and did not bill for Medicaid reimbursement disregards the import of the provider agreement requirement.  As discussed elsewhere in this decision, a provider agreement is ordinarily evidence that the provider meets all applicable requirements for certification and thus is eligible to participate in the program.  Putting aside for the moment that CFP was not furnishing covered services to Medicaid recipients or beneficiaries to be claimed for reimbursement because it was given DSH payments by DCH, the fact is, CFP was not eligible to participate in Medicaid and for that reason would not have been able to provide covered services to any Medicaid recipient or beneficiary and claim payment for those services.  In other words, we reject the State’s attempt to put billing and payment before eligibility; one must first be eligible before it can bill and obtain federal DSH payments.  Why would the State request that the effective date of the provider agreement be retroactive to October 1, 2000 if the effective date had no impact on the State’s ability to claim FFP for DSH payments?

In addition, section 431.108 does not actually state, or use language that reasonably could be understood to mean, that “provider agreements are required only when billing for services,” as the State claims.  Moreover, section 431.108(d)(2) must be read in the context of the full text of section 431.108, which is not per se a billing or payment regulation as the State appears to read it, but which governs the effective date of provider agreements, as the regulation’s caption (“Effective date of provider agreements”) indicates.²⁴  We read section 431.108(d)(2), within the context of the remainder of section 431.108, to mean that if the accredited provider meets section 431.108(d)(1), and either section 431.108(d)(1)(i) or section 431.108(d)(1)(ii) (whichever applies), then the provider may be eligible for a one-year retroactive effective date, so that it could claim reimbursement for covered services furnished during the one-year period preceding the effective date.  Such a provision is not reasonably read to mean that a provider agreement is required only if the provider directly delivered covered services to Medicaid recipients or beneficiaries for which the provider later claimed reimbursement.

As for the State’s reliance on 1997 Federal Register preamble language, we acknowledge that HCFA stated:  “The one-year period for retroactivity is consistent with Medicare and Medicaid regulations which generally require that claims be submitted for payment within one year from the date of service.”  62 Fed. Reg. at 43,933.  However, the fact that

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HCFA apparently had consistency between Medicare and Medicaid claiming and payment rules in mind when promulgating the effective-date rules hardly “confirms” the notion that “provider agreements are required only when billing for services,” as the State suggests.  The State does not set out a persuasive, rational basis for making such a leap based on the preamble language or cite binding authority that supports such a proposition.  And the Federal Register publication from which the State quotes does not bear the State’s assertion.  Most important, the plain language of the regulation does not support it.

In sum, the State has not established that CFP had a provider agreement in effect during any part of FFYs 2001-2009.  As discussed elsewhere, the provider agreement requirement is rooted in the Medicaid statute and regulations and must have been in place to support federal Medicaid funding, of which DSH supplemental payments are a part.

2. Neither hospital was certified as a psychiatric hospital during the relevant federal fiscal years and, accordingly, neither was eligible to receive Medicaid payments for hospital services or DSH payments.
   1. Neither hospital was certified as a psychiatric hospital.

A hospital must be certified in accordance with applicable requirements to participate in Medicare or Medicaid.  To participate in Medicaid, the hospital must meet Medicare conditions of participation and any additional applicable conditions of participation.  CMS determined that neither hospital was certified as a psychiatric hospital during the relevant fiscal years.  AF at 65, 69.  The State does not dispute that.  See MI Br. at 12.  Michigan’s state plan provisions that went into effect in 1994 expressly stated that public institutions for mental diseases “must be certified . . . as meeting the standards for psychiatric hospitals” in accordance with the Medicare statute.  AF at 844.  Furthermore, CMS maintains, and the State does not dispute, that CFP was not certified by CMS as meeting the special conditions of Medicare participation for psychiatric hospitals until November 17, 2010.  See AF at 55-58; CMS Response Br. at 15; MI Br. at 5.²⁵  And, as discussed, even were we to apply section 431.108(d)(2), CFP would not have a retroactive effective date that falls within FFYs 2001-2009.  In short, neither hospital had the required certification.  Absent evidence that the applicable certification requirements were met, FFP is not available for the period during which no provider agreement was in effect.

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The issue is whether the State nevertheless is entitled to FFP for any DSH payments made to the hospitals.  The State raises various arguments on this issue, which we address in detail below.

2. We reject the State’s arguments that, despite the lack of certification as psychiatric hospitals, the State reasonably determined it could make DSH payments to the hospitals.

The State contends that it “reasonably concluded that it could make DSH payments” to CFP and HVC Hospital because:

both were licensed and approved as “hospitals” by “an officially designated authority for State standard setting.  See [42 C.F.R.] § 440.10.  Moreover, both were accredited as “hospitals” by the Joint Commission. . . .  Medicare regulations in effect during the time period in question provided that a hospital “meet[s] the requirements for participation in Medicare” if it is accredited by the Joint Commission, 42 C.F.R. § 488.5 (2009).  While the hospitals were not additionally certified as meeting the two Medicare special conditions of participation for psychiatric hospitals, the State reasonably concluded that this was not required for DSH payments to CFP and HVC hospital because it was not claiming for “IMD services” for adults aged 65 or older under . . . Section 1905(a) [of the Act] and regulations at 42 C.F.R. § 440.140, but instead was making a DSH payment under Section 1923 [of the Act] and regulations at 42 C.F.R. § 447.299.

Nothing in Section 1923 [of the Act] suggests that an IMD or other mental health facility must meet Medicare’s special conditions of participation to receive DSH payments.  Section 1923(h) refers to “institutions for mental diseases” and “other mental health facilities” as eligible for DSH payments; it does not describe these facilities as “psychiatric hospitals,” which is the term used in the regulations outlining Medicare’s special conditions of participation, see [42 C.F.R.] §§ 482.60-62.  This choice of broad and inclusive statutory language indicates a congressional recognition that DSH payments could be made to more than just the “psychiatric hospitals” that meet the Medicare special conditions of participation, or those hospitals that provide the narrowly-defined Medicaid “inpatient psychiatric services” requiring adherence to Medicare’s special conditions of participation when delivered to individuals age 65 and older, 42 C.F.R. § 440.160.[²⁶]

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Nor do CMS’s DSH regulations include any requirement that IMDs or other mental health facilities must comply with Medicare’s special conditions of participation.  See 42 C.F.R. Part 447, Subpart E.  CMS does not have regulations implementing Section 1923(h)’s provisions governing DSH payments to IMDs and other mental health facilities.  However, after the statutory provision was enacted in 1997, CMS sent out a State Medicaid Director letter “outlin[ing its] policy” regarding DSH allotments “and how they apply to institutions for mental disease [IMD] or other mental health facilities.” . . .  That letter does not indicate any CMS “policy” that such payments are limited to hospitals meeting Medicare’s special conditions of participation.

MI Br. at 12-13 (citations to record materials omitted).

In its reply brief, the State asserts that “the text of Section 1923 itself does not require that a hospital meet all requirements for provision of inpatient psychiatric hospital services” (a State plan service) to be eligible for DSH payments, and that:

[j]ust because the statute describes a DSH payment as an “adjustment” or an “increase,” it does not follow that the hospital must be eligible for or receiving an underlying Medicaid payment for delivery of services.  A DSH payment can be an “adjustment” from $0 in Medicaid service payments.  Indeed, Section 1923(h) expressly authorizes DSH payments to IMDs, which do not necessarily receive any Medicaid service payments (because of the IMD exclusion).

MI Reply Br. at 12.  The State further argues that the requirements for Medicaid payment for specific services under the State plan (such as inpatient psychiatric hospital services) cannot properly be applied to DSH payments because DSH payments are not payments for specific services.  The State writes:

In justifying the disallowance, CMS relies on a host of authorities that impose requirements on States making payments to entities providing services under the state plan.  But a DSH payment is not payment for a state plan service.  DSH payments are not tied to a specific service provided to a specific beneficiary, but rather are measured by costs not paid by Medicaid, including costs for patients ineligible for Medicaid.  As CMS recently explained, in calculating costs reimbursable under DSH, a State may consider all medically necessary inpatient and outpatient costs for Medicaid-eligible individuals and the uninsured, “regardless of whether those beneficiaries or hospitals were entitled to payment as part of the Medicaid benefit package under the state plan.”  CMS, Medicaid Program; Disproportionate Share Hospital Payments—Uninsured

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Definition, 79 Fed. Reg. 71679, 71681 (Dec. 3, 2014) (emphasis added).  Because DSH payments do not reflect payment for state plan services to state plan beneficiaries, it was reasonable for DCH to conclude that state plan requirements did not apply.

Id. at 2.

The State thus argues, essentially, that, even though it was aware that the hospitals were certified only as hospitals, but not certified as meeting the special conditions of participation for psychiatric hospitals,²⁷ it reasonably believed it could make DSH payments to them, since the hospitals themselves were not claiming Medicaid reimbursement for IMD services provided to Medicaid beneficiaries, and in the absence of authority specifically requiring IMDs to meet the special conditions of participation to receive DSH payments.  But the issue is not whether the hospitals needed to meet the special conditions of participation when they were not themselves claiming Medicaid payments for services delivered.  The State does not dispute that both hospitals met the statutory definition of the term “institution for mental diseases” and were in fact providing psychiatric care to their patients.  Accordingly, regardless of whether the hospitals themselves were not claiming Medicaid reimbursement for IMD services but were given DSH payments, they needed to meet the Medicare certification requirements for psychiatric hospitals to claim any Medicaid payment under the State plan for inpatient hospital services furnished to the under-21 and 65-and-older populations, and neither hospital met those requirements.  And DSH payments supplement Medicaid payments; neither hospital was eligible to participate in Medicaid and therefore neither was eligible for Medicaid payments that would include DSH supplements.

Relying principally on Maine, DAB No. 2931, CMS asserts that a hospital cannot receive DSH payments if it is not qualified to receive Medicaid payments for covered services under the State plan.  CMS Response Br. at 12, 14 (stating that “[t]he services that a

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hospital provides must be eligible for payment in order for them to be eligible for adjustments to payment”), 15-25.  In Maine, the Board stated:

Conditions of participation are not imposed on types of payments (e.g., DSH supplemental payments) but on types of providers.  DSH recipients are not a separate provider type but a subset of the provider type to which they belong, such as . . . psychiatric hospitals.  To receive any Medicaid payments, including supplemental payments (such as DSH) above the base Medicaid rates, all providers must comply with the [conditions of participation] applicable to their provider type.  For hospitals, Medicaid regulations expressly “specify that hospitals receiving payment under Medicaid must meet the requirements for participation in Medicare . . . .”  42 C.F.R. § 482.1(a)(5); see also id. §§ 440.10(a)(3)(iii) (hospitals providing inpatient hospital services must meet Medicare requirements) and 440.160(b)(1) (psychiatric hospitals providing inpatient services for those under 21 must meet Medicare requirements).  The fundamental requirement that providers receiving Medicaid funding qualify to participate in Medicaid is not a restriction on state flexibility to designate particular providers as DSH recipients. 

DAB No. 2931, at 17 (emphasis supplied here).

The State, however, asserts that Maine’s holding – to receive Medicaid payments, including DSH payments, the provider must meet the applicable conditions of participation – is not controlling here because CFP and HVC Hospital, unlike the state-owned facility in Maine, were qualified to participate in Medicare and Medicaid as acute care “hospitals,” having been accredited as such by The Joint Commission.  MI Reply Br. at 8-9.  The State writes:

In deciding Maine, the Board was addressing Maine’s contention that it could continue to make DSH payments to an entity that was not even a hospital, because it was not compliant with the regular conditions of participation applicable to all hospitals, not just those special conditions of participation applicable to psychiatric hospitals.  The Board did not consider whether a State could make DSH payments to an IMD that was an accredited hospital, compliant with all Medicare rules including those governing patient safety, but that was not certified as meeting the two additional requirements for participation as a psychiatric hospital.  Similarly, the Board rejected Maine’s contention that its psychiatric hospital was eligible to receive DSH payments “as something other than a state psychiatric hospital” because an entity that does not meet Medicare’s general conditions of participation is not a hospital under Medicaid law, and DSH payments may only be made to hospitals. . . .  In this case, there is

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no dispute that both CFP and HVC Hospitals were regular hospitals under Medicaid law, by virtue of their Joint Commission accreditation. . . .  Even if CFP and HVC Hospital could not claim for psychiatric hospital services, they were qualified to enroll in Medicaid and bill Medicaid for regular hospital services.

MI Reply Br. at 8-9 (citations to MI Br. omitted) (italics in original).

We reject the State’s attempt to factually distinguish its case from Maine.  Since the State does not dispute that CFP and HVC Hospital were IMDs, both institutions must have met, but did not meet, the applicable special conditions of participation for psychiatric hospitals and, thus, they were not certified or eligible to participate in Medicaid.  Obtaining status as an accredited psychiatric hospital is necessary to claim Medicaid payment in accordance with the under-21 and 65-and-older benefits.

Furthermore, the State appears to disregard the Board’s response to Maine’s contention that CMS could not lawfully deny FFP for DSH payments to Riverview Hospital because Riverview was an IMD that was not precluded from receiving DSH payments under section 1923 of the Act.  The Board stated:

. . . Maine’s late claim that CMS cannot deny DSH payments to Riverview even though it admittedly “no longer meets” the definition of a “psychiatric hospital” because IMDs are not excluded from receiving DSH is unfounded.  That some IMDs may qualify to receive Medicaid DSH payments does not mean that every IMD must be considered qualified.  Riverview is not qualified as a DSH recipient under either federal law or Maine’s state plan because only IMDs that are psychiatric hospitals providing Medicaid-eligible services are eligible to receive Medicaid DSH payments.

We find no novel interpretation here of law by CMS, as Maine contends, but instead conclude that Medicaid law has consistently permitted states to designate as DSH recipients only hospitals that participate in Medicaid and are eligible to receive Medicaid payments. . . .

Maine at 20-21 (citations omitted) (emphasis in original).  Thus, the Board made clear that an IMD – which CFP and HVC Hospital undisputedly were, and CFP still is – must be qualified, or eligible, as psychiatric hospitals by meeting the conditions of participation for psychiatric hospitals “[t]o receive any Medicaid payments, including supplemental payments (such as DSH) above the base Medicaid rates.”  Maine at 17.  Moreover, although the Board recognized that section 1923 of the Act confers on states discretion in directing DSH payments to qualified hospitals, it made clear that states may not direct DSH payments to hospitals not qualified to participate in Medicaid at all.  Id. at

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15-16.  The Board also stated, “Section 1923(b)(4) of the Act provides that ‘[t]he Secretary may not restrict a State’s authority to designate hospitals as disproportionate share hospitals under this section.’  This provision of the statute applies to DSH designations, but does not on its face preclude disallowance of all Medicaid FFP to a hospital ineligible for Medicaid payments.”  Id. at 16.  The State’s claim that CMS wrongly disallowed FFP for the DSH payments it had made to two IMDs that did not meet the applicable conditions of participation (or the provider agreement requirement) is, in short, a claim of entitlement to federal funding in violation of federal law.  We cannot accept such a claim.

3. The hospitals were subject to the inmate and IMD exclusions.

No federal Medicaid funding is available for the care or services provided to anyone who is an inmate of a public institution, except as a patient in a medical institution.  And no federal Medicaid funding is available for the care or services of inpatients in IMDs who are between the ages of 21 and 64 years.  However, Medicaid may cover inpatient psychiatric hospital services furnished to individuals 65 or older in an IMD that meets (among other requirements) the Medicare conditions of participation for psychiatric hospitals.  Medicaid also may cover inpatient hospital services furnished to individuals under 21 years of age in a facility that meets (among other requirements) the Medicare conditions of participation for psychiatric hospitals.

The parties do not dispute that both hospitals were IMDs.  However, with respect to HVC Hospital (which closed in 2003), the parties dispute whether the hospital was a public institution for purposes of the inmate exclusion.  MI Br. at 3, 16-17; CMS Response Br. at 22-25; MI Reply Br. at 10-11.  With respect to both hospitals, CMS asserts, essentially, that no under-21 or 65-and-over “exception” to the IMD exclusion applies.  CMS Response Br. at 16-22.  The State, however, primarily asserts that it had inadequate advance notice that ineligibility for Medicaid reimbursement under the under-21 and 65-and-over benefits would also mean ineligibility for DSH payments.  MI Br. at 17-19; MI Reply Br. at 11.

We determine that no DSH payments are allowable.  As we state elsewhere in this decision, the State’s claim that it reasonably made DSH payments in the absence of express agency announcement that such payments may not be allowable and reimbursable is not convincing and its payments contravene Congress’s intent.

1. Inmate Exclusion

CMS contends that HVC Hospital was ineligible for any payments, including DSH payments, with respect to its inpatient services during FFY 2001 because its patients were “inmate[s] of a public institution,” not “patient[s] of a medical institution.”  CMS Response Br. at 15-16, 22-23.

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The State, however, argues that HVC Hospital was not subject to the inmate exclusion because it was a “medical institution” as defined in 42 C.F.R. § 435.1010²⁸; authorized under Michigan law to provide medical care and accredited by The Joint Commission; had the necessary personnel, equipment, and facilities to deliver services and manage patient health needs in accordance with accepted standards; and had patients who were admitted as inpatients (meaning they received inpatient hospital services).  MI Br. at 17.  Further, although the State acknowledges that HVC Hospital was an MDOC facility, it maintains that the hospital was not a “prison hospital” (meaning it was not a “public institution”) because DCH controlled and operated the hospital for individuals in MDOC custody.  Id. at 2, 3 (stating that all HVC Hospital employees, except for perimeter security, worked for DCH), 15, 17.  The State also asserts that, when it made the DSH payments to HVC Hospital, it reasonably believed that the payments were not barred by the inmate exclusion because it also believed, reasonably, that the hospital’s patients were not inmates of a public institution but, rather, were inpatients of a medical institution, which was not operated by MDOC but by DCH.  Id. at 15-17.

On reply, the State makes a broader contention – that the inmate exclusion “did not unambiguously” prohibit FFP for DSH payments, regardless of whether a hospital’s patients are classified as inmates of a public institution or as patients of a medical institution.  MI Reply Br. at 10.  The State says that “none of the authorities CMS cites show that Michigan was on notice during the relevant time period that CMS interpreted these Medicaid services requirements [relating to inmates of a public institution] as applying to DSH payments.”  Id.  According to the State, as with the statutory and regulatory provisions regarding Medicaid provider agreements, the inmate exclusion rule “addresses the availability of federal funds for payments for Medicaid services provided to inmates, not DSH payments.”  Id.  The same is also true, says the State, about HCFA’s 1997 and 1998 announcements concerning the inmate exclusion (AF at 118, 123), “which address payment for services, not DSH.”  MI Reply Br. at 10.  Thus, the State maintains, essentially, that it reasonably made DSH payments during the relevant years since CMS did not explicitly state that such payments may not be made to a hospital for the care of prison inmates until August 16, 2002, when CMS issued a letter to the state Medicaid Directors (2002 SMDL).  MI Br. at 17-18; MI Reply Br. at 10-11.

For purposes of the inmate exclusion, the term “public institution” is defined as “an institution that is the responsibility of a governmental unit or over which a governmental unit exercises administrative control.”  42 C.F.R. § 435.1009 (Oct. 1, 2000); id. § 435.1010 (Oct. 1, 2008).  On December 12, 1997, HCFA issued a memorandum to its

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regional offices (1997 Memorandum), addressing the inmate exclusion.  AF at 123.  The 1997 memorandum provides, in part, that “administrative control” which renders a facility a public institution “can exist when [the] facility is actually an organizational part of a governmental unit or when a government unit exercises final administrative control, including ownership and control of the physical facilities and grounds used to house inmates.”  AF at 124.  “Administrative control can also exist when a governmental unit is responsible for the ongoing daily activities of a facility” (such as “when facility staff members are governmental employees or when a governmental unit, board, or officer has final authority to hire and fire employees”).  Id.

On April 10, 1998, in RIL 98-22, HCFA provided additional information “to help clarify, and in some instances modify existing policy interpretations” on Medicaid coverage for inmates of public institutions.  AF at 118.  There, HCFA rejected the notion that a hospital situated in a correctional institution could be considered a medical institution if it was operated or owned by a private entity.  RIL 98-22 states in part:

Private Health Care Entities

Some States have contracted with private health care entities to provide medical care in public institutions to the institutions’ inmates.  FFP is not available for medical care and services provided in such situations because inmates are not receiving services as patients in a medical institution. Rather, they are continuing to receive medical care in a public institution.

Some States are also considering the feasibility of selling or transferring ownership rights of prison medical units (including the housing facilities and immediate grounds) to private health care entities, thereby potentially establishing the unit as a medical institution.  We do not believe this arrangement is within the intent of the statute’s exception, and adhere to the policy that FFP is unavailable for any medical care provided on the greater premises of prison grounds where security is ultimately maintained by a governmental unit.

AF at 120 (underlining in heading in original removed). 

It is undisputed that the state of Michigan owned HVC Hospital (and CFP).  AF at 4, 5.  Ostensibly, an owner – Michigan state – exercises control over what it owns.  There is no assertion, or evidence, that, any time during the relevant year(s), the Michigan state government ceded control over HVC Hospital (or CFP) to anyone or any entity that is not a division or instrumentality of the state government.  Accordingly, HVC Hospital was a public institution under state government control.  Moreover, regardless of whether HVC Hospital was controlled or operated by MDOC or DCH, or even jointly controlled or operated by MDOC and DCH, the hospital retained its “public institution” status.  Since

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it is undisputed that MDOC and DCH were each a governmental unit or instrumentality, the fact that DCH operated HVC Hospital through a contract between MDOC and DCH (AF at 4-5, 260) would not transform HVC Hospital from a public institution to a medical institution.  As CMS says, “[i]f contracting with a private entity does not change the crucial fact of governmental control and establish the unit as a medical institution, obviously, contracting with another government agency will not do so.”  CMS Response Br. at 25.  We fully agree.  Furthermore, the State acknowledges that, except for perimeter security personnel, all HVC Hospital employees worked for DCH.  MI Br. at 2.  The fact that the hospital’s staff members were employed by DCH, an arm of the Michigan state government, is another indication of the government’s administrative control over the hospital.  AF at 124 (1997 memorandum, stating that “[a]dministrative control can . . . exist when a governmental unit is responsible for ongoing daily activities of a facility, for example, when facility staff members are government employees”).

The State’s emphasis on DCH’s operation of HVC Hospital serving inmates in MDOC custody appears to assume (or at least suggest) that, for a hospital to retain its essential character as a public institution, the hospital must be controlled and/or operated by a department of corrections or other governmental entity with law enforcement authority over individuals.  See AF at 4 (¶ 3); AF at 845-46 (organizational charts included in the Michigan state plan, effective early 2002, indicating that Huron Valley Center (which housed the hospital), like CFP, was a Bureau of Forensic Mental Health Services facility, within the Health Programs Administration).  However, the State does not cite authority that supports such an apparent understanding, and we see no support for it in the statute, regulations, or the 1997 and 1998 HCFA issuances.  Since the essential question for determining whether an institution is a public institution is whether a government entity exercises administrative control over it, HVC Hospital, owned by the state of Michigan and, as the State says, operated by DCH, was a public institution.

We also consider the patient population.  In its 1997 Memorandum, HCFA made clear that “[a]n individual is an inmate when serving time for a criminal offense or confined involuntarily” in a state or federal prison, jail, or detention or “other penal” facility.  AF at 123 (underlined in original; bolded here); see also Proposed Rule, 64 Fed. Reg. 60,882, 60,900 (Nov. 8, 1999) (stating that “the term ‘inmate’ includes only a person involuntarily residing in a penal setting”).

The State does not dispute that HVC Hospital provided medical care to individuals who were serving time for conviction for a criminal offense or confined involuntarily in a penal facility.  See AF at 239 (describing MDOC “jurisdiction over all adults convicted of felonies who are sentenced to prison” as well as over those who are sentenced to a county jail term or are under probation), 260 (“Huron Valley Center offers residential mental health treatment . . . for convicted felons with serious mental illness,” and it is a “Security Level” “V” facility that “includes 2 perimeter chain-link fences, electronic detection systems, and an emergency response vehicle”), 268.  There is no assertion or

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evidence that any patient served by HVC Hospital could leave at will or voluntarily remain at a state-controlled facility.  AF at 123.

Further, CMS maintains, and the State does not dispute, that the hospital itself was located at the Huron Valley Center correctional facility.  CMS Response Br. at 9; AF at 4-5; AF at 221-222; AF 260 (MDOC materials, stating that Huron Valley Center offers “residential mental health treatment for convicted felons” and “on-site” routine medical care).  This is another factor supporting the conclusion that HVC Hospital’s inmate-patients were confined to a penal facility.  See 64 Fed. Reg. at 60,900 (stating that an institution that is a part of the state’s penal system “is primarily a penal institution rather than a medical institution”).  In addition, any visits a Huron Valley Center inmate made to the hospital to receive medical care did not render the inmate a patient of a medical institution.  See AF at 119-120 (RIL 98-22, providing that an inmate is “not considered to be a patient in a medical institution” when receiving care provided “at a clinic, physician office, prison hospital, or dispensary”); AF at 125 (1997 memorandum, stating FFP is unavailable for “medical care provided to an inmate taken to a prison hospital or dispensary”); see also N.Y. State Dep’t of Health, DAB No. 1809, at 5-6 (2002) (stating that, in two earlier Board decisions, the Board “correctly held” that institutional status of the individual, not the individual’s physical location, determines whether the general IMD exclusion applies).

“FFP is not available” for services provided to inmates.²⁹  AF at 118 (RIL 98-22); AF at 123 (1997 Memorandum).  As HCFA stated in RIL 98-22, section 1905(a)(29)(A) of the Act “excludes [FFP] for medical care or services for any person who is an inmate of a public institution, unless that person is a patient in a medical institution.”  AF at 118.  “Unless a person is an inmate and in a public institution, the prohibition against FFP in section [1905(a)(29)(A) of the Act] is not applicable.”  Id. (emphasis added).

We reject the State’s argument that it reasonably believed the DSH payments made to HVC Hospital would be permissible.  As discussed elsewhere, Congress enacted the inmate exclusion (and the IMD exclusion) to prevent the use of federal Medicaid funds to pay for care for which state and local governments are responsible.  The State’s claim

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that it nevertheless reasonably determined DSH payments were allowable for public institutions like HVC Hospital that provided services to prison inmates is implausible because HCFA long ago made announcements consistent with Congress’s action.  If FFP is not available for services subject to the inmate exclusion, then DSH payments for such services likewise are not available.

2. IMD exclusion

Neither party disputes that CFP and HVC Hospital met the statutory definition of an IMD.  However, CMS asserts that neither hospital is entitled to the “exception” to the IMD exclusion.  We agree.

Neither hospital was qualified to receive Medicaid payments under the under-21 provision.  As specified in section 1905(a)(16)(A) of the Act, medical assistance under a State plan includes “inpatient psychiatric hospital services for individuals under age 21.”  During the relevant year(s), section 1905(h) defined “inpatient psychiatric hospital services for individuals under age 21” in relevant part as “inpatient services which are provided in an institution (or distinct part thereof) which is a psychiatric hospital as defined in section [1861(f) of the Act, the Medicare statute] or in another inpatient setting that the Secretary has specified in regulations.”  Act § 1905(h)(1)(A). 

As discussed earlier, neither hospital met the special conditions of participation for psychiatric hospitals and neither had certification as a psychiatric hospital.  Moreover, neither hospital was certified as a psychiatric hospital constituting a “distinct part” of a larger institution.  And, neither is shown to have provided inpatient services to under-21 individuals “in another inpatient setting that the Secretary has specified in the regulations.”  Accordingly, neither can benefit from the under-21 provision.³⁰

Furthermore, neither hospital was qualified to receive Medicaid payments under the 65-and-older provision.  As specified in section 1905(a)(14) of the Act, medical assistance under a State plan includes payment for “inpatient hospital services . . . for individuals 65 years of age or over in an institution for mental diseases.”  Neither hospital was eligible for Medicaid payments for their services during the relevant year(s) because both were

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undisputedly IMDs and neither was certified as meeting the special conditions of Medicare participation for psychiatric hospitals.³¹

The State emphasizes that CMS never advised states during the relevant years that it regarded an institution’s ineligibility for Medicaid payments under the 65-and-older and under-21 benefits as also disqualifying the institution from DSH payments.  MI Reply Br. at 1-2, 11, 14.  The State acknowledges that Maine, DAB No. 2931, issued in 2019, includes interpretations of the Medicaid statute that the State says “are in tension with its position in [the present] case,” but that these interpretations (even if reasonable) “were not known to Michigan in the 2000s,” when the disallowed DSH payments were made.  Id. at 13-14; see also id. at 12-13 (asserting that the State “was unaware” when it made the disallowed DSH payments that “CMS interpreted the Medicaid services requirements as applying to DSH payments,” and that Michigan was not “alone in believing” it could make DSH payments to IMDs that did not meet requirements for State plan services).  The State asserts that “at least six (6) States, in addition to Michigan, believed that certification with Medicare’s special conditions of participation for psychiatric hospitals was not necessary to make DSH payments to IMDs.”  MI Br. at 8.  In support of that assertion, the State cites several HHS Inspector General audit reports and a February 2019 letter from CMS to the State’s counsel in which CMS acknowledged that, on various dates between August 2011 and July 2014, CMS became aware that several other states had made DSH payments to psychiatric hospitals that were not certified as meeting the Medicare special conditions of participation.  Id. at 8-9 n.2; AF at 89.

In 2019 in Maine, which we have discussed in some detail earlier, the Board held that a hospital cannot be eligible for DSH payments if it was not qualified to participate in Medicaid.  The Board stated:  “To receive any Medicaid payments, including supplemental payments (such as DSH) above the base Medicaid rates, all providers must comply with the [conditions of participation] applicable to their provider type.”  Maine, DAB No. 2931, at 17.  As also discussed elsewhere in this decision, CMS’s position that DSH payments are not allowable under the circumstances presented here is consistent with Congressional intent; the State’s position is unquestionably contrary to that intent.

In relying on the Inspector General audit reports and CMS’s acknowledgement about other states’ DSH claiming practices, the State presumably wishes to convey that it was not alone in believing that hospitals like CFP need not be certified as psychiatric hospitals, to lend credibility to its claim that it acted reasonably.  We are not swayed.  We will not speculate on, and need not determine, what other states might have “believed.”  Even assuming other states in fact believed that certification was not necessary, that would hardly compel a conclusion that those states reasonably believed that certification was not necessary, much less that the State acted reasonably.  The State does not assert or

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show that it formed a belief that CFP and HVC Hospital need not be certified as psychiatric hospitals based in whole or in part on its knowledge about any other state’s DSH claiming practices during or around the time when the State made DSH payments to the hospitals.  Even if it had, such a belief would not have been reasonable, as the State did not meet its responsibility to ensure that it (or its hospitals) met all applicable requirements (including the provider agreement requirement).  And, from our perspective, had the State been aware of other states’ DSH claiming practices when the State was making DSH payments to the two hospitals, that would have been even more reason to question whether, in light of the purpose of Medicaid (and DSH) funding as revealed in legislative history, the State ought to follow the same path.  Under such circumstances, the State could have asked (and in our view it would have been reasonable to ask) CMS for clarification or a definitive position on the matter considering the State’s “cooperative and collegial relationship with CMS” as a “responsible partner” in the Medicaid program.  MI Br. at 7.  Lastly, given that CMS stated that it became aware of other states’ improper DSH claiming practices at the earliest in August 2011 (AF at 89), and there is no record evidence inconsistent with CMS’s representation, we cannot fault CMS, as the State appears to do, for not acting earlier to alert states about improper DSH claiming practices.  In any event, as explained earlier, CMS’s delayed action in the State’s case did not abridge CMS’s authority to take disallowances in 2018.

3. The State has not shown that the hospitals had a one percent MIUR during the relevant federal fiscal years.

In both disallowance decisions, CMS stated that neither hospital met the one percent MIUR threshold.  AF at 64, 69.  To be designated a disproportionate share hospital and, thus, entitled to receive DSH supplemental payments, the hospital must have a “Medicaid inpatient utilization rate,” or “MIUR,” of at least one percent.  Act § 1923(d)(3); N.J. Dep’t of Hum. Servs., DAB No. 2737, at 3 (2016).  The MIUR is a fraction, the numerator of which is the “hospital’s number of inpatient days attributable to patients who (for such days) were eligible for medical assistance under a[n] [approved] State plan . . . .”  Act § 1923(b)(2).  The denominator of the MIUR fraction is “the total number of the hospital’s inpatient days in that period.”  Id.  “[T]he term ‘inpatient day’ includes each day in which an individual (including a newborn) is an inpatient in the hospital, whether or not the individual is in a specialized ward and whether or not the individual remains in the hospital for lack of suitable placement elsewhere.”  Id.  Put differently, the MIUR, expressed as a percentage, represents the number of inpatient days of care furnished to Medicaid-eligible patients during a given period, divided by the total number of inpatient days of care provided during that period.  New Jersey, DAB No. 2737, at 3.

The 1993 House Committee report on amendments to the Medicaid DSH statute stated in relevant part:

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The Committee is concerned by reports that some States are making DSH payment adjustments to hospitals that do not provide inpatient services to Medicaid beneficiaries.  The purpose of the Medicaid DSH payment adjustment is to assist those facilities with high volumes of Medicaid patients in meeting the costs of providing care to the uninsured patients that they serve, since these facilities are unlikely to have large numbers of privately insured patients through which to offset their operating losses on the uninsured.  It is difficult for the Committee to understand how the payment of a Medicaid DSH payment adjustment to a facility that has no Medicaid inpatients can be justified on statutory or policy grounds.  The Committee bill therefore prohibits States from designating a hospital as a Medicaid disproportionate share hospital unless at least 1 percent of the facility's inpatient days are attributable to Medicaid patients.

H.R. Rep. 103-111, 103rd Cong. 1st Sess. 211 (1993), reprinted in 1993 U.S.C.C.A.N. 378, 538 (emphasis supplied).  The one percent MIUR requirement is thus part and parcel of being a disproportionate share hospital.  To be eligible for DSH payments, the hospital must be a disproportionate share hospital that meets the MIUR threshold.

1. CMS has met its initial burden to establish a basis for determining that the hospitals did not meet the one percent MIUR requirement.

The State first asserts that the State Auditor never raised an issue about the hospitals’ MIUR, and that CMS’s disallowance letters “represent the first time the State had notice of any allegation that the hospitals did not comply with the 1 percent test, nearly 18 years after the beginning of the time period at issue.”  MI Br. at 20.  The State argues that CMS did not meet its initial burden to provide in the disallowance decisions “‘sufficient detail about the basis for its determination’” that the hospitals did not have the required MIUR.  Id. at 21 (quoting Me. Dep’t of Health and Hum. Servs., DAB No. 2292, at 9 (2009), aff’d, 766 F. Supp. 2d 288 (D. Me. 2011)).  For these reasons alone, the State says, “the disallowances should be reversed to the extent they rely on CMS’s allegations of noncompliance with the 1 percent MIUR.”  Id.³²

To meet its initial burden, CMS must have provided, as the State correctly says, “sufficient detail about the basis for its determination.”  Maine, DAB No. 2292, at 9.  However, CMS’s initial burden to provide “sufficient detail” about the basis for its

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disallowance decisions does not require CMS to spell out in detail every single reason for its decisions within the four corners of the decisions.  The Board has repeatedly rejected arguments challenging decisions based on allegations that the decisions were not sufficiently specific, stating that an agency may revise the basis or raise new grounds for its action during the administrative adjudication process so long as the non-federal party is given adequate notice and an opportunity to respond.  See, e.g., Maine, DAB No. 2931, at 12-13 (and cited cases); Tex. Health & Hum. Servs. Comm’n, DAB No. 2404, at 10 (2011) (citation omitted) (“The Board has held . . . that a federal agency’s legal justification for the disallowance may be clarified, revised, or supplemented during a Board proceeding if the non-federal party is given an adequate opportunity to respond.”); Ill. Dep’t of Children and Family Servs., DAB No. 1462, at 7 n.5 (1994) (stating that the Board “ordinarily allows a party to present new arguments during the regular briefing process” and, “[i]n the case of agency parties, a new argument may include what is in effect an alternative basis for the disallowance”).

As the State acknowledges, CMS notified the State in its disallowance notices that neither hospital met the minimum MIUR.  The State was given and used the opportunity to dispute CMS’s allegation, arguing, inter alia, that “the available evidence” shows that “more than 1 percent of CFP’s patients were Medicaid-eligible.”  MI Br. at 21.³³  In response, CMS explained in more detail its position on the failure to meet the MIUR requirement, stating, in part:

The figures [the State] produced concerning CFP inpatient days . . . do not show that CFP met the threshold.  First, [the State] should not have included inpatients 65 and over.  [The State] has not claimed that CFP met the special CoPs [conditions for participation] for psychiatric hospitals, and even [the State] acknowledges that that was a requirement for the 65-and-over exception to the IMD exclusion.  See [MI Br. at] 12.  Moreover, . . . it was necessary for CFP to meet the special psychiatric hospital CoPs to qualify for the under-21 exception to the IMD exclusion.  Unless the IMD qualifies for that exception, the days of its under-21 patients are not considered Medicaid-eligible for the MIUR calculation either.

Also, the fact that CFP and HVC [H]ospital did not have provider agreements and were not participating in Medicaid prevented them from meeting the 1% threshold. . . .

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CMS Response Br. at 29.³⁴

The State filed a reply in which it made additional arguments about the MIUR requirement.  MI Reply Br. at 9-10.  But it did not reassert that CMS still was not specific enough for the State to understand why CMS determined that neither hospital met the MIUR threshold and did not ask us for more time to submit additional relevant documents about the MIUR.

Considering the parties’ explication of the nature of their dispute about the MIUR, the suggestion that CMS unfairly surprised the State in alleging the failure to meet the minimum MIUR for the first time in the disallowance decisions is unconvincing.  CMS’s disallowance decisions, together with its response brief, gave the State “sufficient detail” about the alleged failure to meet the MIUR threshold.  CMS thus carried its initial burden as to this allegation to enable the State to respond.  We next address the State’s burden.

2. The State has not borne its burden to show that either hospital met the one percent MIUR requirement.
   1. HVC Hospital

We begin with HVC Hospital.  During the relevant years, Michigan’s state plan stated in relevant part:

In order to qualify for DSH payments, hospitals must have at least one percent Medicaid inpatient days to total inpatient days.

Hospitals that fail to supply indigent volume data will not be eligible to receive disproportionate share payments.

Michigan State Plan Under Title XIX of the Social Security Act Medical Assistance Program, Att. 4.19-A, page 21.³⁵

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The State claims that CMS provided no explanation or basis for determining that HVC Hospital did not meet its MIUR for FFY 2001 (MI Br. at 20, 21), but offers no evidence that causes us to question CMS’s determination.  Although it offered MIUR records concerning CFP (discussed below), it did not do the same for HVC Hospital.  The State concedes that it “has been unable to locate similar documentation of HVC Hospital’s MIUR” for FFY 2001.  Id. at 22.  Under these circumstances we are compelled to conclude that the State has not shown that CMS erred in determining that HVC Hospital did not meet the MIUR and, thus, the State has not met its burden as to this issue.³⁶

2. CFP

As for CFP, the State submitted a February 26, 2019 declaration of P.M., the director of the State’s Bureau of Audit (AF at 180-181), identifying two attachments to the declaration (id. at 182-184).  The first attachment is a table summarizing the calculation of CFP’s MIUR for calendar years 2001-2005 (id. at 182); the second attachment is a one-page excerpt from a November 23, 2009 report of an audit of CFP’s compliance with the MIUR requirement for FFYs 2006-2009 and a one-page table of CFP’s MIUR calculations for those years (id. at 183-184).  P.M. states that the “Office of Audit” performed the “analyses” as reflected in the table for calendar years 2001-2005 in 2006, and, in the table for calendar years 2006-2009, in 2009.  Id. at 180.

According to the State, the documents show that CFP had a MIUR higher than one percent for FFYs 2001-2009.  The State says that, for each of those years, “approximately 1.2% to 6.0% of CFP’s inpatient days were attributable to” under-22 and over-64 patients who, according to the State, “met Medicaid financial eligibility requirements.”  MI Br. at 21-22.  The State maintains that, for each relevant year, the tables show:  (1) the sum of inpatient days of individuals younger than 22 and older than 65 who were eligible (or who CFP determined were eligible) for Medicaid; (2) CFP’s total inpatient days; and (3) CFP’s MIUR percentage, obtained by dividing Medicaid Eligible Days by Total Inpatient Days, which in each case exceeded one percent.  See AF at 182, 184.

CMS maintains that the State’s evidence does not support the minimum MIUR because it does not show that CFP had “Medicaid-eligible inpatient days to include in the numerator of that fraction.”  CMS Response Br. at 27-29.  According to CMS, “[t]he Act and regulations treat the IMD exclusion” – the prohibition on Medicaid payment for services rendered to IMD patients 21 to 64 years of age – “not just as a limit on particular covered services, but also as a general limit on Medicaid eligibility of individuals, by virtue of their institutional status.”  Id. at 28 (citing N.Y. State Dep’t of Health, DAB No. 1867 (2003)).  CMS asserts that “[t]he same reasoning applies to inpatients of any age in IMDs . . . that do not meet the requirements of the 65-and-over and under-21 exceptions to the

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IMD exclusion.”  Id.  CMS states:  “[I]t was necessary for CFP to meet the special psychiatric CoPs to qualify for the under-21 exception to the IMD exclusion.  Unless [CFP] qualifie[d] for th[e] [65-or-older or under-21] exception, the days of its [65-and-older] [and] under-21 patients are not considered Medicaid-eligible for the MIUR calculation either.”  Id. at 29.  CMS thus argues, essentially, that the State was prohibited from using inpatient days for patients between 21-64 years of age, as well as those 21 and younger and 65 and older, to compute the MIUR.  See id.

In reply, the State disputes that CFP had no eligible inpatient days to include in the MIUR fraction’s numerator.  The State contends:

CMS claims that because neither facility qualified for the over-64 or under-22 exceptions to payments for services in an IMD, there can be no Medicaid-eligible inpatient days. . . .  In effect, CMS argues that the MIUR numerator must reflect days paid by Medicaid, rather than days provided to individuals “eligible for” Medicaid.

But the statute expressly provides that the MIUR numerator is based on the number of individuals “eligible for” Medicaid, not the number of individuals for whom regular Medicaid payments are or could be made.  [Act] § 1923(b)(2) (explaining that the MIUR numerator is “the hospital’s number of inpatient days attributable to patients who (for such days) were eligible for medical assistance under a State plan . . . and the denominator . . . is the total number of the hospital’s inpatient days in that period.” (emphasis added)).  Even CMS agrees that individuals in an IMD remain “eligible for” (and enrolled in) Medicaid when they are in an IMD, even if payment cannot be made for services delivered to them, and that DSH payments can be paid for uncompensated care costs associated with those Medicaid eligible patients for whom regular Medicaid payments are prohibited by the IMD exclusion.  See, e.g., CMS, Additional Information on the DSH Reporting and Audit Requirements, at 16 (“[T]he costs of services provided in an IMD to an individual who is 22-64 and who is otherwise Medicaid eligible, can be included either as uninsured uncompensated or Medicaid uncompensated in the UCC [uncompensated care costs], depending on the eligibility status (as determined by the state) of the individual while in the IMD.”  (emphasis added)).[³⁷]  Thus, it was reasonable for Michigan, at the time, to interpret the requirement as applying to eligibility of individuals.

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MI Reply Br. at 9-10 (some citations omitted; State’s italics).³⁸

CMS is correct that CFP was prohibited from using inpatient days for patients who are 21 years and older but under 65 years old, to compute its MIUR.  In an August 17, 1994 letter to state Medicaid directors (1994 SMDL), CMS set out its “interpretation of the new DSH requirements,” including section 1923(b)(2)’s utilization requirement, in the

Omnibus Budget Reconciliation Act of 1993.  AF at 203, 204.  The 1994 SMDL states in part:

It is important to note that the numerator of the MUR [Medicaid utilization rate] formula does not include days attributable to Medicaid patients between 21 and 65 years of age in [IMDs].  These patients are not eligible for Medical Assistance under the State plan for the days in which they are inpatients of IMD’s and may not be counted as Medicaid days in computing the Medicaid utilization rate.

AF at 205 (underlining in original replaced with italics here).  Thus, CMS clearly stated, long before the years under review, that inpatient days attributable to patients who fall within the age range covered by the IMD exclusion may not be used to calculate the MIUR.

The Board has stated:

[The 1994 SMDL]’s instruction to exclude IMD patients ages 22 through 64 in calculating the Medicaid utilization rate is fully consistent with how the general IMD exclusion has been applied in other contexts.  Both Board and court decisions have held that the Act and regulations treat the IMD exclusion as a general limit on Medicaid eligibility of individuals, by virtue of their institutional status, as well as a limit on particular covered services. . . .  Thus, the Board has held that IMD patients ages 22 through 64 are ineligible for Medicaid care or services including ancillary and physician services provided in the IMD by outside providers as well as medical services received away from the IMD (or example, in an acute care hospital to which they were temporarily transferred).

N.Y. State Dep’t of Health, DAB No. 1867, at 14-15 (2003) (footnote and citations

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omitted) (cited in CMS Response Br. at 28).  The Board has also stated:  “[N]ot only are IMDs ineligible to be reimbursed for the cost of inpatient hospital services to patients ages 22 through 64, but such patients are themselves ineligible for Medicaid by virtue of their institutional status.”  Id. at 16.  Thus, the State may not use inpatient days for patients 22-64 years old to compute and meet the threshold MIUR.

With respect to the parties’ competing positions on whether inpatient days for the under-21 and 65-and-older patient population may be used to compute the MIUR, the parties’ disagreement raises a question about the meaning of section 1923(b)(2)’s phrase “inpatient days attributable to patients who (for such days) were eligible for medical assistance under a State plan” for purposes of determining the numerator of the MIUR fraction.  As we understand the State’s argument, the State maintains that all days on which inpatient services were provided to patients who met basic eligibility requirements to receive Medicaid coverage under the State plan may be used.  CMS, however, appears to argue that only the inpatient days for which the provider hospital’s services to inpatients were paid for under the State plan or otherwise qualified for Medicaid coverage (and reimbursement) may be used, but CMS has not directly addressed why the section 1923(b)(2)’s language supports its position.

We need not conclusively determine which party is right, or has the better argument, on the “eligibility” question for purposes of computing the MIUR.  It is the State that ultimately must show that CFP had the minimum MIUR during the relevant years, but it has not satisfactorily made such a showing, and its offer of proof of CFP’s MIUR raises significant concerns.  First, as noted earlier, the State has offered only post-payment analyses performed after the relevant years (2006 analysis for years 2001-2005; November 2009 analysis for years 2006-2009) purportedly supporting MIUR of at least one percent for each year, using the inpatient days for patients under 21 and 65 and older.  The State has not submitted any evidence showing that, before or when it gave CFP the DSH payments, it determined that CFP met the MIUR requirement for every year at issue based on the State’s contemporaneous understanding or application of the statutory criteria.  As for the calculations for years 2001-2005, the table (AF at 182) includes no information at all about what was considered to determine a patient’s eligibility for Medicaid.  With respect to the calculations for years 2006-2009, the State does not make clear, and we are unable to determine based on the State’s submission, that the calculations were based on data sufficient to verify the patients’ eligibility for Medicaid, consistent with the State’s alleged understanding of “eligibility” for purposes of computing the MIUR.  For instance, the State’s submission is less than specific and precise, as it provides that “the patient was considered eligible” if, “[i]n general,” “assets were under $2,000.”  AF at 183.  The State’s submission also raises concerns about, among other things, consistency throughout the relevant years in calculating CFP’s MIUR and what specifically was or was not considered to determine CFP’s MIUR.  For one thing, it indicates that, to determine eligibility, “[t]he patient’s history of Medicaid denials was also considered for recent admissions,” but that “previously, this information

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was not available to CFP reimbursement.”  Id.  As another example, the State’s submission indicates that a comparison of the calculations for years 2001-2005 to those for years 2006-2009 reflects a “significant difference in Medicaid eligibility” in terms of percentages, which was attributed to the fact that “CFP Reimbursement office” made the calculations for years 2006-2009, whereas “the State Facility and CMHSP Reimbursement Section” made the calculations for years 2001-2005, “based upon somewhat different information sources.”  Id.  The same submission also provides that the audit results for years 2006-2009 “do not necessarily predict that these individuals would be approved by DHS [Department of Health Services] for Medicaid, due to the multiplicity of factors DHS may consider,” and observes that CFP did not revisit past determinations of eligibility for years 2001-2005 using available data on Medicaid denials.  Id.  In short, because the State’s offer of proof on CFP’s MIUR calculations raise numerous concerns, we are unable to conclude that the State has satisfactorily substantiated CFP’s threshold MIUR for the relevant years even were we to accept that the State’s understanding of the “eligibility” concept for purposes of MUIR fraction’s numerator is consistent with the governing authorities.

Accordingly, and in light of the above discussion, we need not engage in a detailed discussion of the State’s attempt to rely on a CMS document titled “Additional Information on the Disproportionate Share Hospital [DSH] Reporting and Audit Requirements” (DSH FAQs document), which sets out frequently asked questions and answers on DSH reporting and auditing, as support for the State’s claim that it reasonably understood “eligibility” to mean that even those who may be subject to the IMD exclusion could remain eligible for payment purposes and that DSH payments can be made for uncompensated care costs associated with such patients.  MI Reply Br. at 9-10.  We do note, however, that the language in page 16 of the DSH FAQs document on which the State purportedly relied does not specifically address the calculation of MIUR.  The quoted language – “[T]he costs of services provided in an IMD to an individual who is 22-64 and who is otherwise Medicaid eligible, can be included either as uninsured uncompensated or Medicaid uncompensated in the [uncompensated care costs], depending on the eligibility status (as determined by the state) of the individual while in the IMD.” – is part of CMS’s answer to question 28, “How should States count costs not otherwise covered for individuals in an IMD (as Medicaid shortfall, uncompensated care costs, or not included) for those individuals with Medicaid ages 22-64 while in an IMD if the individual is also a dual eligible (Medicare)?”  See DSH FAQs document (https://www.medicaid.gov/medicaid/downloads/part-1-additional-info-on-dsh-reporting-and-auditing.pdf) at 15-16.³⁹

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In sum, the State has not shown that CFP met the threshold MIUR for the relevant years.   We thus conclude that CFP was not eligible to receive DSH payments.

3. We reject the State’s alternative arguments that CMS is at fault for the State’s inability to produce HVC Hospital’s MIUR records.

The State acknowledges that the “[r]ecords from 2000-2001 related to [HVC Hospital’s] DSH payment are not available.”  MI Br. at 22.  However, it contends that it is not at fault for its inability to produce those records.  According to the State, the “record retention period for documentation supporting Medicaid payments is three years from the date of submission of the quarterly expenditure report, unless any litigation, claim, or audit is started before the expiration of the 3-year period, which was not the case here.”  Id. (citing 45 C.F.R. § 75.361).  The State asserts that it has no obligation to now “conjure up evidence” many years after it paid HVC Hospital to rebut CMS’s claim that the hospital did not meet the MIUR.  MI Br. at 20-21.  The State contends that the entire disallowed amount for HVC Hospital should be overturned as untimely.  It writes:

The Board has explained a disallowance may be considered untimely “if a grantee can prove prejudice that is ‘attributable to the loss of records resulting from their innocent loss or destruction after [the] expiration of the record retention period.’”  California Dep’t of Health Care Servs., DAB No. 2204, at 11 (2008) (quoting California Dep’t of Health Servs., DAB No. 1490, at 8 (1994)).  The facts of this case – where an issue was raised for the first time 18 years after the payment was made, and long after [HVC Hospital] has closed – support such a finding of prejudice here.

Id. at 22.

As the State correctly states, where, as here, the non-federal party challenges a disallowance on timeliness grounds, the Board may consider whether the non-federal party has been prejudiced due to the federal party’s delay in making the decision on appeal.  See Ca. Dep’t of Soc. Servs., DAB No. 855, at 3 (1987) (citing Ca. Dep’t of Health Servs., DAB No. 666 (1985)), aff’d, 904 F.2d 710 (9th Cir. 1990).  However, the non-federal party claiming entitlement to federal funding bears the burden to show prejudice.  As the Board has stated, “generally a disallowance may be considered untimely only if a grantee can prove prejudice that is ‘attributable to the loss of records

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resulting from their innocent loss or destruction after [the] expiration of [any applicable] record retention period.’”  California, DAB No. 2204, at 11 (citing Ca. Dep’t of Health Servs., DAB No. 1490, at 8 (1994), quoting California, DAB No. 855, at 3).  Moreover, in asserting prejudice, the non-federal party is not given the benefit of “presumption that [it] kept pertinent records and retained them for the requisite period.”  N.Y. City Hum. Res. Admin., DAB No. 1199, at 11 (1990) (citation omitted).

Furthermore, the federal agency is not precluded from recovering unallowable costs merely because records allegedly supporting those costs were destroyed in accordance with record retention requirements.  See Ky. Cabinet for Hum. Res., DAB No. 957, at 6 (1988).  The non-federal party that claims entitlement to federal funding ultimately must bear its obligation to account for disputed costs or payments which is not defeated per se by the passage of an applicable record retention period.  Id.; California, DAB No. 855, at 3 (citing Mo. Dep’t of Soc. Servs., DAB No. 395 (1983)); California, DAB No. 1007, at 8; Sw. Va. Cmty. Health Systems, Inc., DAB No. 2605, at 5-6 (2014).  Its “burden to document costs and to provide documentation sufficient to show its claim for FFP is proper . . . exists apart from the requirement to retain records. . . .”  Missouri, DAB No. 395, at 15; see also id. at 16 (“Inasmuch as documentation of costs is a fundamental principle of grants management and the State has not shown how or why the records were disposed of, the State cannot now use the technical requirements for retention of records as a shield to overcome its failure to document costs especially where the State continually had been informed of the necessity to document these costs in order to receive 90 percent federal reimbursement.”).

The State avers that “[t]he facts of this case – where an issue was raised for the first time 18 years after the payment was made, and long after a provider has closed – support . . . a finding of prejudice here.”  MI Br. at 22.  A determination of whether a delay in CMS’s decision-making prejudiced the non-federal party would entail examination of the circumstances surrounding and the context of the case at hand.  Relevant considerations could include the reason or basis for the disallowance to which the non-federal party would need to respond appropriately and sufficiently – with relevant documentation – to meet its burden to show that it is entitled to the federal funding at issue.

The State does not explain why and how the disallowance decisions in 2018 prejudiced the State’s ability to substantiate the FFY 2001 MIUR for HVC Hospital.  Notably, the State does not actually assert or attempt to show that records substantiating, or at minimum relevant to, HVC Hospital’s FFY 2001 MIUR existed and were maintained, but were later disposed of in accordance with the applicable record retention schedule.

The State does say that documents concerning HVC Hospital’s MIUR for FFY 2001 are “unavailable,” but does not explain what it means by its use of the word “unavailable.”  Notably, the State does not address whether relevant and material documents existed at one time but are no longer “available” only because they were disposed of after the

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record retention period and what those documents would show had they been retained and “available.”  If such documents in fact existed earlier but are no longer “available,” the State presumably could have offered evidence in support of its claim of prejudice, such as a declaration of a records custodian with relevant knowledge attesting that relevant records that once existed cannot now be produced and explaining the reasons why they are unavailable.  Cf. N.Y. State Dep’t of Soc. Servs., DAB No. 1284, at 8-9 (1991) (finding that the state was prejudiced in part due to the “expiration of the record retention period” where the state reasonably showed that it was unable to fully substantiate compliance with certain requirements due to the loss of certain “original” “microfiche” forms (indicating earlier existence of relevant, original documents) after the end of the record retention period).  We note, moreover, that the State does not say whether HVC Hospital ever submitted information relevant to computing the MIUR, such as “indigent volume data,” as required under the State plan and if so whether the State reviewed or audited that data.  Under these circumstances, regardless of the passage of time, we are unable to rule out the possibility that the State never had any FFY 2001 MIUR records for HVC Hospital to produce and, possibly, that the hospital never had sufficient indigent patient volume that, calculated correctly, would have met the threshold MIUR.  The State, moreover, does not identify any unresolved factual question that is material to our determination of whether the 2018 disallowance should be upheld or reversed, in whole or in part, but which the State is now disadvantaged in trying to answer because relevant documents were innocently destroyed long ago.

The absence of any indication that the State had relevant records that it is now unable to produce renders the State’s assertion of prejudice less than compelling.  See, e.g., Latino Resource Org., DAB No. 1974, at 5 (2005) (“The absence of any . . . evidence in the record that [the grantee] had responsive documentation is a further reason why we do not find credible [its] assertion of prejudice due to any delay in the disallowance action.”); California, DAB No. 1007, at 8 (“Even if we assumed that the record retention period here had expired, in spite of the notice received by the State in 1985 that its practice might subject it to a disallowance, the State has failed to present any evidence that specific documents relevant to its appeal for the fiscal year 1983/1984 actually existed, were retained for the full three-year retention period and then were innocently destroyed by the State to the State’s prejudice.”); Michigan, DAB No. 2868, at 8 (declining to further consider argument that the state should be excused from producing certain documents where the state failed to show that the relevant documents ever existed); Ca. Dep’t of Health Servs., DAB No. 1240, at 14 (1991) (rejecting similar argument alleging prejudice because the state “did not identify the specific documents which were presumably lost or destroyed or state when the alleged loss or destruction actually occurred”).

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4. CMS’s determination that the State’s DSH payments to HVC Hospital for FFY 2001 exceeded the hospital’s DSH limit for that year was not erroneous because the hospital’s patients were all inmates of a public institution who had a source of third-party coverage for health care – namely, the State’s constitutional obligation to provide medical care to prisoners – and because the State has not alleged or shown that any of the hospital’s costs of inpatient or outpatient services for FFY 2001 may be considered uncompensated (and thus within its hospital-specific DSH limit).

A hospital’s annual DSH payment limit is equal to its uncompensated (unreimbursed) costs of furnishing “hospital services” to persons who “either are eligible for medical assistance under the State plan or have no health insurance (or other source of third-party coverage) for services provided during the year.”  Act § 1923(g)(1)(A)-(B).  “[P]ayments made to a hospital for services provided to indigent patients made by a State or a unit of local government within a State shall not be considered to be a source of third party coverage.”  Id. § 1923(g)(1)(C).⁴⁰

Congress amended section 1923(g) of the Act by requiring states to impose hospital-specific limits on Medicaid DSH payments in response to reports that some hospitals had received DSH payments that exceeded their net costs, and in some instances their total operating costs.  Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66, § 13621, 107 Stat. 312, 629-33 (1993); H.R. Rep. No. 103-111, at 211-12 (1993), reprinted in 1993 U.S.C.C.A.N. 378, 538-39; see also Mo. Dep’t of Soc. Servs., DAB No. 2161, at 4-7 (2008) (discussing legislative history).  In implementing the statutory changes, CMS issued the 1994 SMDL, explaining that the annual hospital-specific limit is the sum of two cost elements:

• “the cost of services furnished to Medicaid patients, less the amount paid under the non-DSH payment method under the State plan” (a difference that the 1994 SMDL refers to as the “Medicaid shortfall”); and
• “the cost of services provided to patients who have no health insurance or source of third party payment for services provided during the year, less the amount of payments made by these patients.”

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AF at 206⁴¹; see also 42 C.F.R. § 447.295 (setting forth “the methodology for determining the costs for individuals who have no health insurance or other source of third party coverage for services furnished during the year for purposes of calculating” the hospital-specific DSH limit under section 1923(g)).

CMS contends that it properly disallowed FFP for the State’s DSH payments to HVC Hospital in FFY 2001 because those payments exceeded its hospital-specific limit for that year.  AF at 69-70; CMS Response Br. at 25-27.⁴²  CMS does not allege a dollar amount for HVC Hospital’s “cost of services furnished to Medicaid patients” – the first cost element – for FFY 2001.  However, CMS implies that this cost was zero because, it says, “With regard to the first element, HVC hospital was not [then] providing services under the Medicaid state plan.”  CMS Response Br. at 26 (citing MI Br. at 14 (“Michigan reasonably believed that a provider agreement was not necessary because neither CFP nor HVC hospital [was] ‘providing services under the state plan.’”)).⁴³  The State does not specifically dispute CMS’s apparent position as to the first cost element.  It does not assert that HVC Hospital had uncompensated costs for services furnished to Medicaid patients eligible for medical assistance under the State plan during FFY 2001 or specify any non-zero amount of such costs.

On the second cost element, CMS states, “[T]he second figure does not include the cost of caring for prison inmates.”  CMS Response Br. at 26.  CMS also writes:  “Just as the fact that HVC patients were prisoners rendered [HVC Hospital] ineligible for FFP under the Inmate exclusion, that fact also served to make the HVC [H]ospital ineligible for

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DSH [payments].”  Id. at 25.⁴⁴  We understand CMS to be arguing that HVC Hospital’s “cost of services” furnished to patients lacking insurance or other sources of third-party payment (second cost element) was also zero because the hospital’s patients were all prison inmates, who, for purposes of DSH payments, were wards of the state who had a third-party payment source for their medical care.

The State maintains that when it made the FFY 2001 DSH payments to HVC Hospital, it reasonably regarded the hospital’s prison-inmate patients as uninsured indigents for whom no third-party coverage source was available, and that the inmate exclusion did not apply to HVC Hospital.  Accordingly, the State says, it properly included the uncompensated costs of furnishing services to those patients in calculating HVC Hospital’s DSH limit for FFY 2001.  MI Br. at 8, 17-18.  However, after CMS issued, on August 18, 2002, an SMDL instructing that states cannot consider prison-inmate patients as being without a third-party coverage source, the State stopped claiming FFP for DSH payments made to HVC Hospital.  Id. at 3, 18.⁴⁵ 

The question we must answer is, “Was the State (or DCH) a source of third-party coverage for prison inmates to whom HVC Hospital provided hospital services?”  If so, then HVC Hospital’s costs of providing those services in FFY 2001 may not be counted for the second cost element of the hospital-specific limit and those payments represent the overage by which the State exceeded the limit.  The State does not dispute that if the second cost element is zero for FFY 2001, then there are no DSH payments that could be made consistent with HVC Hospital’s DSH limit for that year.  However, the State maintains that it reasonably understood in FFY 2001, before CMS issued its August 2002 SMDL, that it could properly include the costs in the second cost element.

The SMDL, issued on August 16, 2002, states in part:

Prisoner Inmate Care and the Calculation of the OBRA 93 Uncompensated Care Cost Limits

Section 1923(g) of the Social Security Act establishes a hospital-specific DSH limit.  It limits Medicaid payments to the costs incurred during the year of furnishing hospital services by the hospital to individuals who are

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either eligible for medical assistance under the State plan or have no health insurance or source of third party coverage for services provided during the year.  Inmates of correctional facilities are wards of the State.  As such, the State is obligated to cover their basic economic needs (food, housing, and medical care) because failure to do so would be in violation of the eighth amendment of the Constitution.  Therefore, because these individuals have a source of third party coverage, they are not uninsured, and the State cannot make DSH payments to cover the costs of their care.

Further, this conclusion is consistent with Section 1905(a) of the Social Security Act and the regulations at 42 CFR 435.1008 and 435.1009, which prohibit (FFP) for services, provided to inmates of public institutions.  To read section 1923(g) of the Social Security Act to permit additional DSH payments for the costs of prisoner care would directly conflict with this statutory prohibition, and effectively render the statutory prohibition meaningless.

AF at 128-129.  Thus, in the 2002 SMDL, CMS explicitly stated that because the Eighth Amendment to the United States Constitution requires states to provide health care to inmates, those inmates are considered to have third-party coverage – the state government – for purposes of calculating a disproportionate share hospital’s uncompensated costs under section 1923(g) of the Act.  See New York, DAB No. 2037, at 13-14 (examining the above-quoted SMDL language and stating that “the 2002 SMDL does provide a reason to support its conclusions that a state is a source of third party payments for prison inmates and cannot make DSH payments to cover the costs of inmates’ care”; “the state is obligated to meet the inmates’ basic needs”).

In general, the Board defers to a federal agency’s interpretation of the authorities under which it implements its program so long as the interpretation is reasonable, and the non-federal party has had timely and adequate notice of that interpretation or did not rely to its detriment on another reasonable interpretation.  See, e.g., Blackfeet Tribe, DAB No. 2675, at 11 (2016) (citing Mo. Dep’t of Soc. Servs., DAB No. 2184, at 2 (2008)).  We consider whether, before CMS issued the 2002 SMDL, the State reasonably acted in accordance with a different, but reasonable, interpretation in including the uncompensated costs of care provided to HVC Hospital’s prison-inmate patients in computing the hospital-specific DSH limit for FFY 2001.

The State does not explain why or on what basis it determined, before the 2002 SMDL was issued, that it may properly include HVC Hospital’s uncompensated costs of furnishing care to prison inmates in calculating the hospital’s DSH limit.  The State has not produced any evidence of internal deliberation about this question before it made DSH payments to the hospital.  The one thing that tends to favor the State’s position is that CMS evidently did not explicitly state that no DSH payments may be made for the

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cost of medical care provided to inmates of public institutions until it announced that interpretation in the 2002 SMDL.

We note, however, that in 1997 and 1998, HCFA conveyed, essentially, that the state government is a third-party payment source with respect to the costs of medical care furnished by a public institution to prison inmates.  The 1997 and 1998 HCFA announcements, together, undermine the State’s claim that it reasonably regarded HVC Hospital’s prison-inmate patients as uninsured indigents with no third-party coverage source.

Specifically, on December 12, 1997, HCFA issued a memorandum, the subject of which was “Clarification of Medicaid Coverage Policy for Inmates of a Public Institution,” directed to all associate regional administrators.  AF at 123-126.  There, HCFA stated:

Criteria for Prohibition of FFP

When determining whether FFP is prohibited under [section 1905(a)(A) of the Act, which excludes FFP for medical care provided to inmates of a public institution], two criteria must be met.  First, the individual must be an inmate; and second, the facility in which the individual is residing must be a public institution.  An individual is an inmate when serving time for a criminal offense or confined involuntarily in State or Federal prisons, jails, detention facilities, or other penal facilities.  An individual who is voluntarily residing in a public institution would not be considered an inmate, and the statutory prohibition of FFP would not apply. . . .

Regarding the second criteria necessary for determining whether FFP is prohibited, a facility is a public institution when it is under the responsibility of a governmental unit, or over which a governmental unit exercises administrative control.  This control can exist when a facility is actually an organizational part of a governmental unit or when a governmental unit exercises final administrative control, including ownership and control of the physical facilities and grounds used to house inmates.  Administrative control can also exist when a governmental unit is responsible for the ongoing daily activities of a facility, for example, when facility staff members are government employees or when a governmental unit, board, or officer has final authority to hire and fire employees.

Id. at 123-124 (underlined in original; replaced with bolding).

In its April 10, 1998 Medicaid Regional Information Letter (RIL 98-22), HCFA reinforced its earlier statement on the inmate exclusion, that is, section 1905(a) of the Act “excludes [FFP] for medical care or services for any person who is an inmate of a public

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institution, unless that person is a patient in a medical institution.”  AF at 118.  RIL 98-22 also states:

[T]he statute precludes FFP but not Medicaid eligibility.  If a person is an inmate of a public institution, the person may still be eligible for Medicaid.  However, no FFP will be available for medical care or services provided to the individual.

Id.  RIL 98-22 also provides:

[T]he terms “inmate” and “public institution” are both significant in determining whether FFP is available.  Unless a person is an inmate and in a public institution, the prohibition against FFP . . . is not applicable.

Id.

RIL 98-22 also explained that the term “inmate,” which carries a “strong connotation” of involuntary confinement, “would not include individuals who are voluntarily residing at” a public institution.  Id.  Accordingly, “FFP is not available when a person is involuntarily residing in a public institution”; however, for a person voluntarily residing in such an institution, the inmate exclusion “does not apply because the person is not an inmate.”  Id.  RIL 98-22 also explained that “a facility is a public institution when it is under the responsibility of a government unit, or over which a governmental unit exercises administrative control.”  Id. at 119 (citing 42 C.F.R. § 435.1009).  Administrative control by a governmental unit could exist if, for instance, the facility is “[a]ctually an organizational party of a governmental unit”; “[w]hen a governmental unit exercises final administrative control, including ownership and control of the physical facilities and grounds used to house inmates”; or “[w]hen a governmental unit is responsible for the ongoing daily activities of a facility, for example, when facility staff members are government employees or when a governmental unit, board, or officer has final authority to hire and fire employees.”  Id.

Thus, HCFA made clear that one important consideration for determining whether a patient is an inmate of a public institution is whether the patient is serving time for a criminal offense or is involuntarily confined to a penal institution.  The State nowhere disputes that HVC Hospital’s patients were serving time for a criminal offense or that those patients were involuntarily in a penal institution to serve time for a criminal offense.  HCFA moreover made clear that the defining characteristic of whether a facility is a “public institution” is that a governmental unit exercises responsibility and control over the facility.  The State does not dispute that HVC Hospital was (as CFP was) controlled by the Michigan state government.  The fact that HVC Hospital, as the State says, was operated by DCH under a contract with MDOC (MI Br. at 3) does not change the essential fact that the hospital was state-owned and operated.  The State does not

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assert or show that DCH and MDOC were not in fact state-operated and state-controlled entities.

Importantly, HVC Hospital’s patients had a third-party payment source – the state government.  In New York, DAB No. 2037, the Board concluded that “CMS policy consistently and reasonably treated state payments for the care of inmates in state custody as a source of third party coverage.”  DAB No. 2037, at 1-2.  In so doing, the Board considered the legislative history, emphasizing that Congress amended section 1923(g)(1)(A) of the Act in 1993 “to constrain the use of federal DSH funding to replace expenditures that the states were obliged to incur apart from providing Medicaid services” and agreeing with CMS that Congress’s “1993 amendment sought to address perceived abuses of DSH.”  Id. at 7-8.  The Board stated:

The basic scheme described for DSH payments is to assist those hospitals that are serving Medicaid patients and that are also serving a substantial number of other poor patients who lack insurance or other third party assistance.  In order that the uncompensated care not drain the hospital’s ability to provide quality care to Medicaid patients, Congress provided the DSH payment adjustments up to the limit of the costs of such uncompensated care (for the Medicaid-eligible and uninsured) minus any amounts the hospital received from Medicaid or from the individuals themselves.

Id. at 8.  DSH payments are intended to defray the costs borne by hospitals that serve a disproportionately high number of low-income patients who lack insurance or other third-party payment source; such payments are not intended to cover the costs of those who have a third-party payment source.

Considering Congress’s intent and CMS’s interpretation of the exclusion rules consistent with, and in furtherance of, that intent, we are unable to accept the State’s claim that it reasonably determined it could give DSH payments to a state-owed hospital (and one that had no provider agreement and did not meet all certification requirements for psychiatric hospitals) that served inmates who were wards of the state and still expect the federal government to bear a share of those costs.  We fully agree with CMS’s position that treating the state’s constitutional responsibility to provide medical care to inmates as a source of third-party payment “aligns with the overall intent of the Inmate exclusion that the federal government not pay for care that [is] traditionally the responsibility of the states,” and that such an interpretation is “the reasonable way to understand the hospital-specific limit in light of that exclusion.”  CMS Response Br. at 27.  Accordingly, we reject as unconvincing the State’s claim that it reasonably believed it could make DSH payments to HVC Hospital in FFY 2001 in the absence of express agency announcement until 2002 that such payments were not allowable.  While we do not take lightly the State’s claim that it did not have specific, express notice from CMS that such payments

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were not allowable until 2002, we cannot accept the State’s position because it unmistakably undermines Congress’s intent behind the exclusion rules.

The State takes issue with CMS’s reliance on New York, DAB No. 2037, and St. Francis Medical Center v. Shalala, 1998 WL 230233 (D.N.J. 1998), an unpublished United States District Court decision discussed in DAB No. 2037, at 9-10.  CMS Response Br. at 26; MI Reply at 11.  The State points out that, unlike New York, which concerned disallowed DSH payments made after CMS issued the 2002 SMDL, the State made the disallowed DSH payments before then.  See DAB No. 2037, at 1 (discussing DSH payments made for the quarter ending on and after June 30, 2004); MI Br. at 18.  As for CMS’s reliance on St. Francis, the State points out that the decision involved a Medicare DSH payment calculation, “a wholly distinct DSH calculation than that in Medicaid” and states:

The issue in [St. Francis] was whether under the “Pickle” method of calculating Medicare DSH eligibility, payments for care provided to prisoners should be counted as “state and local government sources for indigent care.” . . .  Even assuming that this unpublished case has any precedential value in the Medicaid context, the quoted language in CMS’s brief that suggests the court held that prisoners are “wards of the State” for which the State is obligated to cover the costs of medical care is incorrect.  That language is simply a quote from CMS’s own argument.  The actual holding of that case is that the funds the hospital received are provided “under a specific contract with the State, voluntarily entered into by [the hospital], for the medical care of prison inmates” and thus should not be considered to be provided “to cover indigent patient care.”  Thus, even if Michigan should have been aware of an unpublished decision in another jurisdiction involving another program, it has no bearing on whether a hospital’s uncompensated costs in providing inpatient services to uninsured prisoners could be considered for purposes of calculating the Medicaid hospital-specific cap in Section 1923(g).

MI Reply Br. at 11.

We agree with the State that St. Francis, which concerned a Medicare DSH payment calculation, does not directly address the question before us.  In New York, the Board looked to St. Francis’s instructive discussion on the “meaning of indigence” because New York argued that its payments on behalf of inmates should not be treated as payments covered by a third party but rather should be considered as payments on behalf of indigent patients.  See DAB No. 2037, at 1-2, 9-10.  We do not conclude that the State should have derived from St. Francis an understanding that the DSH payments at issue were not allowable.  As for the State’s argument about CMS’s reliance on New York, the State also correctly points out that the State cannot be expected to have known about the Board’s rationale in New York because New York was issued in 2006, after CMS issued

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the 2002 SMDL.  MI Br. at 18.  However, as explained, the 1997 and 1998 agency announcements do constitute advance notice to the State about the scope of the exclusion rules, which are consistent with Congress’s directive.  The State’s claim of reasonable understanding that the FFY 2001 DSH payments to HVC Hospital were allowable is unconvincing and is unquestionably inconsistent with the intent and purpose of the exclusion rules.

5. We have no authority to overturn the disallowances for equity reasons.

The State maintains that the two disallowances totaling almost $200 million based on expenditures stretching back almost two decades could have disastrous consequences for Michigan’s Medicaid program.  MI Br. at 1.

The Board does not have authority to overturn a lawful disallowance for equity reasons.  As the Board stated in Maine, “[T]he longstanding federal policy is that inmates in state custody remain a state responsibility and the costs of their care for which the state is the responsible third party are not part of the uncompensated care costs for which DSH funding is intended to compensate.”  DAB No. 2931, at 22-23 (citing New York, DAB No. 2037).  We cannot reverse or reduce a disallowance based on “equitable factors such as the collateral impact of a disallowance on [a state’s] budget” and must base our decision on the record evidence.  Id. (citing 45 C.F.R. §§ 16.14, 16.21).

Conclusion

We uphold the disallowance of $195,662,968.

Endnotes

¹  The State asked the Board to consolidate the two cases.  By letter dated December 28, 2018, the Board notified the parties that the Appellate Division had docketed the cases under numbers A-19-32 and A-19-33 and would consolidate them under lead docket number A-19-32 unless CMS objected to consolidation within 10 days.  CMS raised no objection.  We issue a single, consolidated decision for both cases.

²  In general, the State plan “describ[es] the nature and scope” of a state’s Medicaid program and “giv[es] assurance that it will be administered in conformity with the specific requirements of” the Act, the regulations implementing the Act, and other “applicable official issuances” of the Secretary of Health and Human Services.  42 C.F.R. § 430.10.

³  For purposes of the IMD exclusion, section 1905(i) of the Act defines an “institution for mental diseases” as a “hospital, nursing facility, or other institution of more than 16 beds, that is primarily engaged in providing diagnosis, treatment, or care of persons with mental diseases, including medical attention, nursing care, and related services.”  It is undisputed that both hospitals met the statutory definition of an institution for mental diseases.

⁴  When the DSH payments and disallowance decisions at issue were made, the inmate and IMD exclusions were found in paragraph (29) of section 1905(a) of the Act.  Paragraph (29) was redesignated as paragraph (30) by the Substance Use-Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act, Pub. L. No. 115-271, enacted on October 24, 2018.  See Act § 1905 (2018 amendment note); Pub. L. 115–271, § 1006(b)(2)(B), 132 Stat. 3894, 3914.  The 2018 legislation also narrowed the scope of the IMD exclusion by authorizing Medicaid payment for substance use disorder treatment furnished to certain patients of IMDs.  However, the 2018 amendment is not relevant to the issues in this case.

⁵  The IMD exclusion is reflected in other paragraphs of section 1905(a) that specify the scope of reimbursable “medical assistance.”  See Act § 1905(a)(1) (“inpatient hospital services (other than services in an institution for mental diseases)”) and 1905(a)(4)(A) (“nursing facility services (other than services in an institution for mental diseases) for individuals 21 years of age or older”).

⁶  The cited regulations also define an “institution” as “an establishment that furnishes (in single or multiple facilities) food, shelter, and some treatment or services to four or more persons unrelated to the proprietor.”  42 C.F.R. § 435.1009 (Oct. 1, 1999); id. § 435.1010 (Oct. 1, 2008).

⁷  With its opening brief, the State submitted an exhibit list and 25 exhibits (with cover sheets for each exhibit) together as a single document, marked page 1 through page 199.  Similarly, CMS submitted with its response brief a single document marked page 200 through page 850, and which comprise CMS’s exhibit list, exhibits 26 through 33, and a cover sheet for each exhibit.  The State filed a reply brief.  It also filed an addendum to its exhibit list and Exhibit 34, with a cover sheet for the exhibit, marked page 851 through page 856.  We cite to the exhibits by reference to “AF” (Appeal File), followed by the page number(s) the parties assigned (e.g., AF at 856).

⁸  Consistent with the statutory and regulatory requirements, Michigan’s state plan indicates that eligible persons must be 21 or younger, or “under 22.”  AF at 844.  The regulations permit state Medicaid programs to cover inpatient psychiatric hospital services furnished to an individual who is 21 if the individual “was receiving the services immediately before he or she reached age 21.” 42 C.F.R. § 441.151(a)(3); see also Mo. Dept. of Soc. Servs., DAB No. 2161, at 6 n.3 (2008).

⁹  Consistent with statutory and regulatory requirements, Michigan’s state plan states (and stated as of 1994) that “[m]edical [a]ssistance will be provided on behalf of patients who are 65 years of age or older in certified public or private institutions for mental diseases,” and that “[p]ublic institutions . . . must be certified by the Department of Public Health as meeting the standards for psychiatric hospitals under Title XVIII [the Medicare statute].”  AF at 843. Similarly, the state plan states (and stated as of 1994) that “[m]edical [a]ssistance will be provided on behalf of patients who are 21 years of age or younger in certified public or private institutions for mental diseases,” and that “[p]ublic institutions . . . must be certified by the Department of Public Health as meeting the standards for psychiatric hospitals under Title XVIII [the Medicare statute].”  AF at 844.

¹⁰  CMS asserts, and the record reflects, that HVC Hospital “was part of the Correctional Mental Health Program, which [MDOC] established in a 1992 contract with [DCH]. . . .  The Bureau of Forensic Mental Health Services, an office within DCH, administered the program. [The Bureau’s] duties included the operation of an inpatient psychiatric hospital for MDOC patients/prisoners within Huron Valley Center. . . .  The Bureau . . . also operated CFP.”  CMS Response Br. at 9 (citations omitted); see also AF at 211-12, 221-22, 260.

¹¹  By CMS’s calculation, which the State does not dispute, the total amount of DSH payments to CFP questioned by the State Auditor for FFYs 2001 through 2009 was $309,856,936.  See AF at 65.  The amount of federal reimbursement provided or claimed for those payments totaled $177,262,968.  Id.

¹²  The State does not disagree with CMS that $18,400,000 “represents the federal share of $32,700,000 in claims associated with DSH payments” the State made to HVC Hospital in FFY 2001.  AF at 69.

¹³  The unfavorable audit findings were first announced in early 2007.  We do not determine here that the State should have known, as of early 2007, based on the first announcement of the audit findings, that CMS could eventually disallow FFP for the DSH payments.  However, given the negative audit findings, the State hardly could have been surprised once CMS took the disallowances based on the audit findings.  Yet the State continued to take FFP and to make DSH payments to CFP through FFY 2009.  (The same cannot be said of HVC Hospital, however, because FFY 2001 is the only year at issue and the hospital closed in 2003.)

¹⁴  The State does not expressly argue that laches applies against CMS; nor does it assert that equitable estoppel lies against CMS.  We note, however, that the Board has stated that laches is generally inapplicable against the federal government.  See, e.g., Maryland, DAB No. 519, at 4; Ky. Cabinet for Hum. Res., DAB No. 957, at 5 (1988) (citing Ga. Dep’t of Med. Assistance, DAB No. 798 (1986)).  Moreover, even assuming estoppel could lie against CMS in this case, the State has not established the elements of estoppel, to include affirmative misconduct by CMS and detrimental reliance by the State.  See Kentucky, DAB No. 957, at 5 (“While it is not clear that the federal government can ever be estopped, it certainly cannot be in the absence of affirmative misconduct” by government officials. (citing other Board decisions)); Heckler v. Cmty. Health Servs. of Crawford Cnty., Inc., 467 U.S. 51, 59 (1984) (setting out the elements of estoppel).  “Failure to question costs earlier is not grounds for estoppel; inaction is not affirmative misconduct.”  Ca. Dep’t of Health Servs., DAB No. 1139, at 11 (1990); Kentucky, DAB No. 957, at 5 (same).

¹⁵  In December 2013, the Office of Management and Budget consolidated the contents of OMB Circular A-133 and several others into one set of uniform administrative requirements, cost principles, and audit requirements, published at 2 C.F.R. Part 200. See 78 Fed. Reg. 78,590 (Dec. 26, 2013).  The State submitted excerpts from OMB Circular A-133.  They are in pages 132 through 136 of the Appeal File.

¹⁶  The text of OMB Circular A-133, as it existed when the State Auditor issued the relevant audit findings, can be found in the website of the Office of Management and Budget at https://georgewbush-whitehouse.archives.gov/omb/circulars/a133/a133.html.

¹⁷   Section 4.13 of Michigan’s state plan (eff. 2005) requires agreements with “each provider furnishing services under the plan.”  AF at 847.  The state plan (eff. 2009) also includes provisions on the policies and methods for establishing inpatient hospital services payment rates, including those for disproportionate share payments for IMDs.  See id. at 850.

¹⁸  The Board issued Maine, DAB No. 2931, on March 12, 2019.  The parties completed their briefing in this consolidated case at the end of April 2019.

¹⁹  For example, the State says, “the regulations require that a provider ‘keep any records necessary to disclose the extent of services the provider furnishes to beneficiaries;’ provide ‘any information regarding payments claimed by the provider for furnishing services under the plan;’ and include its National Provider Identification ‘on all claims submitted under the Medicaid program.’  42 C.F.R. § 431.107(b)(1), (2), (5)(ii) (emphasis added).  But DSH payments do not involve ‘payments claimed’ and ‘submitted under the Medicaid program’ for services ‘furnish[ed] to beneficiaries.’”  MI Reply Br. at 3.

²⁰  The current section 431.107(b)(1) uses the word “beneficiaries” in place of “recipients.”

²¹  The Board disfavors arguments about interpretation or position developed after the fact for litigation purposes in the absence of evidence of prior understanding or practice consistent with the purported interpretation or position.  See, e.g., Maine, DAB No. 2931, at 12 n.6 (stating that Maine’s interpretation of State plan language “appears to have been developed only in anticipation of this litigation as Maine failed to show any prior practice consistent with it apart from this dispute” and that “the Board cannot and will not defer to a proposed interpretation that would be impermissible under governing federal law, as Maine’s theory here would be”); Fla. Agency for Health Care Admin., DAB No. 3031, at 19 (2021) (stating that “it would not be appropriate to defer to Florida’s proposed reinterpretation [of certain section 1115 waiver terms] under the circumstances here, especially given that Florida’s own practice was not consistent with the interpretation it now propounds”), 20-21, 23 (rejecting arguments as to how certain waiver terms the state had prepared and CMS had agreed to ought to be read as “amount[ing] to an after-the-fact attempt to eliminate a significant portion of [the state’s] overall overpayment liability”); Utah Dep’t of Health, DAB No. 2131, at 17 (2007) (concluding that “the absence of contemporaneous evidence showing the [s]tate implemented the annual [graduate medical education] pool limit provision using a [state fiscal year, or SFY] 2001 base year suggests that the alleged intent to use SFY 2001 as the base year was not an ‘official interpretation’ but an after-the-fact attempt to justify the [s]tate’s claims for FFP associated with payment pools that were set without regard to the pool limit provision”).

²²  The State makes this argument only about CFP apparently because HVC Hospital closed in 2003 and did not initiate the process for entering into a provider agreement with the state Medicaid agency.  See MI Br. at 19.

²³  Section 431.108(d)(2) that is currently in effect is the same as the version we quote, except for the word “recipient.”  The current version uses the word “beneficiary” in place of “recipient.” The State uses the words “Medicaid beneficiary” apparently referring to the current version.  MI Reply Br. at 6.  The slight difference in the wording of section 431.108(d)(2) has no material bearing on our analysis.

²⁴  Section 431.108 follows the regulations that govern the provider agreement requirement, section 431.107 (captioned “Required provider agreement”).

²⁵  During the period at issue (FFYs 2001-2009), The Joint Commission, the national accrediting organization, had a CMS-approved accreditation program for facilities or institutions requesting Medicare participation as hospitals but not as psychiatric hospitals. See AF at 316-17, 329 (excerpts from State Operations Manual, CMS Pub. 100-07, Chapter 2).  CMS did not approve The Joint Commission as a national accrediting organization for psychiatric hospitals until February 2011. See 76 Fed. Reg. 10,598 (Feb. 25, 2011).  As noted earlier, neither party disputes that, during the relevant fiscal years, CFP and HVC Hospital were accredited as hospitals by The Joint Commission.

²⁶  The State asserts that an IMD need “not necessarily” meet special conditions of Medicare participation for psychiatric hospitals to qualify for Medicaid payment under the under-21 benefit, alluding to provisions that extend the benefit to non-hospital settings.  MI Br. at 12. However, the State does not assert that CFP and HVC Hospital were not obligated to meet those conditions in their specific circumstances.

²⁷  After the parties here completed briefing at the end of April 2019, the Board issued a decision upholding CMS’s disallowance of FFP for Medicaid payments to two stated-owned IMDs for inpatient hospital services provided to individuals 65 years or older because neither hospital was eligible for FFP for lack of compliance with Medicare special conditions of participation for psychiatric hospitals. Va. Dep’t of Med. Assistance Servs., DAB No. 3108 (2023).  There, the Board rejected the state’s argument that the hospitals were not required to meet the certification requirements for psychiatric hospitals because they did not bill Medicare for inpatient psychiatric services, stating that CMS is authorized to disallow expenditures claimed without the required certification.  Id. at 25 (citing N.Y. State Dep’t of Soc. Servs., DAB No. 1441, at 2, 14 (1993)).  The Board stated, “Regardless of whether [the hospitals] billed Medicare, the [s]tate was required to establish that the IMDs had been certified as compliant with the Medicare special CoPs to be eligible for FFP in the claimed Medicaid payments for inpatient hospital services rendered in those facilities to 65-or-older individuals.”  Id.; see also id. at 26 (stating that the certification requirement “is not simply a technical requirement,” and that its “‘purpose is to ensure that the services provided by a facility are of the type and quality which Congress intended to fund under title XIX [Medicaid]’” (quoting New York, DAB No. 1441, at 13-14)).

²⁸  The State appears to imply that if HVC Hospital met the definition of a “medical institution,” it categorically cannot be a “public institution.”  Importantly, however, in accordance with 42 C.F.R. § 435.1009 in effect in FY 2001, “the term ‘public institution’ does not include” a “medical institution.” The current regulations in 42 C.F.R. § 435.1010 define “public institution” similarly.  Accordingly, if HVC Hospital meets the definition of a “public institution,” it cannot also be considered a “medical institution” under the regulatory definition.

²⁹  The state’s (or its hospitals’) eligibility to receive federal funding should not be confused with individual patients’ eligibility to receive Medicaid-covered services, however.  In its 1997 memorandum, HCFA made clear that the unavailability of FFP “does not specify, nor imply, that Medicaid eligibility is precluded” for such inmates; such persons “may be eligible for Medicaid if the appropriate eligibility criteria are met.”  AF at 123.  “FFP is available for any Medicaid covered services provided to an ‘inmate’ while an inpatient” of a medical institution “provided the services are included under a State’s Medicaid plan and the ‘inmate’ is Medicaid-eligible.”  AF at 124-25.  In RIL 98-22, HCFA reiterated that the inmate exclusion “precludes FFP but not Medicaid eligibility”; that “[w]hen an inmate is an inpatient in [a medical institution], FFP is available for Medicaid covered services provided to the individual, even though the person is still considered to be an inmate”; and that FFP is unavailable for services furnished to inmates in a “prison hospital” or otherwise “on the premises of a prison, jail, detention center, or other penal setting.”  AF at 118, 119-20, 121.

³⁰  CMS notes that January 2001 regulations define a Psychiatric Residential Treatment Facility (PRTF) as “‘a facility other than a hospital, that provides psychiatric services, as described in subpart D of part 441 of this chapter, to individuals under age 21, in an inpatient setting.’” CMS Response Br. at 20 (italics added) (quoting 42 C.F.R. § 483.352 (Oct. 1, 2009) and citing 66 Fed. Reg. 7148 (Jan. 22, 2001)).  The State does not contend that CFP and HVC Hospital were PRTFs or were other “inpatient setting[s]” that the Secretary of Health and Human Services had specified by regulation as being qualified to receive Medicaid payment under the under-21 exception to the IMD exclusion.

³¹  As noted, CFP was certified as meeting the special conditions of participation for psychiatric hospitals effective November 17, 2010, after the relevant fiscal years.  See MI Br. at 5; CMS Response Br. at 15; AF at 55. 

³²  We do not understand the State to be arguing that CMS is foreclosed from asserting as a basis for disallowance a problem not first identified in a Single Audit Act audit.  Assuming such an argument, we know of no authority that would preclude CMS from later taking a disallowance under such circumstances.  The Board has stated that the “failure of a prior auditor to identify” problems discovered subsequently “may be regrettable, but cannot serve to invalidate [a] disallowance.”  Ne. La. Delta Cmty. Dev. Corp., DAB No. 2165, at 9 (2008).

³³  The State submitted documents concerning CFP’s (but not HVC’s) MIUR, which we will address below.

³⁴  CMS maintains that “in preparing its brief,” the State “could have asked for an explanation of the finding that CFP and HVC Hospital did not meet the 1% MIUR threshold, just as it asked for an explanation of CMS’s statement that DSH payments to the HVC hospital exceeded the hospital-specific limit.”  CMS Response Br. at 28 (citing AF at 812 (State’s Jan. 10, 2019 letter to HHS Assistant Regional Counsel)).  The State has not made us aware of any impediment to its asking CMS, earlier, for a more detailed explanation about CMS’s determination on the MIUR requirement.  Nevertheless, the fact that the State apparently did not first ask CMS for such an explanation does not preclude the State from now asserting that CMS did not meet its initial burden.

³⁵  CMS submitted as part of the Appeal File excerpts from Michigan’s state plan, which is well over 1,000 pages in length.  Here we cite to a page from the state plan that CMS did not submit, but the entire state plan is accessible to the public on the Michigan state government’s website, at:  https://www.mdch.state.mi.us/dch-medicaid/manuals/MichiganStatePlan/MichiganStatePlan.pdf.

³⁶  The State does raise alternative arguments faulting CMS for the State’s inability to produce records concerning HVC Hospital’s MIUR, which we will address separately below.

³⁷  The State did not submit a copy of CMS’s “Additional Information on the DSH Reporting and Audit Requirements” for inclusion in the Appeal File.  We refer to it as CMS’s “DSH FAQs document.”  It is available at:  https://www.medicaid.gov/medicaid/downloads/part-1-additional-info-on-dsh-reporting-and-auditing.pdf.

³⁸  The State also says, “CMS did not dispute that the information submitted [AF at 180-184] was correct, nor did it submit documentation contradicting the information [the State] provided.”  MI Reply Br. at 10.  We read CMS’s response brief as specifically asserting that the information the State submitted shows CFP’s MIUR was not correctly calculated.  Moreover, between CMS and the State, the State is in a far better position to be able to produce a state-owned institution’s information and documentation relevant to the MIUR.  And the State ultimately must bear the burden to show that it is entitled to the FFP for the DSH payments, which, considering CMS’s related allegation of failure to meet the threshold MIUR, the State also must show that CFP met that threshold.

³⁹  The DSH FAQs document itself is not dated, and the State does not specify when CMS issued it or when the State or CFP became aware of it.  We note, however, that a few years ago the Board reviewed the very same DSH FAQs document in another Medicaid case, noting there that CMS had issued it in January 2010 (and in December 2018, withdrew questions and answers 33 and 34, which the State does not assert are relevant here, from that document).  See Fla. Agency for Health Care Admin., DAB No. 3031, at 9-11 (2021).  Assuming CMS issued the DSH FAQs document on which the State relies in 2010, the State and CFP could not have known of and relied on the document’s contents during any of the FFYs 2001-2009 at issue with respect to the MIUR for CFP (or, for that matter, HVC Hospital, which closed in 2003).

⁴⁰  See New York, DAB No. 2037, for an extended discussion of the “indigent patients” provision (which was then codified in section 1923(g)(1)(A) of the Act).  There, the Board concluded that CMS’s policy of treating “indigent patients” as limited to those without financial resources and not equivalent to prison inmates as a category is a reasonable and permissible interpretation of the statute, if not compelled by the statute’s plain meaning.  DAB No. 2037, at 12.

⁴¹  In Virginia, the Board recognized the 1994 SMDL as “an official CMS interpretation of the relevant language in section 1923(g)(1)(A),” which “timely and adequately notified” states of CMS’s construction of the statute.  DAB No. 2084, at 12.  In upholding the Board’s decision, the district court stated that when CMS issued the 1994 SMDL, “it is clear that [CMS] . . . tied [DSH] reimbursement to ‘the amounts that would be allowable under the Medicare principles of cost reimbursement.’”  Virginia, 609 F. Supp. 2d 1, 10 (D.D.C. 2009) (quoting 1994 SMDL).

⁴²  CMS does not raise a similar argument about CFP for any audited year.

⁴³  In 2014, CMS apparently clarified the status of uncompensated costs of Medicaid-eligible prisoners for purposes of the hospital-specific DSH limit in 2014, indicating then that such costs may be included in calculating the limit only if they are attributable to services furnished to the prisoner as a patient of a “medical institution.”  Final Rule, 79 Fed. Reg. 71,679, 71,689 (Dec. 3, 2014) (“With respect to DSH, in those cases in which a Medicaid eligible individual meets the patient in a medical institution exception – (that is, a Medicaid eligible inmate is transferred to a hospital to be a patient for inpatient services), the state Medicaid agency has determined the individual to be eligible for Medicaid, and makes a regular hospital payment, DSH can be used to make up any shortfall.  The costs of the service less non-DSH payments would be factored into the limit calculation.”); see also Proposed Rule, 77 Fed. Reg. 2500, 2504 (Jan. 18, 2012) (“costs associated with providing hospital services to . . . individuals [who are inmates in a public institution or are otherwise involuntarily held in secure custody as a result of criminal charges] cannot be included in calculating the hospital-specific DSH limit”).

⁴⁴  The State understands CMS to be asserting that HVC Hospital exceeded its hospital-specific DSH limit not as “a separate ground for disallowance, but [as] a restatement of [CMS’s] position that prisoners are not considered uninsured” for purposes of calculating the hospital-specific DSH limit.  MI Br. at 15 n.4.

⁴⁵  The State asserts that CMS “acknowledges” that before CMS issued the 2002 SMDL, there was no agency guidance on the question of whether uncompensated costs of providing services to inmates could be counted in determining the hospital-specific DSH limit.  MI Reply Br. at 11.  We do not read CMS’s position to be that it affirmatively acknowledges that the 2002 SMDL is the agency’s first announcement addressing the question.  We do note that CMS does not identify another source of relevant agency guidance pre-dating the 2002 SMDL.