Financial Management Review

New York State Operated Developmental Centers and

Other Intermediate Care Facilities

For the Period April 1, 2010 through March 31, 2011

Control Number 02-FM-2013-NY-01

ISSUED BY:

Financial Management Branch

Division of Medicaid and Childrens Health Operations

Centers for Medicare and Medicaid Services

Region II

Report No. 02-FM-2013-NY-01

July 25, 2014

Table of Contents

Section Page

I. Executive Summary 1

II. Background 2

III. Purpose, Scope, and Methodology 4

IV. Findings and Recommendations 6 1: OPWDD Did Not Adequately Support Reported Costs 6

2: State Fiscal Year 2013-2014 Reimbursement Rates

Require Adjustment 8

3: OPWDD Lacks Proper Internal Controls 9

4: OPWDD Did Not Comply With Federal Requirements

For Establishing A Cost Allocation Plan 11

5: OPWDDs 2010-2011 Consolidated Fiscal Report Is Not Reliable 11

6: New York Did Not Comply With Federal Upper

Payment Limit Requirements 13

V. Exhibits 15 1. Agency Certification Statement Template 15

2. OPWDD Signed Agency Certification Statement 16

VI. New York States Response to Draft Report 17

VII. CMS Response to the States Comments 35

1

I. EXECUTIVE SUMMARY

In 2012, the U.S. Department of Health and Human Services (HHS) Office of Inspector

General (OIG) issued a report to HHS Centers for Medicare & Medicaid Services (CMS) in which OIG concluded that the Medicaid daily rate for developmental centers, a type of

intermediate care facility (ICF), operated by the New York State Office for People with

Developmental Disabilities (OPWDD) may be excessive and, therefore, not consistent with

federal statutory requirements.1 OIG indicated that if the state had relied upon actual costs to

derive its payment rates, the federal government might have saved approximately $700

million in Federal Financial Participation (FFP) in state fiscal year (SFY) 2008-2009.

ICFs are designed for individuals with intellectual and developmental disabilities that limit

them from living independently. In New York State, ICFs can be state-operated facilities or

non-state operated facilities. OPWDD operates ICFs with more than 30 beds, which are

referred to as developmental centers, as well as ICFs with 30 or fewer beds, which are referred to as other state-operated ICFs.

Since issuance of the OIG report, CMS worked with New York State to develop a new

payment methodology that is based on the states reported costs and complies with federal statutory and regulatory requirements, including compliance with the program regulations

imposing an upper payment limit (UPL) on ICF services. The new methodology, effective

with the state fiscal year beginning April 1, 2013, relied upon the unaudited costs reported

under New York States Medicaid program for ICFs operated by OPWDD for SFY 2010-2011. While this new payment methodology resulted in a significant reduction to the

statewide average daily rate for developmental centers and a modest adjustment to the

comparable rate for other state-operated ICFs, CMS informed the state that the rates were

subject to change if warranted by the results of this review.

This review was conducted by CMS New York Regional Office with the assistance of the OIGs Office of Audit Services, New York Regional Office.

The review found:

1. For SFY 2010-2011, OPWDD did not adequately support reported costs of $154,208,154 for the ICFs it operated.

2. New Yorks ICF Medicaid reimbursement rates for SFY 2013-2014, which are based on SFY 2010-2011 costs, require adjustment and do not fully comply with federal

requirements.

3. OPWDD lacks proper internal controls for ensuring the accuracy and reliability of its accounting data and financial reporting.

1 OIG report number A-02-11-01029 - Medicaid Rates for New York State-Operated Developmental Centers May

Be Excessive, May 2012. OIG noted that the Medicaid daily rate per Medicaid beneficiary in SFY 2010-2011 was

$5,118, or $1.9 million for the year.

2

4. OPWDD did not comply with federal requirements for establishing a cost allocation plan.

5. OPWDDs 2010-2011 Consolidated Fiscal Report (i.e., cost report), as submitted, cannot be fully relied upon as the basis for allowable Medicaid rates.

6. OPWDDs unadjusted, self-reported data for SFY 2010-2011 confirms Medicaid payments over the one-year review period exceeded the allowable UPL by

$1,140,165,090 FFP. After adjusting for the unsupported costs determined through

this review, payments exceeded the UPL by $1,257,499,670 FFP for the review

period.

In written comments responding to a draft copy of our report, the state generally agreed with

Findings 2, 3, 4 and 5 for which this final report does not include recommended recovery

amounts, although the rate adjustments required by Finding 2 are likely to result in a modest

recovery when finalized. For the first finding, the state agreed that it did not adequately

support reported costs and offered a substitute cost allocation methodology which we

accepted for purposes of this review and the results of which are reflected in this final report.

In addition, the state disagreed with our disallowing the portion of services assessments

(provider tax) costs which are based on the Medicaid revenues that were found to be

unallowable. The state argued the entire costs are allowable because they were derived from

the rates specified in the approved State Plan. We continue to maintain that services

assessments which are based on unallowable Medicaid revenues are also unallowable. For

the sixth finding, the state disagreed that CMS is entitled to seek recoveries on payments

made in SFY 2010-2011 or for any period prior to April 1, 2013, when a State Plan

Amendment (SPA) containing clarified requirements took effect. The state believes that our

recommended recovery relative to the SFY 2010-2011 review period extends beyond the

parameter of the review and offered a variety of reasons why any recovery attempt would not

be legally supportable. We disagree that this review was thus limited in scope. We further

continue to maintain that federal regulations preclude FFP that exceeds the UPL determined

upon Medicare reasonable costs, and that disallowance of such payments is warranted. As

we explain fully in the report, nothing in the states comments has persuaded us to change our recommendations, although some draft report amounts have been modified in this final

report based on the states input. Accordingly, this final report continues to recommend that the state refund reimbursements for the review period that were in excess of the UPL.

II. BACKGROUND

Medicaid Program

Enacted through amendments to the Social Security Act (the Act), Medicaid is a health and

long-term care coverage program jointly financed by states and the federal government. The

program is administered at the federal level by CMS. Each state establishes and administers

its own Medicaid program and determines the type, amount, duration, and scope of services

covered within broad federal guidelines. Federal law requires states to cover certain

mandatory benefits and permits them the choice of providing other optional benefits. Federal

law also requires states to cover certain mandatory eligibility groups, including qualified

parents, children, and pregnant women with low income, as well as older adults and people

with disabilities with low income. States have the flexibility to cover other optional

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eligibility groups and to set eligibility criteria within the federal standards. States must

submit a Medicaid State Plan for CMS approval that delineates the specific benefits and

eligibility groups it plans to cover, and which includes other related information. For

subsequent program changes, states are allowed, with CMS approval, to amend the State Plan

through a SPA [State Plan Amendment].

Pursuant to section 1905(b) of the Act, the Federal Medicaid Assistance Percentage (FMAP)

of a states medical assistance expenditures under Medicaid is based on the individual states per capita income relative to the national average. New York States FMAP for the SFY 2010-2011 review period, encompassing April 1, 2010 through March 31, 2011, was 61.59%

for the initial nine months and 58.77% for the final three months.

Among the applicable federal requirements, CMS regulations at 42 CFR 447.272 impose a

UPL on certain Medicaid provider payments that limits allowable reimbursement for services

provided to Medicaid beneficiaries residing in inpatient settings including developmental

centers and state-operated ICFs. Under that UPL, the aggregate annual Medicaid

reimbursements under both rates (combined) cannot exceed a reasonable estimate of the total

amount that would be paid for the services furnished by the same class of facilities under

Medicare payment principles. Since Medicare does not pay for ICF services, CMS guidance

on demonstrating UPL compliance requires states to follow Medicare principles for paying

based on reasonable costs. In using this UPL methodology, Medicaid costs must be

determined in accordance with the Medicare cost principles described in the Medicare

Provider Reimbursement Manual - Publication 15-1 (also known as PRM 15-1). Medicare

cost principles by design are intended to provide fair and equitable compensation to

providers for the delivery of health care services to program beneficiaries. They recognize

all necessary and proper costs incurred by a facility to deliver patient care services, and

establish rates that would ensure any program using them pays its and only its fair share of

such costs.

New York States Medicaid Program

The New York State Department of Health (DOH) is the single state agency with overall

responsibility for administering the New York Medicaid program. For purposes of this

report, the reference to New York means the state as a whole or DOH. In accordance with

New Yorks approved Medicaid State Plan, OPWDD provides Medicaid-reimbursed services to eligible beneficiaries with intellectual and developmental disabilities. OPWDD is both a

service provider, through state-operated Medicaid and non-Medicaid programs, as well as a

regulator of non-state operated programs funded by OPWDD. Data furnished by OPWDD

reported annual operating costs for all OPWDD programs totaling $7,670,060,669, with

$5,182,071,421 attributed to non-state operated programs and $2,487,989,248 to state-

operated programs including $666,702,851 to OPWDD operated ICFs.

OPWDDs administrative structure during the review period consisted of a Central Office component and 13 regional Developmental Disabilities State Operations Offices (DDSOs).

As a service provider, OPWDD directly operates ICFs designed for individuals with

intellectual and developmental disabilities that limit them from living independently. ICFs

provide 24-hour staffing support for individuals with specific adaptive, medical and/or

behavioral needs and include intensive clinical and direct-care services, professionally

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developed and supervised activities and a variety of therapies. Our review was limited to the

reported costs and revenues of OPWDD-operated ICFs. OPWDDs cost data for SFY 2010-2011 segregated costs by nine developmental centers and 41 other state-operated ICFs.

Under the approved State Plan in effect for the review period, separate daily reimbursement

rates were established annually for the developmental centers and for the other state-operated

ICFs. Specifically, New Yorks payment methodology in the State Plan for SFY 2010-2011 was approved in the early 1990s and used trended base cost calculations and included adjustments and automatic escalators to determine the per diem rate applicable during the

state fiscal year. The State Plan payment methodology itself did not include any check to

determine that the base costs (with adjustments) that were carried forward and escalated

annually remained reasonable or that the adjustments and escalators were warranted for the

services at issue, although this check is inherent to a properly calculated UPL. Over time, as

developmental centers closed, some costs associated with these closed facilities remained in

the rates. Moreover, it appears that the automatic adjustments and escalators exceeded the

actual rate of cost increase. This combination resulted in excessive daily payment rates and

eventually caused the state to exceed the allowable UPL for this class of facilities for many

years. New York neither revised its State Plan, nor requested a waiver or expenditure

authority to permit rates that generated reimbursements that exceeded the UPL.

After federal reviewers questioned the rates being paid to ICFs, New York submitted SPA

12-003 to establish new methods and standards for developing reimbursement rates for

developmental centers and other state-operated ICFs, effective April 1, 2013. The rates for

the initial SFY 2013-2014 rate period under SPA 12-003 are based on the cost report for the

period 3 years prior, which is the SFY 2010-2011 period.2 SPA 12-003 further requires that

the rates be adjusted for any final audit or review findings, and when cost data for each rate

period year is finalized, New York must calculate the UPL. SPA 12-003 specifically states

that if reimbursements exceed the UPL as calculated by New York and approved by CMS,

the state must treat any overage as an overpayment and refund the federal share.

III. PURPOSE, SCOPE, AND METHODOLOGY

Purpose

The purpose of this review was to validate the reported costs of OPWDD-operated ICFs for

SFY 2010-2011 to ensure that they are allowable Medicaid costs, and based on the findings,

determine if any further adjustments should be made, including any changes to the SFY

2013-2014 reimbursement rates.

Scope

The scope of the review covered OPWDDs reported ICF operating costs for SFY 2010-2011 totaling $666,702,851, consisting of $551,091,123 for developmental centers and

$115,611,728 for other state-operated ICFs. For the same period, OPWDD reported total

ICF program costs of $732,367,952 consisting of $594,818,223 for developmental centers

and $137,549,729 for the other state-operated ICFs.

2 SFY 2013-2014 covers the period from April 1, 2013 through March 31, 2014.

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Methodology

To accomplish the review objectives, our methodology included the following:

reviewing applicable Federal and state requirements, Medicaid State Plan sections and related program data;

correspondence with New York State personnel from DOH, OPWDD and the Division of the Budget;

review of OPWDDs unaudited Consolidated Fiscal Report for SFY 2010-2011;

analysis of data and information produced by OPWDDs Central Office as well as its DDSOs;

obtaining an understanding of OPWDDs internal controls pertaining to the New York Medicaid program;

unannounced site visits to three DDSOs that operate ICFs to observe, first-hand, the operating activities as well as the cost compiling and reporting procedures, taking

facility tours and conducting interviews with management and staff;

verification of Medicaid data through eMedNY, New Yorks Medicaid management information system; and

correspondence with other CMS and HHS OIG personnel with subject-matter expertise.

We reviewed OPWDDs unaudited SFY 2010-2011 reported costs of developmental centers and other state-operated ICFs. We focused our analysis on personal services (salaries and

wages paid to OPWDD personnel), related fringe benefits, and services assessment (provider

tax) costs, which represented 85% of the total reported program costs for developmental

centers and 73% for the other state-operated ICFs.

We did not perform a detailed review of the remaining costs encompassing other-than-

personal-services (non-personnel costs such as food, repairs, supplies, etc.), equipment,

capital, and agency administrative costs. Therefore, our review did not make any

adjustments to these reported costs. We allowed the costs reported for other-than-personal-

services (except services assessments on revenues found to be unallowable), equipment, and

capital, but did not allow the reported agency administrative allocation costs of $16,697,354

for developmental centers and $3,502,887 for other state-operated ICFs since these costs, to

the extent supported, are predominantly reimbursable as non-service related costs.

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IV. FINDINGS AND RECOMMENDATIONS

Finding 1 OPWDD did not adequately support reported costs.

New Yorks approved State Plan methodology requires that Medicaid costs be determined in accordance with the Medicare cost principles described in PRM 15-1. Per Section 2304 of

PRM 15-1, provider cost information must be current, accurate and in sufficient detail to

support payments made for services rendered to beneficiaries. Our analysis focused on the

SFY 2010-2011 cost report categories of personal services, fringe benefits and services

assessments.

Personal Services

OPWDD reported total personal services costs of $256,238,755 for developmental centers

and $62,747,643 for other state-operated ICFs.3 Costs in the personal services category of

the cost report were classified as either direct personal services or allocated personal services.

Direct Personal Services

OPWDD directly apportioned costs in the direct personal services category to various

OPWDD programs based on a coding system that tracked the costs at the individual

employee level. OPWDD reported direct personal services costs totaling $170,166,939

for developmental centers and $45,761,195 for other state-operated ICFs. We found the

developmental centers direct personal services job classifications to be consistent with

PRM 15-1s direct patient care provisions, and we applied this conclusion to the other state-operated ICFs direct personal services job classifications.

Allocated Personal Services

OPWDD assigned the costs in the allocated personal services category to six allocation

groups based on the type of cost, and then allocated the costs in each group to various

OPWDD programs by applying pre-established ratio-values. This resulted in OPWDD

reporting allocated personal services costs totaling $86,071,816 for developmental

centers and $16,986,448 for other state-operated ICFs. However, we found some of these

amounts not to be reasonably supported.

OPWDDs allocation methodology failed to appropriately allocate the costs in the allocated personal services category to all benefiting regulatory and oversight functions.

For example, the majority of costs associated with human resources management in

OPWDDs Brooklyn DDSO were allocated as Medicaid services even though a portion of these costs supported the overall regulatory functions of OPWDD. As a result, the

costs allocated to the developmental centers and other state-operated ICFs were

overstated and the costs allocated to other programs were understated. However, the over

and understated amounts could not be precisely quantified because the data was compiled

and reported by OPWDD in a manner that does not distinguish regulatory and oversight

3 There are other personal services costs not reported in the personal services category of the cost report; OPWDD

accounted for these costs through an unapproved cost allocation plan.

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activities from service provider activities. Therefore, the findings in our draft report to

OPWDD utilized an alternate methodology for estimating the allocation of these costs,

which is an approach supported by Office of Management and Budget (OMB) Circular

A-87.4 In response, OPWDD proposed a modified version of our methodology which

produced unsupported personal services costs totaling $28,044,533 for developmental

centers and $483,233 for other state-operated ICFs. Recognizing that OPWDD payrolls

were disbursed and beneficiaries received services, as well as the fact that OPWDDs cost report and cost allocation data had not been contemporaneously compiled, we

accepted OPWDDs proposed substitute accounting for these costs for purposes of this review, and make recommendations later in this report to help ensure prospective

OPWDD compliance.

Fringe Benefits

Related fringe benefit costs were reported at 44.09% of total personal services costs. This

percentage complied with the statewide fringe benefit rate in effect for the SFY 2010-2011

per the New York State Office of the State Comptrollers Accounting Bulletin A-616. The rates cost components include health insurance, pensions, social security, workers compensation, employee benefit funds, dental insurance, unemployment benefits, and

survivors benefits. While the proper rate was utilized for cost reporting purposes, it was applied to total reported personal services costs, including those allocated personal service

costs that were found to be unsupported (see above). Therefore, the portion of the fringe

benefit costs that corresponded to the unsupported personal services costs was also found to

be unsupported. The unsupported fringe benefit costs total $12,364,835 for developmental

centers and $213,057 for other state-operated ICFs.

Services Assessments

Section 43.04 of New York State Mental Hygiene Law established a gross receipts

assessment that is imposed on providers of ICF services. For SFY 2010-2011, the

assessment was imposed at a rate of 5.5% and OPWDD reported services assessment costs

equating to approximately 5.4% of total reported reimbursements. Since we found that

OPWDD received Medicaid reimbursements that could not be supported (see Finding 6), we

adjusted the reported Medicaid services assessment costs to be based on supported Medicaid

reimbursements. We found that $110,544,125 in unsupported services assessment costs were

reported for developmental centers and $2,558,372 for other state-operated ICFs.

Table 1 on the page that follows summarizes the personal services, fringe benefits and

services assessments cost categories.

4 This methodology was used to determine the amounts of personal services costs in the allocated personal services

category that could be reasonably attributed to developmental center and other state-operated ICF activities.

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TABLE 1

UNSUPPORTED 2010-2011 REPORTED COSTS

Cost

Category

Reported

Developmental

Center Costs

Unsupported

Developmental

Center Costs

Reported

Other State-

operated ICF

Costs

Unsupported

Other State-

operated

ICF Costs

Total

Reported

Costs

Total

Unsupported

Costs

Personal

Services $256,238,755 $28,044,533 $62,747,643 $483,233 $318,986,398 $28,527,766

Fringe

Benefits $112,975,667 $12,364,835 $27,665,434 $213,057 $140,641,101 $12,577,892

Services

Assessments $135,130,000 $110,544,125 $10,116,002 $2,558,372 $145,246,002 $113,102,496

Total $504,344,422 $150,953,493 $100,529,079 $3,254,662 $604,873,501 $154,208,154

Although we did not perform a detailed review of the other reported cost categories,

OPWDD appears to have utilized the personal services cost compiling and reporting

methodology for some other cost categories, such as other-than-personal services and some

capital costs. As a result, similar unsupported costs likely exist in other cost categories.

Recommendation 1:

New York must make the necessary adjustments to internal cost documentation records and

procedures to only include properly supported costs for developmental centers and other

state-operated ICFs.

Finding 2 SFY 2013-2014 reimbursement rates require adjustment.

In accordance with SPA 12-003, New York computed statewide average daily

reimbursement rates for SFY 2013-2014 of $1,267.15 for developmental centers and $724.54

for other state-operated ICFs. The established rates provide reimbursement for claims

incurred during SFY 2013-2014. SPA 12-003 bases the SFY 2013-2014 rates on cost report

data for the period 3 years prior, which is the SFY 2010-2011 cost report. A trend factor,

based on the U.S. Department of Labor, Bureau of Labor Statistics Consumer Price Index for All Urban Consumers (Medical Care Services Index), is applied to adjust SFY 2010-2011

costs for the SFY 2013-2014 rate period. SPA 12-003 also requires New York to make

adjustments to the rates for any final audit or review findings.

Our review of New Yorks computation of the SFY 2013-2014 rates identified two errors in the developmental center rate. The computation utilized an incorrect ending beneficiary

census number for a closed developmental center as well as a capital cost amount that was

inconsistent with the reported cost data. Adjusting for these errors as well as for the

unsupported costs identified in this review, we recomputed the developmental center and

other state-operated ICF rates for SFY 2013-2014 to be $1,200.89 and $807.46,

respectively.5 Based on these revised daily rates, New York received net excess

reimbursements for SFY 2013-2014 claims.

5 This represents a 5.3% decrease in the payment rate for developmental centers for SFY 2013-2014 claims, and a

corresponding 11.5% increase to the payment rate for other state-operated ICFs.

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The rate methodology specified in SPA 12-003 utilizes estimates, such as the fringe benefit

rate. When annual cost data are finalized following the end of the rate year, New York must

calculate the UPL. Any reimbursement amounts in excess of the UPL must be treated as an

overpayment, of which the federal share must be refunded. As such, any cost estimates

included for purposes of establishing the prospective rates for a given rate year are later

subject to the UPL calculation.

Recommendation 2:

New York must:

adjust the SFY 2013-2014 developmental center and other state-operated ICF reimbursement rates retroactive to April 1, 2013; and

upon finalizing cost data for SFY 2013-2014, calculate the corresponding UPL and refund the federal share of any excess reimbursements.

Finding 3 OPWDD lacks proper internal controls.

Title 45, part 92 of the CFR addresses uniform administrative requirements for grants and

cooperative agreements to state and local governments; 45 CFR 92.20 (a) requires states to

expend and account for grant funds in accordance with the fiscal controls and accounting

procedures of the state. Sections 950 and 951 of Article 45 of the Executive Laws of New

York State detail the states internal control responsibilities, which include but are not limited to: safeguarding of assets; checking the accuracy and reliability of accounting data and

financial reporting; promoting the effectiveness and efficiency of operations; ensuring

compliance with applicable laws and regulations; and encouraging adherence to prescribed

managerial policies. Additionally, OMB Circular A-133 addresses audits of states, local

governments, and non-profit organizations. Subpart A of section 105 of the circular defines

the objectives of internal control pertaining to compliance requirements for federal programs.

This includes ensuring transactions are properly recorded and accounted for in order to

permit the preparation of reliable financial statements and federal reports.

Our review found the following deficiencies in OPWDDs internal controls:

OPWDD maintains its Financial Management System (FMS) to internally account for costs. However, OPWDD does not formally prepare cost reconciliations of FMS data to

the official state accounting records maintained by the Office of the State Comptroller.

For SFY 2010-2011, the Comptroller reported total OPWDD personal services costs of

$1,173,815,412. In June 2013, as a result of CMS questioning, OPWDD prepared a reconciliation of its personal services cost data for SFY 2010-2011, which indicated FMS

exceeded the relevant Comptrollers expenditures by a net amount of $1,098,283, with FMS reporting $2,917,119 more in DDSO expenditures, and $1,818,836 less in Central

Office expenditures, than the Comptroller. OPWDD officials were unable to explain

these differences other than to deem the $1,818,836 variance acceptable since the FMS

total was lower than the Comptrollers expenditures and therefore the discrepancy would not cause federal claims to be overstated. However, there are no written managerial

policies for reconciling cost data or establishing variance thresholds which would trigger

further investigation.

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OPWDDs cost methodology allocates certain personal services, other-than-personal-services, and capital costs based on a proration of the direct personal services

expenditures incurred by each of the final cost centers (i.e., benefiting programs) in the

allocation group. During our review, we discovered that 3 final cost centers which

incurred direct personal services expenditures were not included in the formula utilized to

allocate other costs. This resulted in costs being under-allocated to certain programs and

over-allocated to other programs. OPWDD stated that this error occurred because an

OPWDD staff member was informally instructed by supervisory staff to deviate from

written allocation procedures. OPWDD was unable to provide documentation of

supervisory approval for deviating from the established procedures.

OPWDD utilized the square-footage of occupied space as the basis for allocating certain DDSO costs, such as maintenance and repairs. OPWDD stated that the allocation

methodology utilized surveys prepared by all DDSOs in 2006. However, the square

footage reported on the surveys differed from the amounts used to allocate the costs.

OPWDD could not produce documentation supporting the square footage amounts

utilized in the allocation methodology. As a result, the allocation amounts are not

properly supported. In addition, space occupied by Central Office staff stationed at

DDSO sites was included for allocation purposes as part of the space occupied by the

developmental center. These costs should have been allocated across multiple OPWDD

programs rather than being entirely allocated to the developmental centers.

OPWDD did not establish adequate internal controls for ensuring the accuracy and reliability

of its accounting data and financial reporting. There are no written OPWDD managerial

policies, related procedures, or guidelines for: reconciling internal FMS cost data to the

official accounting records maintained by the Comptrollers Office; internally reconciling individual programs cost data to FMS summary data, including establishing thresholds identifying variances requiring investigation; documenting and obtaining approval to deviate

from prescribed procedures; or for specifying the appropriate level of supervisory review of

subordinates work. The data utilized by OPWDD to prepare the cost report cannot be fully relied upon since reconciliations were not routinely performed, an unapproved deviation

from established procedures occurred, and documentation to support reported costs was

either outdated or not maintained.

Recommendation 3:

OPWDD must establish adequate internal controls for ensuring the accuracy and reliability of

its accounting data and financial reporting, including:

the establishment of formal written policies and procedures requiring the periodic reconciliation of cost data that define the level of acceptable variances;

performing regular, periodic reviews of cost allocation methodologies;

enhancing supervisory oversight;

ensuring adherence to written policies and procedures with deviations properly approved and documented; and

maintaining adequate documentation to support reported costs.

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Finding 4 OPWDD did not comply with federal requirements for establishing a cost allocation plan.

Title 45, part 95 of the CFR establishes requirements regarding general administration of the

medical assistance and other public assistance programs. Subpart E sets forth requirements

for: a) the preparation, submission, and approval of state agency cost allocation plans; and b)

adherence to approved cost allocation plans in computing claims for FFP.

New York did not seek or obtain federal approval of the cost allocation plan utilized for SFY

2010-2011 administrative costs, as required. We noted that the developmental center and

other state-operated ICF personal services costs reviewed were generated from the same

OPWDD cost pools as its administrative costs. Therefore, an approved cost allocation plan is

essential to evaluating the correctness and fairness of the cost amounts reported for

developmental centers and other state-operated ICFs. New York stated that a cost allocation

plan is currently being developed and that it will submit it for federal approval when

finalized. In the absence of being able to evaluate developmental center and other state-

operated ICF costs against such a plan, our review calculations utilized an alternate

methodology offered by the state which resulted in our accepting certain developmental

center and other state-operated ICF costs.

Recommendation 4:

New York must develop a cost allocation plan in accordance with federal requirements that is

approved by HHS.

Finding 5 OPWDDs 2010-2011 Consolidated Fiscal Report is not reliable.

New York SPA 12-003 specifies that the state will report costs in accordance with generally

accepted accounting principles in a complete Consolidated Fiscal Report (cost report) format.

SPA 12-003 defines the cost report as the reporting tool utilized by all government and non-

government providers to communicate annual costs incurred as a result of operating OPWDD

and other programs and services, along with utilization and staffing statistics. A complete

cost report format includes an agency certification statement as well as an independent

certification of financial statements or a compliance review. SPA 12-003 further states that

the base period cost report is the cost report period three years prior to the initial period. The

initial period, per SPA 12-003, is SFY 2013-2014 and therefore, the base period cost report is

the report for SFY 2010-2011.

In addition, the New York State Consolidated Fiscal Reporting and Claiming Manual

(Manual) covering the SFY 2010-2011 states that full cost report submissions, which include

all expenses and all revenues of the service provider, are required if a service provider

receives Medicaid payments. Full cost report submissions require completion of all

applicable cost report certifications and schedules, including the Agency Identification and

Certification Statement (agency certification statement), and submission of an independent

accountants certification of the financial statements or a compliance review conducted by an independent auditor as detailed in the Manual.

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OPWDD prepared a cost report in the Consolidated Fiscal Report format for the first time for

SFY 2010-2011. The guidelines for preparing the cost report are demonstrated in the

Manual, which can be accessed on the New York State Education Department website.6 This

Manual is relevant to all service providers.

For SFY 2010-2011, OPWDD did not prepare a complete, full cost report containing an

agency certification statement (see Exhibit 1) in accordance with the Manual. OPWDD

submitted a modified SFY 2010-2011 agency certification statement containing the OPWDD

Executive Deputy Commissioners signature on July 24, 2013 (see Exhibit 2). OPWDDs submitted agency certification statement is missing specific language that is included in the

required agency certification statement template. OPWDD officials stated that the language

was altered to be applicable to OPWDD as a New York state agency. The specific language

that was removed from the agency certification schedule required for all service providers

includes the following statements:

- Misrepresentation of any information contained in this report may be punishable by fine and/or imprisonment under New York State law,

- I hereby certify that I have read and understand the above statement, - information furnished in this reportis true and correct to the best of my

knowledge, and - [the cognizant agency] may reject this report if it has not been fully, or accurately

completed.

Certain language of the agency certification statement may need to be adjusted to more

appropriately reflect OPWDDs state agency status; however, the above statements that were excluded from the submitted certification are applicable to OPWDD and should not have

been eliminated.

In addition, for SFY 2010-2011, OPWDD did not prepare a full cost report containing an

independent accountants or auditors certification. While costs for SFY 2010-2011 were being incurred, OPWDD was not aware that a full cost report would be required for this

period. As a result, OPWDD did not obtain an independent accountants or independent auditors certification. OPWDD officials stated that a certification for SFY 2010-2011 would be difficult to obtain at this time but has agreed to obtain the independent certification

beginning with SFY 2013-2014.

As a result of not preparing a complete, full cost report for SFY 2010-2011, OPWDD is

neither fully compliant with SPA 12-003 nor the Manual. Without a signed agency

certification statement attesting to the required language, or an independent accountants or auditors certification, the data reported in the SFY 2010-2011 cost report may be inaccurate and unreliable. As a result, the reimbursement rates for developmental centers and other

state-operated ICFs are based on data that cannot be fully relied upon.

Recommendation 5:

OPWDD must annually prepare a complete, full cost report as required of all service

providers per the New York State Consolidated Fiscal Reporting and Claiming Manual and

6 The Manual is available online, at: www.oms.nysed.gov/rsu/Manuals_Forms/Manuals/CFRManual/

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in accordance with SPA 12-003. The complete, full cost report must include all certifications

required by the Manual.

Finding 6 New York did not comply with federal UPL requirements.

Per 42 CFR 447.272, aggregate annual ICF payments cannot exceed a reasonable estimate of

the total amount that would be paid for the services furnished by the same class of facilities

under Medicare payment principles. Since Medicare does not pay for ICF services, CMS guidance on demonstrating UPL compliance requires states to follow Medicare principles for

paying based on reasonable costs.

New Yorks reported total Medicaid reimbursements for developmental centers and state-operated ICFs of $2,495,110,874 and $165,912,377, respectively, materially reconciled to

eMedNY data. We initially calculated the SFY 2010-2011 UPL utilizing OPWDDs self-reported costs, which resulted in excess federal share reimbursements of $1,140,165,090.

We also calculated the SFY 2010-2011 UPL after adjusting for the findings of this review

(see Finding 1), which increased the excess federal share reimbursements to $1,257,499,670.

Our UPL calculations for the review period are summarized in Table 2. The cost data shown

in Table 2 summarizes the reported and accepted costs, adjusted for non-Medicaid activities,

which comports with standard UPL practice. Our review confirmed reimbursements were

made in excess of the UPL, requiring the state to refund $1,257,499,670 to the federal

government for the review period.

TABLE 2

UPPER PAYMENT LIMIT SUMMARY

Developmental Center and Other State-Operated ICF SFY 2010-2011

Medicaid Participating Amounts

Based on OPWDD Self-

Reported Costs

Adjusted for Costs Found

Unsupported by CMS

Medicaid

Reimbursements

$2,661,023,251

$2,661,023,251

Patient Contributions 15,619,801 15,619,801

Total Reimbursements $2,676,643,052 $2,676,643,052

Operating Costs $689,574,583 $517,507,542

Operating Cost Limit

Adjustment

82,748,950

62,100,905

Capital and Equipment 31,666,009 31,666,009

Medicaid UPL $803,989,542 $611,274,456

Total Excess

Reimbursements

$1,872,653,510

$2,065,368,596

Excess Federal Share* $1,140,165,090 $1,257,499,670

* Annualized OPWDD cost data was reviewed, which we equally attributed to the four

calendar quarters of the review period during which time the federal financial

participation rate was 61.59% over the initial three quarters and 58.77% over the final

quarter.

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Recommendation 6:

New York must:

refund $1,257,499,670 in excess reimbursements to the federal government; and

timely perform annual UPL calculations ensuring only properly supported costs are included and promptly refund the federal share for any excess reimbursements.

15

V. EXHIBITS

Exhibit 1 Agency Certification Statement Template:

16

Exhibit 2 OPWDD Signed Agency Certification Statement:

17

VI. NEW YORK STATEs RESPONSE TO DRAFT REPORT

The state provided the following formal written response to our draft report.

Subsequent to our receipt of this response, the state provided additional information, which

we also considered in preparing our final report.

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19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

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VII. CMS RESPONSE TO THE STATES COMMENTS

After reviewing the States written comments to our draft report and the additional information provided, we maintain that our findings are valid.

Although the state did not provide sufficient supporting documentation to

adequately dispute our findings, the information it provided did result in our

making some adjustments to Findings 1, 2, and 6, which are reflected in this

final report.

CMS Response to the States Comments on Recommendation 1:

The state agreed with our finding that the cost allocation methodology it utilized for cost

reporting purposes did not appropriately allocate costs to all benefiting regulatory and

oversight functions; but disagreed with some details of the substitute allocation

methodology we applied for purposes of our review. In addition, the state disagreed with

our disallowance of the portion of the services assessments (provider tax) costs that is

based on the Medicaid revenues which our review concluded are unallowable. The state

argued that the entire services assessments costs are allowable because they were derived

from the rates specified in the approved State Plan.

The state offered an alternative OPWDD cost allocation methodology, which we accepted

for purposes of this review, and the results of which are reflected in this final report. We

accepted the states alternative methodology as a substitute for cost accounting and documentation requirements, after considering the implications of OPWDDs cost reporting and allocation data not having been contemporaneously compiled, as well as the

fact that OPWDD payrolls were disbursed and services furnished. However, this

alternative methodology was accepted for purposes of this review only, and OPWDD must

take the steps necessary for ensuring full compliance with cost accounting and

documentation requirements, which it has committed to do.

We continue to maintain that services assessments that were based on the portion of

Medicaid revenues that exceeded the UPL are not allowable costs. This approach is

consistent with our understanding of the states treatment of these costs when retroactively adjusting the rates of its private ICF providers.

CMS Response to the States Comments on Recommendation 2:

The state acknowledged the SFY 2013-2014 rates require adjustment, but contested the

draft reports adjustment amounts for personal services and fringe benefits, while offering an alternative allocation methodology for these costs. As discussed above, CMS accepted

the states alternate methodology for purposes of this review. The draft reports amounts have been updated in this final report based on the states alternate methodology.

CMS Response to the States Comments on Recommendations 3, 4, and 5:

The state generally agreed with Findings 3, 4, and 5. CMS will continue to

actively work with the state to resolve any outstanding issues, such as proper

wording of the required certification, audit engagement elements, and

development of an acceptable cost allocation plan.

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CMS Response to the States Comments on Recommendation 6:

The state disagreed that CMS is entitled to recoveries for any period prior to April 1, 2013,

contending it is both outside the parameters of the review and is not legally supportable.

The state offered a variety of reasons for why the payments made in SFY 2010-2011 were

permissible and therefore no recovery should be sought. First, the state noted that

payments in this period were made in accordance with its approved State Plan and that

alone makes them eligible for FFP under section 1903(a)(1) of the Social Security Act. In

acknowledging federal UPL requirements, the state maintained its payment rates were in

compliance with applicable federal upper payment limit requirements citing 1987

rulemaking documents that establish the UPL for state facilities and provided guidance to

states. The state pointed out that this guidance recognized the use of prospective

approaches to estimate the UPL. Specifically, the state said it relied on CMS guidance

which instructed states to use Medicare principles for ICFs in making the requisite UPL

calculation. The state quoted a passage in the rulemaking preamble that provided that states

should apply Medicare cost principles to Medicaid costs incurred in a given base year and

then apply the Medicare market basket rate of increase from the base year to the rate year

to estimate what Medicare costs would have been in the rate year. The state described its

approach to be consistent with this guidance and noted its approach was laid out to CMS in

1990 when the state submitted SPA 90-012 which was approved by CMS. The state

maintained that it interpreted CMS approval of SPA 90-012 as an approval of its UPL calculation, and that it thereafter performed an annual UPL calculation using the same

approach to conclude the reimbursements were compliant with the UPL requirements. The

state objected to the draft reports UPL calculation, believing it to be based on more recent CMS UPL guidance. While disagreeing with using more current base year costs, the state

made two technical objections to the draft reports UPL calculation, which the state believes understated total facility costs and misclassified certain revenue. Finally, the state

maintained that there is no federal regulation that prohibits public facilities from being

reimbursed more than their costs and cited Congressional actions that blocked CMS efforts

to implement such a requirement.

The objective of our review was clearly stated in our letter to the state dated January 30,

2013. It was to determine whether the amounts claimed for SFY 2008-2009 are consistent

with Medicaid requirements including the upper payment limit. This letter informed the

state that our review would focus on the identification of costs actually incurred by state-

operated ICFs and whether they were reasonable, allowable, and adequately supported in

accordance with the terms of the State Medicaid Plan and applicable federal regulation.

The letter also put the state on notice that based on the results of the review, CMS may seek

to recover federal funds on any payments found in excess of federal payment requirements.

While the review year was moved to SFY 2010-2011, this change was mutually agreed to

by both the state and CMS and was made to accommodate resource constraints and data

issues raised by OPWDD officials. 7

7 Moreover, the assertion by the state that this finding was not within the scope of this review does not go to the

merits of the finding, and we are aware of no statutory or regulatory limitation on CMS that precludes it from

disallowing improper state claims because they were identified in a review initially focused on other issues.

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The states position that the payments are permissible because they were made pursuant to an approved State Plan is incorrect. Federal regulations at 42 CFR 447.257 were

promulgated to address this specific situation and provide no FFP is available for state

expenditures for inpatient hospital services or long term care services that exceed the upper

payment limits. Long term care services are defined in regulation at 42 CFR.447.251 to

include intermediate care facilities. Regulations at 42 CFR 447.272 establish a federal

UPL for ICF services provided by state providers. Where state payments are found to be

above the federal UPL, regulations at 447.257 provide CMS with authority to deny FFP

and seek recoveries. Recognizing the prospective nature of UPL estimates, in a preamble

to these regulations8, CMS made clear that a disallowance of FFP because of excess

payment will be made if, upon review of state payments, HCFA [now CMS] determines

that the states assurance was either faulty or invalid based on the information that was available to the state at the time it initially gave its assurance. If such a finding is made,

then action to recover amounts paid in excess of the Medicare upper payment limit will be

taken.

We do not agree with the states assertions that the Medicaid payment rates in effect during SFY 2010-2011 for state providers of ICF services were compliant with federal UPL

requirements applicable to that same period. While the states program and approach may have started out as permissible back in 1990, the rates paid for Medicaid services furnished

in SFY 2010-2011, as the result of our review shows, are clearly above any reasonable

estimate of Medicaid costs that would be expected to be incurred to furnish such services

using Medicare principles of cost reimbursement. As exemplified in Table 2 of this report,

OPWDD self-reported $2,676,643,052 in Medicaid reimbursements but only $803,989,542

in reported costs.

The payments in excess of the UPL were not a reasonable error in estimating Medicare

costs. The significant disparity our review found between the state rates established for

reimbursing state-operated ICF services in SFY 2010-2011 and the costs that the state

reported to furnish these services is beyond any notion of reasonableness.

Moreover, the state was at all times in possession of the information about its own costs,

and did not indicate any reason why it would not have been aware that Medicaid payments

significantly exceeded its actual reasonable costs. The magnitude of the excess payments

is an indication that the state should have been, or actually was, aware that its annual UPL

calculations were both faulty and invalid. Over time, it appears the state failed to

adequately consider the declining volume of services in its UPL calculations in making

adjustments and applying escalators to its rates. The problem was not the use of

prospective rates but the unwarranted increases in those prospective rates that resulted in

growing excesses over actual costs. At the time that the state set rates for the SFY 2010-

2011 period, it had, or should have had, information available to be informed of the

expected utilization of Medicaid services and the likely costs to deliver those services.

Even with the most basic understanding of Medicare cost reimbursement principles, the

state would have known the rates it intended to set for this period were far above the level

of payment that would be recognized using Medicare costs principles.

8 53 Fed Reg 28145 (July 28, 1987).

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We also do not think the 1987 regulatory preamble language the state cited in its response

is a contributing factor. That rulemaking was undertaken to address the very problem of

excessive Medicaid payments to state providers and established not only the prohibition on

FFP regulation previously discussed, but also a UPL specific to state providers. Back then

several audits had shown some states were paying state providers differently and more than

they were paying private providers. One of the examples cited in the preamble is state ICFs

being paid $11 million more than their reported actual allowable costs. Recognizing states

might not have the same incentive to established cost constraining methodologies for state

facilities, to prevent potential excessive payments, CMS modified the application of the

UPL and established its separate application to state facilities.

While this regulatory guidance states that, for ICF services, States should apply Medicare cost principles to Medicaid costs incurred in a given base year and then trend them up to the rate year, that should not be read to permit the use of adjustments and trend factors that

do not reflect changes in actual ICF costs incurred. We agree that the preamble language

permits states flexibility to use different methodologies to accurately demonstrate

compliance with the UPL, but it must be considered in the overall context that payments

cannot exceed reasonable costs. This language does not mean that a state can ignore

changes to the composition of costs of which it is aware, such as the volume of services

and providers expected in the rate year. In other words, this preamble language indicates

federal flexibility for states in the nature of the UPL demonstration, but does not authorize

states to make payments that exceed a reasonable estimate of the costs expected to be

incurred using Medicare cost reimbursement principles.

With respect to the states objection to the draft reports UPL calculation, we note that in the states response the state agrees that the rate methodology had become outdated and was in need of reform. We maintain that our UPL calculation fairly reflects the reasonable costs incurred for the Medicaid services delivered by the state-operated ICFs,

and note that this final reports calculation reflects adjustments partially addressing the states technical objections to the draft reports calculation. We agreed with the states comments regarding the treatment of certain revenue, and we believe our acceptance of the

states alternate cost allocation methodology relative to Finding 1 (for purposes of this report only) addressed the states technical objection regarding the understatement of facility costs, except for services assessments costs.

We are aware of congressional opposition to Medicaid applying a facility-specific payment

limitation to government facilities. As a result, our review was not a review of any single

facility but included all state-owned or operated ICFs. Our recommendation is based on

our finding that Medicaid payments to state ICFs in the aggregate exceeded the Medicaid

payments limits at 42 CFR 447.272.