DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: New York State Dept. of Social Services
Docket No. 87-198
Reconsideration of DGAB No. 905
DATE: April 11, 1988
RULING ON REQUEST FOR RECONSIDERATION
The New York State Dept. of Social Services (State)
requested
reconsideration of New York State Dept. of Social Services, DGAB
No. 905
(1987), in which the Board upheld the disallowance by the Health
Care
Financing Administration (HCFA) of $2,489,194 claimed by the State
under
title XIX (Medicaid) of the Social Security Act for the period July
1
through December 31, 1985. The disallowed costs, which were included
in
the per diem rates for hospitals, were incurred for
supplemental
malpractice insurance purchased by the hospitals for their
affiliated
physicians and dentists. HCFA concluded, and the Board
agreed, that the
costs were not allowable under the terms of a demonstration
project
approved by HCFA for the three-year period ending December 31,
1985
which modified the hospital reimbursement methodology for both
Medicare
and Medicaid. DGAB No. 905 noted that the approved project
proposal
identified certain generally unallowable costs-- bad debts,
charity
care, and a discretionary fund--which were to be reimbursable under
the
project. Relying on an admission by the State that the
supplemental
malpractice insurance costs disallowed by HCFA were not
allowable under
generally applicable cost principles, the Board concluded
that since the
project proposal did not provide for reimbursement of these
costs, their
inclusion in the hospitals' per diem rates was a change in
project
methodology which required HCFA approval.
The Board's regulations at 45 C.F.R. 16.13 state that the Board
may
reconsider a decision where a party promptly alleges a clear error
of
fact or law. Upon review of the State's presentation, however, we
find
that there is no basis for reversing the disallowance.
In its request for reconsideration, the State asserted that the
Board
erred in interpreting the provision for reimbursement of bad
debts,
charity care, and a discretionary fund as precluding reimbursement
of
the supplemental malpractice insurance costs absent HCFA approval.
The
State argued that, because the normal reimbursement methodology
was
based on actual costs, the project proposal had to specifically
provide
for reimbursement of other types of costs, such as bad debts,
charity
care, and a discretionary fund. However, according to the
State, this
provision of the project proposal would not be relevant in
determining
the allowability of actual costs such as the supplemental
malpractice
insurance costs.
For the sake of argument, we assume that the State is correct that
the
allowances for bad debts, charity care, and a discretionary fund can
be
distinguished from the supplemental malpractice insurance costs on
the
basis that the latter, but not the former, were actual costs.
The
project proposal required each payor to add a factor to its rate
which
was to be pooled and then distributed to hospitals which
were
experiencing deficits caused by bad debts (losses from
uncollectible
accounts) or through the provision of charity care (services
provided to
patients free of charge); hence the allowance for bad debts and
charity
care. (Docket No. 87-69, State's appeal file, Exh. 1, pp.
34-37) The
discretionary fund was a percentage of a hospital's
reimbursable
inpatient costs paid to the hospital to use as it deemed
appropriate.
(Id., pp. 31-32) The project proposal did not
require a hospital to
account for how it used these allowances. Thus,
the allowances
themselves were arguably not actual costs (although to the
extent that
the hospitals expended the allowances, actual costs were
incurred).
Accordingly, from the State's point of view, the Board erred
in
concluding that the supplemental malpractice insurance costs were
not
allowable because they were not included in the provision for
these
allowances.
Nevertheless, even if the Board improperly relied on this provision,
the
State still has not pointed to an affirmative basis for finding
the
costs in question allowable. Merely because the
supplemental
malpractice insurance costs were actual costs does not mean that
they
were allowable. Section 447.253(g) of 42 C.F.R. (1983) requires
that
per diem rates for hospitals be determined "in accordance with
methods
and standards specified in an approved State plan." Under
the
demonstration project, which replaced the state plan for this
purpose,
the State used a prospective reimbursement methodology based on
the
Medicare principles of reimbursement (at 42 C.F.R. Part 405, Subpart
D)
with certain modifications specified in the project proposal.
The
Medicare principles do not provide for a per diem rate based on
all
actual costs incurred by a hospital. Thus, the State would have
to
demonstrate that the costs were allowable under the Medicare
principles,
or any modifications effected by the project proposal, not simply
that
they were actual costs.
The State took the position, both in DGAB No. 905 and in its request
for
reconsideration, that in determining the allowability of
the
supplemental malpractice insurance costs, one must not look beyond
the
four corners of the project proposal. However, the State did not
point
to anything in the proposal which indicated that costs like
the
supplemental malpractice insurance costs would be allowable. (Since
the
law requiring hospitals to pay these costs was not effective until
July
1, 1985, long after the January 1, 1983 beginning date of
the
demonstration project, there could have been no provision
specifically
allowing these costs.) The State did argue in DGAB No. 905
that
limitations on reimbursable costs were specified in the
approved
proposal, and that any costs not specified--including the
supplemental
malpractice insurance costs--were thus allowable. However,
the fact
that the proposal identified certain limitations on reimbursable
costs
(such as a prospective revenue cap) does not clearly imply that
all
actual costs not mentioned were allowable.
The State also contended that the Board erred in considering whether
the
supplemental malpractice insurance costs were generally
unallowable
costs under Medicaid, asserting that the only issue before the
Board was
the allowability of the costs under the demonstration
project. However,
whether the costs in question were generally
unallowable was clearly a
threshold issue in this case. If they were
generally unallowable, then
something in the project proposal was required to
render them allowable.
If they were generally allowable, they would remain
allowable unless
something in the project proposal rendered them
unallowable. Thus, the
Board's consideration of this issue did not
constitute error.
The State also asserted that the Board erred as a matter of fact
in
stating that the State did not claim the supplemental
malpractice
insurance costs beyond the end date of the demonstration
project. As is
apparent from another appeal filed with the Board
(Docket No. 87-219),
the State claimed supplemental malpractice insurance
costs for periods
beginning in 1986 under a proposed State plan
amendment. The Board's
statement is thus an error; however, the error
is not material. The
Board made the statement in connection with its
observation that the
State had not argued that the costs were ordinarily
allowable under its
Medicaid program. The implication was that if the
costs had been
generally allowable, the State would have made a claim for any
such
costs incurred after the demonstration project ended. However, the
fact
that the State claimed the later costs on the basis of a proposed
plan
amendment may also be an indication that the State did not regard
the
costs as generally allowable. Moreover, as noted in DGAB No. 905,
the
State did not dispute the statement in HCFA's brief that "[the
State]
does not maintain that . . . [the costs] were ever approved under
its
prior state plan(s) or that they are allowable under
generally
applicable cost principles." DGAB No. 905, p. 2, n. 1.
Accordingly,
the Board was justified in concluding that the costs were
generally
unallowable.
Finally, the State objected to the Board's conclusion that
the
supplemental malpractice insurance costs were not allowable under
a
provision in the project proposal allowing rate increases based
on
"additional costs incurred in meeting state or federal
requirements."
The Board stated that, in order to give meaning to a
separate
requirement for prior approval of changes in the project
methodology,
the quoted provision must be read to allow rate increases only
where the
additional costs have been approved by HCFA. Otherwise, the
Board
stated, "the State could add new costs to its Medicaid program
virtually
without limitation, as long as it found that they were incurred to
meet
the requirements of State law." DGAB No. 905, p. 4. The
State asserted
that it had never used the provision in question to justify
inclusion in
the per diem rate of a cost that was not a reasonable hospital
cost, and
that it had consistently argued that the costs in question here
were
reasonable. Even if the costs in question are reasonable, an
issue
which the Board did not reach in DGAB No. 905, the fact remains
that
the requirement for prior approval by HCFA would be meaningless if
the
State could increase rates without such approval under another
provision
of the project proposal. Accordingly, there is no basis here
for
reversal of DGAB No. 905..Conclusion
For the reasons discussed above, we affirm our decision in DGAB No. 905.
____________________________ Donald
F.
Garrett
____________________________ Alexander G. Teitz
____________________________ Norval
D.
(John) Settle Presiding Board Member