Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: California Department of Health Services
DATE: August 19, 1992
Docket No. 91-108
Decision No. 1352
DECISION
The California Department of Health Services (California) appealed
the
determination of the Health Care Financing Administration
(HCFA)
disallowing federal funding in the amount of $3,726,268 claimed
under
title XIX (Medicaid) of the Social Security Act (Act). The
disallowance
was based on a review by HCFA of the State's claims for payments
to
disproportionate share hospitals for services provided during the
period
July 1 through December 9, 1988. The review found that
California's
claim for funding for augmented payments to 68 disproportionate
share
hospitals during that period was improper because California's
state
plan amendment authorizing the augmented payments had an effective
date
of December 10, 1988. HCFA accordingly disallowed funding for
payments
covered by the review on the ground that the payments exceeded what
was
authorized under California's plan. HCFA asserted on appeal that
an
earlier effective date for the plan amendment would not have
been
permissible because California did not publish prior notice of
its
amendment, as required by HCFA regulations.
For the reasons discussed below, we are remanding this appeal to HCFA
for
further consideration of whether the approved methodology in
California's
state plan amendment should apply to services rendered on
or after July 1,
1988. Section 1923 of the Act required the plan
amendment to apply to
services rendered on or after July 1, 1988. The
question raised here is
whether the regulation on prior published notice
may be applied in a way that
does not obstruct the statutory mandate.
HCFA's Administrator in a formal
decision concerning an equivalent plan
amendment for a similarly situated
state concluded that where it is
impossible for a state to publish notice
prior to the effective date
required by the statute, the regulation on prior
notice will not
preclude an effective date for the plan amendment consistent
with the
statutory effective date. In any.event, the regulation on
notice would
not even apply here at all if California could reasonably have
viewed
the plan amendment as not being a "significant" change, as
California
has consistently argued.
An approved state plan is of course a condition precedent for a
state's
receipt of federal funding under the Medicaid program.
California here,
however, has had the methodology in its plan amendment
approved and
never received a formal disapproval of the effective date it
proposed.
Given the history of California's amendment which is discussed in
the
Background section below, this issue could properly be viewed by
both
parties as being pending and unresolved. Under procedures
applicable to
state plan amendments, HCFA has the administrative
responsibility to
resolve this question, not the Board. However, since
the Board has the
responsibility to review any disallowance that might result
from HCFA's
approval actions, our concern is that California receive
consideration
of all relevant factual and legal issues raised by the plan
amendment so
that any resulting disallowance based on the approval action
would not
be subject to further challenge as being in violation of
statute,
arbitrary and capricious, and unfairly discriminatory.
Background
Title XIX of the Social Security Act, 42 U.S.C. .1396 et seq.,
establishes
a federal-state program, which is popularly known as
"Medicaid," to enable
states to provide medical assistance to
individuals whose income and
resources are inadequate to meet the costs
of necessary medical care and
services. In order to receive federal
funding for their programs under
section 1903 of the Act, each state
must have an approved plan that includes
all of the provisions specified
in section 1902.
The Omnibus Reconciliation Act of 1981, Public Law 97-35, ("OBRA '81")
set
new requirements relating to the methods states could use for
reimbursing
hospital services provided under their programs. Among
other things,
OBRA '81 required states through their plans to use
payment rates which, in
the case of hospitals, "take into account the
situation of hospitals which
serve a disproportionate number of low
income patients with special needs"
("disproportionate share
hospitals"). Pub. L. No. 97-35, section
2173(a)(1), amending section
1902(a)(13) of the Act, 42 U.S.C.
.1396a(a)(13). Since 1982,
California's State plan has provided
assurances that the needs of
disproportionate share hospitals would be
considered in setting Medicaid
payment rates. State Exhibit (Ex.)
3,.Attachment (Att.) 1. In this
regard, California adopted regulations
providing California's own
definition of disproportionate share hospitals and
providing for
additional reimbursement for them effective November
1982. State Ex. 3,
Att. 2.
Congress further amended the Act in OBRA '87 to impose more
specific
requirements relating to disproportionate share hospitals.
This
amendment was enacted on December 22, 1987, but did not take
effect
until July 1, 1988. The amendment provided that a state plan
will not
comply with section 1902(a)(13)(A) relating to payments
to
disproportionate share hospitals as of July 1, 1988 unless the
plan
specifically defines such hospitals consistent with requirements in
the
amendment and further requires rate or payment amount increases for
such
hospitals consistent with a formula specified in the amendment.
Section
4112(a)(1) of Pub. L. No. 100-203. The legislative history
states that
these provisions were necessary because of the "startling record
of
noncompliance" with existing provisions on disproportionate
share
hospitals. H.R. Rep. No. 391(I), 100th Cong., 1st Sess. 525
(1987),
State Ex. 5. California was cited as one of 15 states that had
already
defined disproportionate share hospitals and made payment adjustments
to
them.
The amendment also contained an exception indicating that a state
plan
would be in compliance with the above requirements "if the plan
provided
for payment adjustments for disproportionate share hospitals as
of
January 1, 1984, and if the aggregate amount of the payment
adjustments
under the plan for such hospitals is not less than the aggregate
amount
of such adjustments otherwise required to be made" under the
amendment.
Section 4112(e) of Pub. L. 100-203.
After initial correspondence back and forth between California and
HCFA
concerning whether California could qualify under the exception
in
section 4112(e), California, in a nine-page letter to HCFA's
regional
office dated May 15, 1988, detailed the specifics of its
existing
disproportionate share program and sought to qualify that program
under
the exception. State Ex. 3, Att. 7. HCFA's regional office
then sent a
May 18, 1988 letter acknowledging receipt of California's request
to
qualify under the exception and advising California that it
had
forwarded the request "to our Central Office" and that the
Central
Office would "be in contact with you as soon as their analysis
is
completed." State Ex. 3, Att. 8. Before California received
any
response from HCFA's Central Office (although an exchange of
views
did.continue at the regional level), Congress enacted an amendment
to
section 4112 of Public Law 100-203 which had the effect of limiting
the
exception in section 4112(e) solely to the State of New York.
Section
411(k)(6) of Pub. L. 100-360. This provision was enacted on the
same
day as its effective date--July 1, 1988. In a letter dated July 6,
1988
which was specifically "in response to [California's] letter of May
15,
1988," HCFA advised California that in light of this
statutory
"clarification," California did not qualify for the exception in
section
4112(e) and that it needed to amend its State plan "immediately"
to
comply with section 4112 of OBRA '87. State Ex. 3, Att. 9.
California alleged that, in response to HCFA's letter of July
6,
California began preparing its amendment, which took substantial
efforts
because it involved redesigning California's disproportionate
share
program. State Br., p. 5; Klusman Declaration, State Ex. 3, Para.
10.
On September 30, 1988, California submitted to HCFA its state
plan
amendment implementing the disproportionate share provisions of
OBRA
'87. California specified a proposed effective date of July 1,
1988,
which was consistent with the effective date of the relevant OBRA
'87
provisions. California published notice of the amendment in
the
California Regulatory Notice Register on December 9, 1988.
In a letter dated December 15, 1988, HCFA requested "all
documentation
showing how the State complied with the Federal Regulations for
public
notice [42 C.F.R. .447.205] so we can validate the July 1,
1988
effective date requested for this amendment." State Ex. 3, Att.
13.
California provided HCFA with a detailed response explaining that
the
regulation in question did not apply since the amendment did
not
represent a "significant" change. State Ex. 3, Att. 14.
In a response, the Associate Regional Administrator stated:
[T]he requested effective date of July 1, 1988 is
not
acceptable. Since section 447.256(c) of Federal
regulations
requires that a plan amendment may only be effective
after
publication of public notice, the earliest possible
effective
date for this amendment would be December 10, 1988, the
day
following the date on which notice was published.
For [this and other] reasons set forth above, we do not
believe
the proposed amendment . . . is approvable. Accordingly,
please
be advised that HCFA has begun a disapproval action on the
plan
amendment. The State may, however, wish to either withdraw
the
plan amendment or promptly submit additional data
substantiating
its assurance in order to preclude HCFA's taking final
action
disapproving the plan amendment.
State Ex. 3, Att. 15.
HCFA did not specifically address in that letter or in
subsequent
correspondence California's argument that the cited regulation did
not
apply because the change was not "significant." Nor did HCFA
ever
address the argument made by California in several subsequent pieces
of
correspondence that the amendment should be approved effective July
1,
1988, because section 1923 of the Act mandated that effective date.
See
State Ex. 7.
On May 19, 1989 California submitted an amendment with a December 10,
1988
effective date. California, however, reiterated its belief that
the
July 1, 1988 effective date was required by statute and that this
date was
permitted under federal regulations because the change was not
a
"significant" one within the meaning of the regulation for
California's
program. California stated in that letter that it felt
"under duress
that it has no choice but to accede to [HCFA's] wishes,"
and that it
"reserves all its legal rights to argue its case in the
future as
appropriate." 1/ State Ex. 3, Att. 16 at 3.
California subsequently made augmented payments to its
disproportionate
share hospitals consistent with the formula in its plan
amendment for
services provided on or after July 1, 1988. HCFA
disallowed all
payments for the period July 1, 1988 through December 10,
1988, on the
basis that California lacked an approved plan authorizing
augmented
payments for this period. HCFA does not here dispute that
these
payments were correctly computed under the plan provisions and
were
otherwise fully consistent with the plan. The primary issue
presented
here is whether a disallowance is justified based on the absence of
an
earlier effective date for the State plan amendment
in
question..Analysis
1. Did the Act require an effective date of July 1, 1988
for
California's plan amendment and can the regulation on prior notice
be
applied in a way that does not obstruct the statutory mandate?
In support of this disallowance, HCFA argued that the Board has
repeatedly
held that a state is entitled to reimbursement only for costs
incurred in
accordance with an approved state plan and that where a
state pays a provider
at a rate that is higher than that authorized by a
state plan, the federal
share of the excess amount may be properly
disallowed. HCFA cited
particularly Missouri Department of Social
Services, DAB No. 1229 (1991) and
California Department of Health
Services, DAB No. 1007 (1989). These
and other Board decisions cited by
HCFA on behalf of its position are clearly
distinguishable from the
facts here, however. All of the cases involved
discretionary state plan
amendments that were not mandated by statute with a
specific statutorily
imposed effective date. The Board has never upheld
a disallowance based
on the effective date of a state plan amendment when
that effective date
was inconsistent with the effective date mandated by
statute.
Accordingly, we address below the basic underlying question of
whether
the statute required an amendment for services provided to hospitals
on
or after July 1, 1988.
Section 1923(a)(1) of the Act specifies that a state plan under title
XIX
will not be considered to meet requirements specified in section
1902(a)(13)
insofar as it requires states to take into account the
situation of
disproportionate share hospitals as of July 1, 1988, unless
the state has
submitted by that date an amendment to its plan that
specifically defines
what a disproportionate share hospital is and
provides, effective for
inpatient hospital services provided not later
than July 1, 1988, for an
appropriate increase in the rate or amount of
payment for such services
provided by such hospitals. While the statute
technically required a
state only to submit an amendment to its state
plan, that requirement, as
with all state plan requirements in the
program, was merely the means to an
end. The program "end" in this
instance was to require every state to
make an appropriate increase in
the rates or the amount of payment to
disproportionate share.hospitals
for services provided on or after July 1,
1988. 2/
Thus, we conclude that section 1923(a)(1) of the Act required both
that
states amend their plans effective no later than July 1, 1988, and
that
they make, as a consequence, an appropriate increase in the rate
or
amount of payment they provide for disproportionate share hospitals
for
services provided on or after that date.
Although the statute also required the states to submit their
amendments
before the required effective date, the statute clearly intended
that
the increases apply to services provided on or after July 1, 1988
even
if a state failed to meet the submission deadline. It is clear
from the
plain meaning and effect of section 1923(a)(1) that the
submission
requirement was designed to facilitate rather than deter the
timely
implementation of the plan amendment and the resulting increase
in
payment. Consequently, there is no basis in the statute to
conclude
that a state could use a delay in the submission to delay
implementation
of the plan amendment or the payment increase beyond the time
expressly
prescribed by the statute. Among other things, a delayed
implementation
beyond the statutory time frame would cause arbitrary
differences among
the states in making increased payments to disproportionate
share
hospitals, causing the hospitals in those states that delayed
the
effective date to be disadvantaged in relation to hospitals
elsewhere,
and causing the delaying states themselves to benefit by expending
less
than if they had complied with the statute.
Thus, where a state intentionally attempted to delay the effective date
of
its amendment by delaying its submission and by requesting an
effective date
after July 1, 1988, the Secretary would be required by
section 1923(a)(1) and
section 1902 to disapprove any such request. The
Secretary would also
be authorized to employ the remedies under section
1904 against such a state
to ensure that the state proposed an amendment
with the correct effective
date since the existing plan of that state
would no longer comply with
section 1902 of.the Act as of July 1, 1988.
3/ On the other hand, where
a state had been late in its submission but
requested an effective date of
July 1, 1988, section 1902(b)
affirmatively requires the Secretary to approve
a complying amendment
since the amendment is necessary to fulfill the
conditions specified in
sections 1902(a)(13) and 1923(a)(1).
Thus, we conclude that the Act required a state plan amendment
for
services provided on or after July 1, 1988. 4/
HCFA did not address the effect of these statutory provisions in
its
disallowance letter or indeed in its briefs. HCFA based
its
disallowance on the absence of an approved plan amendment for the
period
July 1, 1988 through December 9, 1988 and on a regulation that
HCFA
alleged required the December 10, 1988 effective date here.
This
regulation, 42 C.F.R. .447.205, provides that a plan amendment
proposing
a significant change in methods and standards for setting payment
rates
must be the subject of published notice by a state before the
proposed
effective date of the amendment. The question raised here by
HCFA's
position then is what impact this regulation has on the
statutory
mandate addressed above.
In a formal plan approval decision involving the same statutory
provision
for disproportionate share hospitals but a different state
(Virginia), HCFA's
Administrator concluded that where it is impossible
for a state to publish
notice prior to the effective date required by
the statute, the regulation on
prior published notice will not preclude
an effective date for the plan
amendment consistent with the statutory
effective date. Decision in the
Matter of the Disapproval of Virginia
State Plan Amendment No. 88-20, Docket
No. 89-6 (July 7, 1990), State
Ex. 8. This formal decision by
the.Administrator represents a statement
of policy and a precedent for HCFA
that must be applied subsequently in
approval decisions on proposed state
plan amendments. See 42 C.F.R.
.430.15(b). HCFA did not persuade
us here that there is any basis to
distinguish California's situation from
Virginia's on a finding of
difficulty or impossibility under the statutorily
imposed deadline.
When section 1923 was originally enacted, it provided an exception
which
California strongly asserted might apply to it. State Ex. 3 and
Ex. 3,
Atts. 5 and 7. Only with the enactment of the clarifying
amendment in
Public Law 100-360 on July 1, 1988 was California certain that
it could
not qualify. Although HCFA's regional staff may have expressed
concerns
to California prior to the enactment of the clarifying amendment,
HCFA
had specifically stated that it would provide California a response
from
its Central Office concerning the exception. See Background
Section
herein. HCFA advised California on July 6, 1988 that it would
have to
amend its plan based on the clarifying statutory amendment. At
that
point in time it was already too late to publish notice before
the
statutorily required effective date.
Thus, we conclude the Administrator's decision concerning Virginia
applies
directly to the factual circumstances faced by California. 5/
Even if California's situation is distinguishable from
Virginia's,
however, the requirement for prior notice would not apply here at
all if
California could reasonably have viewed the plan amendment as not
being
a "significant" change.
The regulation at 42 C.F.R. ..447.205(d)(1) relied upon by HCFA adds
the
requirement of published notice by a state "before the
proposed
effective date of the change" for "any significant proposed change
in
[the state's] methods and standards for setting payment rates
for
services." 42 C.F.R. .447.205(a). (Emphasis supplied.)
When HCFA
added the requirement for prior published notice for
"significant"
changes in section 447.205, it stated that it did not believe
that it
was necessary to set an explicit expenditure threshold above
which
public notice was required "in the interest of promoting
State
flexibility." 46 Fed. Reg. 58680 (Dec. 3, 1981). Thus,.the
preamble
suggested that states had flexibility in deciding whether to view
a
change as "significant" or not for purposes of the published
notice
requirement. Where a proposed change need not be viewed as
significant,
the ordinary rules on effective dates in section 447.256(c)
would apply.
6/
Although California had stated that its change was significant when
it
initially submitted the amendment (State Ex. 3, Att. 11),
it
subsequently asserted that "the use of this boiler plate
phrase
generally used on [State Plan Amendment] transmittals was simply
a
mistake." State Ex. 7 at 4. The State made a persuasive case
in
retrospect that the change did not need to be viewed as significant
for
purposes of the notice requirement in section 447.205(d). State Ex.
7.
Since the basic terms of the plan amendment were mandated by
federal
statute, the State might reasonably have considered the
plan's
significance as lessened for purposes of the prior published
notice
requirement. When section 447.205 was first promulgated, the
preamble
specifically recognized that the need for published notice is
lessened
when legislation mandates the change since the change will have to
be
implemented in any event regardless of the views of interested
parties
and since there will already have been a substantial element of
public
notice and process in the very passage of the legislation. 46
Fed. Reg.
58679 (Dec. 3, 1981). Moreover, California's existing
reimbursement
methodology had already provided for payments to
disproportionate share
hospitals for several years so that this amendment did
not represent a
significant change in direction for California's program, and
the State
asserted that it did not constitute a significant change in
methodology
from prior practice. State Ex. 7. California also
pointed out that the
amount which it would expend on disproportionate share
adjustments under
the amendment as submitted on September 30, 1988, was
quite
insignificant (less than .007 of 1%) in relation to its
annual
$6.billion Medicaid program. Id. at 3. The combined effect
of all of
these factors might reasonably lead to the conclusion that the
change
did not require prior published notice under the regulation.
Accordingly, based on the foregoing analysis we conclude that the
Act
required a plan amendment for services provided on or after July
1,
1988, that the Administrator's decision for a similarly situated
state
might serve as a precedent for how the regulation on notice might
be
reconciled with the statutory mandate, and that the regulation on
notice
would not even apply here if California reasonably viewed the change
as
not being "significant."
2. What is the proper disposition of this appeal given the absence
of
an approved state plan amendment for the time period in question?
It is of course a fundamental precept of the Medicaid program that a
state
is entitled to reimbursement only for payments made in accordance
with an
approved state plan. Section 1903 of the Act.
California
initially requested an amendment to its state plan to cover
the
augmented payments in question but was advised by HCFA that
the
effective date was not "approvable." This communication was
not
characterized as a formal disapproval, provided no analysis of
the
applicable statute or regulations, and made no reference to
any
attendant appeal rights for California. Directly as a result of
this
advice, California resubmitted its amendment with a December 10,
1988
effective date. California alleged that the decision to submit
the
modified amendment in accord with HCFA's "mandates" was the result
of
extensive discussions and "the threat of total disapproval of
a
disproportionate share program that was by this time almost
totally
implemented." State Ex. 3, para. 18. California has
persisted to this
day in requesting an amendment with the earlier July 1,
1988 date and in
fact stated at the time it withdrew its initial proposal
that its
original position was correct (arguing among other things that
the
amendment did not represent a significant change which would
necessitate
publication under section 447.205) and that it "reserves all its
legal
rights to argue its case in the future as appropriate."
California
attempted to appeal the effective date but was advised that no
grounds
for reconsideration existed in view of California's submission of
a
complying amendment. State Ex. 3, Att. 19..California has so far
never
received a formal and binding decision either way from HCFA on
the
earlier effective date. HCFA had advised California in a
written
communication that the effective date was not "approvable" and
that
California may "wish" to withdraw the amendment, thus
effectively
notifying California in a written communication of what can be
viewed as
a partial approval and a partial disapproval of its
amendment.
Considering the effective date issue as a partial disapproval
subject to
appeal is entirely consistent with HCFA's published policy for
treating
effective date disputes and was in fact the way HCFA handled a
dispute
for a similarly situated state, Virginia. See the excerpt from
HCFA's
Regional Office Manual, HCFA Publication No. 23-6, State Ex.
16.
California did not abandon its position when it submitted its
new
amendment, and in fact attempted to initiate an appeal of the July
1,
1988 effective date. The May 19, 1989 written advice to
California
effectively denying its right to appeal appears to be inconsistent
with
HCFA's published policy and with the subsequently issued
Administrator's
Decision.
Since a decision by HCFA in California's favor on the effective date
issue
would result in a withdrawal of the disallowance, obviating the
need for
further Board review, the Board is remanding this case to HCFA.
Conclusion
On the basis of the foregoing, we remand this disallowance to HCFA
for
further consideration of the related plan amendment effective
date
issue. California may return to the Board within 30 days of
receiving
HCFA's decision on that issue.
_______________________________ Judith A. Ballard
_______________________________ Norval D. (John) Settle
_______________________________ Donald F. Garrett
Presiding
Board Member
1. California did subsequently request reconsideration of the
effective
date and was advised by the then acting Administrator of HCFA that
the
grounds for reconsideration did not exist in view of the approval of
the
amendment with the later date. State Ex. 3, Att. 19.
2. The legislative history to the provision verifies what is
already
clear from the statutory language that Congress wished to ensure
that
the required increase would be paid by the states effective with
this
date. See H.R. Rep. No. 391(I), 100th Cong., 1st Sess. 525 (1987)
in
State Ex. 5.
3. Section 1904 authorizes the Secretary to stop further payments to
a
state under the Medicaid program if the Secretary finds that the
state's
plan no longer substantially complies with section 1902.
4. Moreover, as we discuss below, the last-minute amendment to OBRA
'87
by Congress on July 1, 1988 raises the question whether it would
have
been possible in any event for California to have complied with
the
notice requirement in the regulation prior to July 1, 1988, since
the
effect of the provisions of OBRA '87 on California's program was
not
definitively resolved before then.
5. In any event, the issue of whether publication was impossible may
be
a red herring since the statute requires states without exception
to
amend their plans effective July 1, 1988.
6. The basic rule concerning the effective date of a state
plan
amendment provides that an amendment may become effective on the
first
day of the calendar quarter in which an approvable amendment
is
submitted. 42 C.F.R. .447.256(c). Here, California initially
submitted
its proposed amendment on September 30, 1988, the last day of
the
calendar quarter beginning July 1, 1988. Thus, under
section
447.256(c), California could have received an effective date
consistent
with the statutory effective date of July 1,