MEMORANDUM

April 2005

PRIVTLEGED AND CONFIDENTIAL
ATTORNEY WORK PROD UCT

TO: Stephen J. Immelt
Sheree Kanner
Clifford D. Stromberg

Jeffrey G. Schneider

RE: Health and HOSpitals Corporation of Marion County

This memorandum provides background information on the use of
intergovernmental transfers by the State of Indiana and by our client,
Health and Hospitals Corporation of Marion County to generate
supplemental federal Medicaid payments in conjunction with Medicaid nursing
home upper payment limits As you are aware, the Centers for Medicare
and Medicaid Services has issued a ?deferral letter,? pursuant to which
OMS has delayed making federal Medicaid matching payments to the State of
Indiana pending an audit of certain nursing home PL transactions involving
HHC. In addition, HHC recently received a subpoena from the Department of
Health and Human Services? Of?ce of Inspector General requesting
substantially all documents relating to these nursing home IGTIU PL transactions.

The purpose of this memorandum is twofold: First, to provide some
background and context 0n IGTs and UPLs generally, and on the use of these
mechanisms by states to maximize federal payments under Medicaid. This
discussion is intended primarily to assist other Hogan 85 Hartson attorneys who
may not be familiar with this issue and who may be asked to assist HHC with the

OIG investigation or the CMS audit. Second, the memorandum will set forth the
facts (as we understand them as of this writing) surrounding nursing home
payments and related transactions in the State of Indiana, all of which
involve HHC. As we review documents, and have further conversations with State
and HHC of?cials, our understanding of the facts is likely to evolve andchange, and
this memorandum likely will need to be revised. But the intent is to set forth in a
single document our entire understanding of the case as of a particular date. This
memorandum is intended to be a fairly objective discussion of the relevant law and
facts, rather than an advocacy piece.

I. Background on IGTs and UPLs

As you are aware, Medicaid is a joint state/federal program,
administered largely by the states, that ?nances health care for the poor. The
federal share of Medicaid spending in each state varies according to a formula
whereby the states with the poorest populations receive the largest federal
contributions. The federal government pays between 50% and 77% of all costs
incurred by each state in purchasing or providing covered services for Medicaid
recipients. For Indiana, the federal contribution percentage has varied in the past
few years from approximately 63% to approximately 

A. IGTS

IGTs simply are transfers of funds from one governmental entity to
another. One common form of IGT is a transfer of monies from a local government
entity, such as a county, to a state. States occasionally use IGTs as a means of
requiring local governments to help fund the non-federal share of Medicaid
Spending. For example, in New York, counties are required to contribute 50% of the
non-federal share. As an alternative to making an a local government can
certify that it has made direct Medicaid expenditures that qualify for federal
matching payments. By way of illustration, in a state with a 50% federal matching
percentage, a county'government could make an IGT to the state of $10 million. If
the state then used that money on Medicaid spending, the federal government
would pay $5 million to the state, or 50% of the expenditure. Alternatively, the
county government could certify that it spent $10 million directly on Medicaid
services. This certi?cation similarly would result in a federal contribution of $5

 

The federal assistance percentage for Indiana was 65.27% in ?scal year 2004
and 62.78% in ?scal year 2005. For federal ?scal year 2006 (October 1, 2005
through September 30, 2006), the federal assistance percentage will be 62.98%.
69 Fed. Reg. 68370-73 (Nov. 24, 2004).

million, even though the county spending did not flow through the state Medicaid
agency.

In the late 1980s and early 1990s, state governments began using
accounting mechanisms to increase the level of federal Medicaid contributions.
Initially, states used provider ?donations? and provider-specific taxes to achieve this
result. In a typical arrangement, a provider would make a donation to state
Medicaid agency, and the donation would then be returned to the provider through
enhanced Medicaid payments. For example, a provider might make a $1 million
donation, and receive, in turn, $1 million in enhanced payments. The end result
was no additional net spending by the state, and no additional net revenues to the
provider, but the state would show an additional $1 million in Medicaid spending,
which would qualify for federal matching payments. Some states also used
provider-speci?c taxes to achieve the same effect state taxes would be levied
against targeted providers, and then some or all of the tax receipts would be
returned to the provider through enhanced Medicaid payments. Again, the end
result was no net expenditure by the state, and no net revenue to the provider, but
the state could obtain federal matching contributions on the ?enhanced? Medicaid

payments.

Congress cracked down on these ?nancing mechanisms when it
enacted the Medicaid Voluntary Contribution and Provider Speci?c Tax
Amendments of 1991 (the ?Voluntary Contribution This law excludes for
purposes of calculating federal Medicaid matching payments expenditures that
are tied to these types of non-bone ?de donatiOns and targeted provider taxes.3
Signi?cantly, however, Congress recognized that IGTs and certi?ed expenditures
from local governments are legitimate sources of state Medicaid funding, even when
the local government unit making the IGT or certi?ed expenditure is a hospital or
other health care entity. Consequently, in the 1991 law, Congress expressly
permitted IGTs and certi?ed expenditures to be included for purposes of computing
the federal Medicaid match, even when the IGTs or certi?ed expenditures otherwise
might constitute an impermissible donation or provider tax had the revenues been

received from a non-governmental entity.4

 

Pub. L. No. 102~234, 105 Stat. 1793, codi?ed at 42 U.S.C. ?1396b(w).



Id. See also 42 C.F.R. ?433.50 etseg.

Section 1903(w)(6)(A) of the Social Security Act, 42 U.S.C. ?1396b(w)(6)(A)
(?Notwithstanding the provisions of the sub?section [prohibiting the use of
certain provider donation and targeted provider taxes for purposes of computing
the federal Midland match], the Secretary may not restrict States? use of funds

IA

[Footnote continued]

The extent of this Congressional carve?out remains open to debate.
The express language of the Voluntary Contribution Act states that IGTs and
certified expenditures from local governments that are derived from ?state and local
taxes? are permissible for purposes of determining state Medicaid expenditures and
computing the federal match? Thus, if a county government collected local property
taxes, for example, and then transferred those tax revenues to the state through an
IGT (or spent those revenues directly on Medicaid services, and certi?ed the
expenditures), those transferred or certi?ed tax revenues would be ?counted? as
part of the state?s share of Medicaid Spending for purposes of applying the federal
matching percentage and determining the federal government?s contribution. The
statute is silent, however, with respect to the treatment of IGTs and/or certi?ed
expenditures from local governments that are n_ot derived from state or local taxes.

Federal regulations, in turn, state that ?public funds? may be
considered as part of the state?s share of Medicaid Spending for purposes of
determining the federal match, so long as such funds are not ?federal funds.?5 Thus,
IGTs that are ?public funds? appear to be permissible, even if not derived from state
or local taxes, so long as such funds are not ?federal funds.? The purpose of the
?federal fund? prohibition is to prevent states from using federal dollars to generate
additional federal dollars through the federal Medicaid match. For example,
assume that a local government, such as a county, received a federal grant of $50
million, and transferred that money to the state Medicaid agency through an IGT.
Assume further that the state then spent the $50 million on Medicaid, and claimed
the expenditures for federal matching purposes. Absent the regulatiozi, in a state
where the federal contribution is 50%, the federal government would have to pay an
additional $25 million to ?match? expenditures that came from the federal
government in the ?rst instance. Policy makers occasionally refer to this as

?re cycling.?

The problem with the regulation is that it does not provide much
guidance as to what revenues constitute ?public funds? (which E: permissible for

 

[Footnote continued]

where such funds are derived from State or local from or
certi?ed by units of government Within a State as the non?Federal share of
[Medicaid expenditures], regardless of Whether the unit of government is also a
health care provider. . . 

Ion

Id.

It?)

42 C.F.R. ?433.51.

use in computing state Medicaid spending for federal matching purposes) vs.
?federal funds? (which are permissible for this purpose). Given that the
regulation was promulgated as part of the implementation of the Voluntary
Contribution Act, states and providers have taken the position that the only
?federal funds? prohibited from being used for purposes of computing the federal
match are those provider donations and provider-speci?c taxes that are expressly
disallowed by that law. In the states? view, all other public funding can be used as a
source of permissible IGTs, including Medicare and Medicaid dollars that have
?owed to local government entities as payment for medical services furnished to
Medicare and Medicaid recipients. In support of this position, the states point to
language in the pre-amble of the 1991 federal register notice implementing the
Voluntary Contribution Act. In the preamble, CMS (then called the Health Care
Financing Administration) stated that ?[?unds transferred from another unit of a
state or local government which are not restricted by the statute are not considered
a provider-related donation or healthcare related tax. Consequently, until the
Secretary adopts regulations changing the treatment of intergovernmental
transfers, States may continue to use, as the State share of medical assistance
expenditures, transferred or certi?ed funds from any governmental 

Notwithstanding this expansive statement, CMS apparently has begun
taking a more restrictive view of what constitutes a permissible IGT for purposes of
computing state Medicaid expenditures. In a letter to Senator Charles Grassley,
dated April 28, 2004, the Administrator of CMS, Dr. Mark McClellan, took the
position that in order for IGTs to be used for purposes of computing the federal
Medicaid match, the IGT ?must be derived from state or local tax revenues.?
(emphasis added).? Dr. McClellan based his argument on the fact that, as noted
above, the statutory provision permitting IGTs speci?cally mentions only these
sources of revenue. The states have countered that just because the statute
expressly forbids CMS from restricting the use of state and local tax revenues for
this purpose, that does not mean that no other types of revenues may be used for
IGTs. In other words, CMS now appears to be reading the statutory provision as
exclusive, whereas the states read it as non-exclusive.

 

At this juncture, it remains an open question as to what revenues may
be used as the source of IGTs for purposes of funding a state?s share of Medicaid
spending. It is clear, however, that in order to so qualify, an IGT must be made by
a unit of local government. Also, by statute, local governments are prohibited from

 

l-q

57 Fed. Reg. 55119 (Nov. 24, 1992) (emphasis added).

Inc

The letter is attached at Tab A.

paying more than 60% of the total non?federal share of Medicaid expenditures.a
Thus, the aggregate amount of all local government IGTs and certi?ed expenditures
in any year may not exceed 60% of a state?s total share of Medicaid Spending for

that year.
B. UPLs

The Upper Payment Limit, or UPL, refers to a cap on the amount that
states can pay to providers for covered Medicaid services. These limits are created
by regulation, not statute,l? but are based on the statutory requirement that state
Medicaid payment mechanisms be consistent with ?ef?ciency, economy and quality
of Current UPL regulations limit payments for Medicaid-covered services
furnished in hospitals, nursing homes and certain other provider settings to the
amount that would have been paid for such services under Medicare principles-L2- A
separate UPL is calculated for different types of providers hospitals and
nursing homes) and for different classes of facilities based on ownership. Thus, for
example, there is a separate nursing home UPL in each state for state
government-owned or operated facilities; non-state government-owned
or operated facilities (Lg, facilities owned or operated by local
government units); and privately owned and operated facilities}?! Within these
categories, the UPL is computed in the aggregate. Thus, for example, a state can
make Medicaid payments 1:2 a particular NSGO nursing home that is in excess of
what Medicare would have paid that facility for the same services, so long as the
State?s payments to SGO nursing homes does not, in the aggregate, exceed that
amount that would have been paid to these facilities under Medicare payment

principles.

Each state computes the UPL for different classes of facilities by
making a ?reasonable estimate? of what Medicare would have paid for the same
servicesg? CMS must approve the methodology used to compute the UPLs.

 

[no

Section 1902(a)(2) of the Social Security Act, 42 U.S.C. ?1396a(a)(2).

l9- 66 Fed. Reg. 3154, 3173 (January 12, 2001); 67 Fed. Reg. 2610
(January 18, 2002)..

ll Section 1902(a)(30)(A) of the Social Security Act, 42 U.S.C. ?1396(a)(30)(A).
1?2 42 C.F.R. ?447.272.

Lg

1:1 Id.

C. States? Use of IGTs and UPLs to Maximize Federal Medicaid
Contributions

After the Voluntary Contribution Act signi?cantly limited states?
ability to use voluntary provider donations and provider-specific taxes to increase
the federal Medicaid match, states began using similar mechanisms that were not
expressly prohibited by that law. One such mechanism involves the use of the IGT
process and the UPL calculation. This works as follows: A state ?rst will compute
the difference between the UPL and the amount that it actually is paying to
governmental facilities for Medicaid services. Assume for purposes of illustration
that this difference, in the aggregate, for a certain government class of provider
(mg, NSGO nursing facilities) is $100 million. That means that the State is
authorized under law to pay these facilities $100 million more than the State
actually is paying for Medicaid services. The state will then make a ?supplemental
payment? of $100 million to these facilities. In a state where the federal matching
percentage is 50%, for example, the federal government will then pay the state 50%
of this additional $100 million expenditure, or $50 million. So, in this example, the
state will be ?out of pocket? only $50 million. The facilities that received the
supplemental payments because they are ?government-owned or operated? can
then make IGTs back to the state, and typically are required to do so by the state as
a condition of receiving the supplemental UPL payment. If the IGTs total $50
million in this example, then the state will have no net gain or loss on the
transaction, but $50 million in additional federal Medicaid dollars will have been
funneled to the NSGO nursing facilities. If the IGTs total $75 million in this
example, then the state actually will have made $25 million through these
transactions, and only $25 million in net dollars all of it from the federal
government actually will go to the facilities to pay for additional medical care for
Medicaid recipients. And if the total IGTs in this example are $100 million, then $0
net dollars will have been received by providers, despite the $50 million federal
contribution. In that instance, the state will have ?pocketed? the entire federal

payment.

 

This example, using a $75 million IGT, is re?ected schematically
below:

 

 

 

 

Federal Financial
Percentage ($5D%l

 

OMS

 

1r

 

 

 

 

 

 

 

 

State $50 million
(.50 $100 million)
IGT Supplemental Payment
$100 million (difference
million) between UPL and base
Medicaid expenditures)
1r
Non-State

 

 

Government-Owned
or Operated Providers

 

 

 

Net federal payment $50 million
Net State contribution <$25 million> (the State actually makes $25 million because it
pays $100 to the providers but receives $50 million for CMS and $75 million in IGTs)

Net Medicaid dollars to providers $25 million

 

The key to this arrangement is the gap between the UPL and the
aggregate Medicaid payments made to a governmental class of providers. This
?gap? permits the state to make a supplemental payment, which will be partly
funded by the federal government, and which then can be recouped, in whole or in
part, by the state through IGTs from the same government providers that received
the supplemental reimbursement.

Since 2001, the potential for states to maximize federal payments in
this fashion has been limited somewhat. That is because prior to 2001, a single
UPL was computed for all, providers in a state of a certain type, without regard to
their ownership status. Thus, for example, a single UPL was computed for g?
nursing homes within a given state. By underpaying private facilities, a state could
create a large gap between the UPL and its actual aggregate Medicaid payments.
This, in turn, would allow the state to make much larger supplemental payments to
government facilities than can be made under current regulations.

By way of illustration, assume that the UPL under the pre?2001 rules
was $300 million for a_ll nursing facilities in a particular state. Assume further that
under the 2001 regulations, the separate UPL would be $0 for SGO nursing homes
(for purposes of this example, I am assuming that there are no SGO nursing
facilities in the State), $150 million for NSGO nursing homes, and $150 million for
privately?owned nursing facilities. Additionally, assume that the state?s actual
Medicaid payments, prior to any UPL supplemental payments, were $125 million to
the NSGO facilities and $75 million to the private facilities. In this example, under
the pre-2001 rules, the UPL for all state nursing homes would be $300 million, and
the total Medicaid payments to all nursing facilities in the State would be $200
million ($125 million plus $75 million), creating a $100 million ?gap.? The state
could then make a $100 million supplemental UPL payment to the NSGO nursing

 

homes, which in turn would generate a $50 million federal contribution (assuming a
50% federal matching percentage). As in the previous example, the NSGO facilities
receiving the supplemental payment could then make an IGT back to the state to
cover part, all or more than all of the state?s share of the supplemental payment.

Under the new rules, however, the separate UPL for the NSGO
nursing facilities in the above example is $150 million, and the payment to these
facilities is $125 million. Consequently, the ?gap? is only $25 million. Thus, instead
of making a $100 million supplemental payment to the NSGO nursing homes,
which could then be returned through an IGT, the state?s supplemental payment is
limited to $25 million, and instead of generating $50 million in additional federal
contributions, the state would be able to generate only an additional $12.5 million
(50% $25 million).

Consequently, by enacting regulations in 2001 that created separate
UPLs by class of providers, OMS sought to restrict, to some extent, the use of these
?nancing mechanisms. However, OMS did not seek to eliminate these mechanisms
entirely. The agency was well aware that even under the new regulations, a ?gap?
might remain between the UPL for government facilities and a state?s Medicaid
payments to these facilities a gap which then could be exploited through the IGT
process to generate additional federal contributions without proportional net
payments to providers. Not only was OMS aware of these mechanisms, the agency
also recognized that some states were so reliant on the extra federal ?nancing
generated under the pre-2001 rules that complying immediately with the new rules
would have been extremely burdensome. Consequently, a number of states
quali?ed for special regulatory treatment which allowed them to transition to the

new rules over timeJ??

D. Disputes Between States and the Federal Government Over the
Use of to Maximize Federal Medicaid Contributions

Although the federal government is well aware of the use by states of
the mechanism described above to maximize federal ?nancial
contributions to state Medicaid programs, the government has long been critical of
these mechanisms, because (in its view) the additional federal dollars generated by
these arrangements often are not used to fund actual additional care for Medicaid
recipients.1?G The federal government has been particularly critical of states that

 

42 C.F.R. 

1?6 The many documents critical of these arrangements include (among others):
GAO Report ?Intergovernmental Transfers Have Facilitated State Financing
Schemes? (GAO 04-5743, March 18, 2004); GAO Report ?Medicaid:

[Footnote continued]

use the additional federal dollars generated through these programs to fund non?
Medicaid programs, such as education or roads.

Among other recent actions, Congressional hearings were held in
Spring 2004 on the use of these mechanisms and whether they are appropriate?l
and the Bush Administration, in each of its two most recent budget pr0posals to
Congress, has proposed savings by curtailing the use of these mechanisms, which
President Bush has called ?accounting gimmicks.? The Administration?s budget
proposal for ?scal year 2006 includes a proposed $60 billion reduction in federal
Medicaid spending, $40.5 billion of which would come from the elimination of
PL arrangements and other similar state ?nancing mechanisms.

Despite the federal government?s acute awareness of the use by states
of these arrangements, there has been no formal congressional or regulatory action
to curtail these practices beyond the regulatory changes in 2001 that created
separate UPL calculations for different ownership classes of providers. State
governors, among others, have vigorously opposed any additional restrictions on
these mechanisms, on the grounds that state budgets are already stretched and
could not handle the decline in federal revenue that would result if these
arrangements were prohibited. Arguably, by failing to enact legislation to further
limit or eliminate the practice, and by failing to promulgate more restrictive
regulations, Congress and CMS have implicitly approved the continued use of these
mechanisms.

Nevertheless, OMS has signaled that it views these arrangements as
suspect, or worse, and that it will take action to further limit the use of these
practices. As noted, OMS has taken the position that permissible IGTs are limited

 

[Footnote continued]

Improved Federal Oversight of State Financing Schemes is Needed? (GAO
04-228, February 13, 2004); Report Medicaid: State Financing
Schemes Again Drive Up Federal Payments? 
September 6, 2000); Letter from Mark McClellan, M.D., Administrator, CMS, to
Senator Charles E. Grassley, April 28, 2004 Tab and OIG Report:
?Review of Tennessee?s Intergovernmental Transfers? (OIG A-04-02-02018, May

2004).

1?1 Hearings of the House of Representatives Committee on Energy and Commerce,
Subcommittee on Health, ?Inter-governmental Transfers: Violation of the
Federal-State Medicaid Partnership or Legislative State Budget Tool??
(Hearings Conducted April 2004).

10

to funds from state and local tax revenues, and the agency, therefore, has indicated
that it may challenge IGTS that are from sources other than state and local taxes.
CMS also has stated that when the additional federal dollars generated through
these practices do not ultimately ?ow to providers for use in funding care to
Medicaid recipients, the State ?nancing mechanisms will be viewed as not
consistent with ?ef?cacy, economy and quality of care,? as required by law. CMS
has indicated that it will challenge suspect arrangements by delaying approval of,
or denying, State Medicaid Plan Amendments that contain such
mechanismsl? As experienced in Indiana (discussed below), OMS also is deferring
payments under existing, previously approved SPAs in cases where the agency
questions the source of an IGT or where there is a question as to whether a state?s
supplemental UPL payments ultimately bene?t Medicaid providers and Medicaid

recipients.
II. Indiana?s Nursing Home UPL Progr:-:un19
A. Creation of the Nursing Home UPL Supplemental Payment

Pool

In 2000, the State of Indiana?212 ?led an SPA with CMS, whereby the
State proposed to generate supplemental Medicaid payments to NSGO nursing
homes (there are no SGO nursing facilities in Indiana). The amount of the proposed
supplemental payment ?pool? was the difference between the actual aggregate
Medicaid payments to these facilities for Medicaid services; and a reasonable

 

13 ee Tab A.



12 The following two sections of this memorandum contain primiarily a factual
discussion of Indiana?s nursing home UPL program and the expansion of that
program. Except where otherwise indicated, this information is based on
discussions with HHC of?cials and local counsel, and has not been
independently veri?ed. For example, we have not yet seen any of the purchase
or management agreements discussed in Section of this memorandum. Our
discussions thus far have been with President and Chief Executive
Of?cer, Matt Gutwein; Treasurer and Chief Financial Officer, Dan
Sellers; and local Medicaid counsel, Leah Mannweiler.

The State of Indiana?s Medicaid agency (roughly equivalent to the Department
of Health and Human Services on the federal level) is the Indiana Family and
Social Services Administration The sub-agency that directly
administers Medicaid payments (roughly equivalent to CMS on the federal
level) is the Of?ce of Medicaid Policy and Planning 

11

estimate of the amount that would have been paid for these services using Medicare
principles. In other words, the State of Indiana proposed to take advantage of the
nursing home UPL ?gap.? The State was eXplicit about its intent to take advantage
of this gap in its and CMS approved the SPA on that basis, to be effective
July 1, 2001.22 It is not clear from the SPA or the approval letter whether CMS was
aware that Indiana planned to use IGTs to help fund the State?s share of the
supplemental 'pool. However, in light of the use by other states of this mechanism,
and Indiana?s use of other 'it seems extremely likely that CMS knew, or at
least suspected, that Indiana would use IGTs to fund some or all of the
supplemental nursing home UPL payments. 

B. Distribution of Nursingr Heme UPL Supplemental Payments

Pursuant to the SPA, Indiana must distribute the nursing home
supplemental UPL payment pool to all NSGO nursing facilities that enter into an
agreement with the State to participate in the program. Each participating facility
receives supplemental payments in proportion to that facility?s share of Medicaid
days to the total Medicaid days of all participating facilities.

At the time the SPA was approved, HHC operated one nursing home,
Locke?eld Village, and there were eight additional nursing homes, not af?liated
with HHC, that were eligible to participate in the program in light of their status as
NSGO facilities? Ultimately, however, only HHC entered into a participation

 

?ag State Plan Arnendment, Transmittal 01-005: ?Payments to NFs Owned and
Operated by a Non-State Governmental Entity? (attached at Tab B).

Approval letter from Cheryl A. Harris, Associate Regional Administrator,
Division of Medicaid and Children?s Health, CMS, to Melanie Bella, Assistant
Secretary, Indiana Office of Medicaid Policy and Planning, received
December 12, 2000 (attached at Tab C).

25?: Indiana has a number of other programs in which HHC participates,
including one for NSGO hospitals.

The other NSGO nursing facilities in Indiana at the time the SPA was
implemented were: (1) Autumnwood Extended Care (owned or operated by
Tipton County Memorial Hospital); (2) Clark County Memorial Hospital;
(3) Byron Health Center (owned or operated by Allen County, and also known as
Recovery Health Services, Inc.); (4) Todd Aikens Health Center (owned or
operated by the Board of Trustees of Johnson County Memorial Hospital);
(5) Village of Heritage (owned or operated by the Board of Trustees of Adams
C0unty Memorial Hospital); (6) Woodcrest Nursing Center (owned or operated

[Footnote continued]

12

agreement with the State, so only HHC quali?ed to participate. Since HHC was the
Only entity entitled to receive supplemental payments from the nursing home UPL
pool, HHC was permitted to receive and retain 100% of all supplemental UPL pool
dollars. HHC also was the only entity making IGTs to the State to help fund the
nursing home supplemental UPL payments.

Although the other SGO facilities in Indiana did not formally
participate in the -UPL program, HHC nevertheless funneled some of the
supplemental pool dollars to these facilities by making quarterly payments to these
handful of nursing homes. According to HHC of?cials, the payments were
approximately equal to the amount that these facilities would have received directly
from the State if they had entered into UPL participation agreements. However,
HHC underpaid these facilities relative to what they would have received
had they formally participated. There were several reasons for this: since HHC
was processing payments on behalf of these facilities, it kept some monies as an
informal administrative fee; HHC was the only entity making IGTs to help fund
the pool, so it felt entitled to retain more than its proportional share; and
HHC made the payments to these other facilities quarterly, regardless of
whether it received timely UPL payments from the State. When the State was late
with supplemental pool payments as happened often HHC still paid these
other facilities as scheduled, so HHC felt it was entitled to some ?fee? in recognition
of that fact.

It should be noted that HHC was in no way legally obligated to pay
any portion of the nursing home supplemental UPL payments to these non-
participating facilities. There were (and are) no contractual arrangements, written
or oral, between HHC and these entities, and HHC similarly is not obligated by
statute or by the SPA to make these payments. Also, HHC tends neither to make
nor receive referrals from these facilities, so the payments pannot be viewed as
impermissible inducements under the federal anti-kickback law. According to HHC
of?cials, HHC makes these payments because ?it is the right thing to do.? Also, by
making payments to these facilities through HHC, rather than paying them
directly, the State avoids the administrative burden of entering into participation
agreements with each of these entities and processing and making payments to
them. HHC and the State work together very closely, and HHC of?cials have
indicated that HHC makes these payments, in part, as an accommodation to the

 

[Footnote continued]

by the Board of Trustees of Adams County Memorial Hospital); (7) Lengworth
Villa (Clark County); and (8) Healthwin Specialized Care (part of the St. Clair
Darden Health System, St. Joseph County).

13

State. In addition, by making payments to these other homes when it is under no
obligation to do so, HHC buys some political capital with these facilities and with
the local governments that own and operate them. This is useful, since these
nursing facilities are not pleased about recent expansion of its nursing home
business (discussed below).

Since there were only a handful of NSGO nursing facilities at the
inception of the UPL program, the total number of Medicaid days at these facilities
was relatively small, and thus the total nursing home UPL supplemental payment
pool was similarly small approximately $5 million annually As noted, all of that
money was paid by the State to HHC, but HHC in turn paid approximately $1.5 to
$2.0 million annually to the other eight eligible but non-participating facilities.
HHC initially retained approximately $3.0 to $3.5 million annually.

C. Use of IGTs to Fund Indiana?s Nursing Home UPL

Supplemental Payments

As discussed previously, Indiana?s federal Medicaid match in the past
few years has varied from approximately 63% to approximately 65%. Using 63% for
purposes of illustration, that means that for each dollar of Medicaid spending,
Indiana must contribute 37 cents and the federal government must contribute 63
cents. As noted, CMS views as particularly suspect arrangements where
the IGT exceeds a state?s share of a supplemental UPL payment because in those
cases, not only is the state not contributing to the net additional amount paid to
providers for services to Medicaid recipients, but some of the federal dollars are
diverted from providers and Medicaid recipients and instead are used to ?ll state

coffers.

In this case, HHC and the State of Indiana initially agreed that HHC
would make an IGT equal to the entire state ?p_lu_s federal share of the supplemental
nursing home UPL payment. Consequently, if the total supplemental UPL
payment- pool was $5 million per year, and Indiana?s share was approximately $1.85
million (.37 $5 million), HHC nevertheless was initially paying the State the full
$5 million, in the form of an IGT. This meant that the State was making $3.1
million on this arrangement, and HHC was actually losing money, since it was
paying approximately $5 million in IGTs but keeping only $3.0 to $3.5 million of the
supplemental payments the remaining $1.5 to $2.0 million, as noted, was paid to
the other NSGO nursing facilities. According to HHC of?cials, HHC agreed to lose
money initially, and for a short period of time, as a way of incenting the State to
implement the nursing home UPL program.

At some juncture, HHC and the State agreed that HHC would reduce
its IGT to the amount of Indiana?s share plus 50% of the federal share. Later, this
was reduced further, so that HHC paid IGTs equal to Indiana?s share plus 18% of
the federal share. Most recently, the State and HHC agreed that as of July 1, 2004,

14

HHC would make IGTs exactly equal to the State?s share of the nursing home UPL
supplemental payments. In other words, HHC would cease to ?overmatch? these
UPL dollars. According to HHC of?cials, all IGT payments were used by Indiana to
fund its Medicaid program. Unlike some other states, Indiana did not divert any of
these dollars to fund other government programs.

The nursing home IGTs paid by HHC were clearly linked to the
nursing home supplemental UPL payments made by the-State. Although HHC and
Indiana have always claimed that, as a formal legal matter, the IGT payments are
voluntary, and therefore not a quid pro quo for the UPL payment, the actions of the
parties suggest direct linkage. First, HHC typically makes IGT payments to the
State one day before the corresponding nursing home UPL payments are made to
HHC. HHC of?cials and counsel recognize that this creates a bad impression, and
they have talked in the past about making quarterly IGT payments that are not
directly tied, by timing or amount, to the UPL payments. But this change has not
been implemented to date. Second, a number of Notices of Program Reimbursement
issued by Indiana to HHC have stated that a condition [of receiving
the UPL supplemental payment], your facility is reguired to submit an
intergovernmental transfer (IGT) to receive a payment.?g The NPRs also typically
show the precise amount of the IGT due from HHC to the State. Third, HHC and
the Indiana entered into a written indemni?cation agreement that expressly links
the IGT and URL payments. Under the terms of that agreement, in the event that
CMS disallows the federal portion of the nursing home UPL payments, HHC agrees
to repay the entire amount of the UPL supplemental payments to the State, and the
State agrees to repay the corresponding IGTs to HHCE In other words, if the
federal government ever fails to fund its portion of the nursing home supplemental
UPL payment, HHC and the State of Indiana agreed to ?unwind" the entire

transaction.

On the other hand, one helpful fact is that HHC makes the nursing
home IGT payments to the State i_?n advance o_f the corresponding nursing home
UPL payment. This is signi?cant because, as noted above, CMS has complained
that under these ?nancing mechanisms generally, the federal share of
supplemental UPL payments often is ?re-cycled? back to a state through an IGT.
The Indiana program might be subject to this criticism if the UPL payment was

 

25 mg? Notice of Program Reimbursement dated December 2003, issued to
HHC by Myers and Stauffer LLC, a CPA ?rm retained by the State of Indiana
to process certain Medicaid transactions (emphasis added) (attached at Tab D).

2?6 Indemni?cation Agreement, dated March 6, 2004, between Health and Hospital
Corporation of Marion County and the State of Indiana (attached at Tab E).

15

made prior to the corresponding IGT. In that event, it could be argued that the
federal portion of the nursing home UPL supplemental payment dollars simply are
returned by HHC to the State through an IGT immediately after they are received.
But because the IGTs in this case are made in advance of the UPL payment, it
would be difficult for the government to argue that federal UPL dollars are used to
make the IGT payments?l The State of Indiana and HHC purposely structured the
timing of the payments in this fashion to avoid any suggestion that the IGTs
?recycled? federal 'mOni'e's. ?For the moment, at least, CMS has not publicly claimed
that IGTs are comprised of impermissible federal funds -- Indiana does not
appear on a list of 15 states that CMS very recently accused of ?recycling? federal

dollars?
D. Flow of IGT and UPL Funds

The HHC nursing home IGT payments are paid to the State from a
general fund account. This is the same account into which local tax receipts
are deposited. Hence, there is an argument that nursing home IGTs are
paid using local tax revenues, which, as discussed above, is expressly permitted by
statute. HHC's total local tax revenues are approximately $95 million annually;
HHC's nursing home IGT is, at most, $30 million per year. However, HHC also
participates in other IGTIUPL programs, such as a UPL program for hospital
supplemental payments and a UPL program for physician supplemental payments.
According to HHC of?cials, ma; annual IGT payments for all such programs
currently exceeds its local tax revenues by $10 to $15 million per year. HHC

 

2?7 Of course, the federal government potentially still could claim that federal UPL
dollars were recycled because, for example, 2003 UPL supplemental payment
monies theoretically could have been used by HHC to fund its 2004 IGTs. Any
such claim would be buttressed by the fact that, according to HHC of?cials, the
IGT payments and the UPL supplemental payment monies all ?ow into and out
of the same HHC bank account. However, HHC typically Operates very ?close to
the bone." The organization was barely able, for example, to meet its payroll in
December 2003. Consequently, it might be dif?cult for the government to claim
that UPL dollars from one year were still available to fund IGT payments in a

subsequent year.

The list, which was provided to Congress on the condition that it be kept
con?dential, was leaked to the press and appeared in a New York Times article
on April 12, 2005 (Section A, Page 15). The offending states were named in the
article; the corresponding text indicated that approximately 20 other states (not
identi?ed in the article) apparently have discontinued some or all of the
practices to which the federal government objected.

16

believes that it has other ?clean? money in the same general account, Such as fees
for patient services, which are permitted to be used for IGT payments. As noted
previously, there currently is a debate between CMS and the states as to whether
anything other than state and local tax revenues are permissible sources of IGTs.
This remains unresolved, but stated position is that o_nly state and local tax
revenues are permissible. Moreover, since the local tax revenues in the HHC
general fund account are intermingled with other revenues, it may be dif?cult or
impossible to prove that the precise dollars used by HHC to pay the IGTs were all
from permissible sources.

Once the nursing home supplemental UPL payments have been
received by HHC, they are deposited into the same general account from which the
IGTs were made. On one hand, that fact is potentially damaging, in that it
potentially supports an argument that UPL dollars received in one year are used to
fund IGT payments the following year? Also, because nursing homes are
pro?table, the UPL supplemental payments are not used to support nursing home
operations. This also is potentially problematic the federal government has
stated that UPL mechanisms are more ?suspect" when the additional federal
payments do not go to the providers and to the Medicaid recipients for which they
are earmarked. On the other hand, these UPL dollars used by HHC to fund the
organization?s overall operations, which includes furnishing care to Medicaid
patients. According to HHC of?cials, approximately 85% of all monies deposited in
the HHC general fund account are used to support Wishard Hospital, which is the
largest public hospital in Indiana and which has a Medicaid population of 25% (and
an uninsured population of HHC of?cials also contend that without access to
the nursing home UPL monies, Wishard Hospital would not be solvent. Again,
since the UPL monies are commingled in a general fund account, it may be dif?cult
or impossible to prove that the precise dollars received under the program are used
to fund patient care services for Medicaid patients. But this is n_ot a case where
UPL monies are diverted to uses that are unrelated to patient care or that do not in
any way involve Medicaid services.

E. Sumrnarv of Suspect Elements

In sum; OMS has cited several factors which it believes makes an
arrangement suspect. They are: a direct linkage between the IGT
payment and the provider?s receipt of UPL money; IGTs which exceed the entire
state share of the supplemental UPL payment; diversion of IGT payments by the
state for nonnMedicaid uses; payment of IGTs using UPL money (re-cycling) or
using other impermissible federal funds; diversion of UPL payments from the

 

22 footnote 27, supra.

17

purposes for which they are earmarked; and use of UPL dollars to fund activities
other than Medicaid services.

Of course, as discussed above, with respect to some or all of these
factors, CMS does not necessarily have a strong legal argument that the
arrangements are unlawful. To the contrary, none of these factors, except perhaps
are clearly impermissible under current statutory and regulatory language.
Nevertheless, it is worth noting that the Indiana nursing home program
includes factors and above, and arguably includes factor as well.
Hence, it is not likely to be well received by CMS auditors. Again, however, CMS
was well aware of how the program was structured, and CMS expressly approved
the SPA that described at least the UPL portion of the program explicitly.

ExpansiOn of Indiana Nursing Home UPL Program

A. HI-IC Nursing Home Acquisitions and Effect on NursingHome
UPL Pool

As noted above, HHC owned one nursing home, Locke?eld Village, at
the time the SPA was approved by CMS for the Indiana nursing home UPL
program (in 2001). In addition, there were eight nan-HHC nursing homes that
quali?ed as NSGO facilities. Given this relatively small number of facilities, and
associated Medicaid days, the Indiana nursing home UPL program was relatively

Small.

In 2003, HHC and the State of Indiana jointly decided to expand the
nursing home UPL program by having HHC purchase a number of nursing
facilities. This had the effect of qualifying these former private facilities as
?government-owned.? That meant, in turn, that the Medicaid days and Medicaid
reimbursement paid to the acquired homes could be used to compute the UPL for
NSGO nursing facilities. Consequently, the ?gap? between the nursing home UPL
and actual Medicaid reimbursement for this category of facilities increased, the size
of the UPL supplemental payment pool increased correspondingly, and the amount
of required federal ?nancial contribution for the supplemental UPL payments also
increased. In January 2003, HHC purchased 12 facilities, in October 2003, it
purchased one additional facility, and in December 2003, it purchased ?ve more.
HHC closed one of these homes after the purchase, fer a ?net? increase of 17
facilities. Thus, in total, HHC now operates 18 nursing homes.

There were at least three reasons for these transactions. First, and.
most importantly, HHC sought to increase signi?cantly the amount of its nursing
home UPL payment, and Indiana sought to increase the amount of federal matching
dollars. As a result of these transactions, the total nursing home UPL payment in
2003 was approximately $30 million, up ?-om approximately $5 million in the prior
year.- Even after deducting the associated IGT payments and the annual payments

18

HHC makes to the eight non-HHC facilities, HHC ?netted? approximately $12
million from the UPL program in 2003, far in excess of what HHC retained from the
program in the prior two years combined.

Second, Indiana was concerned generally about nursing home quality
throughout the State. Indiana trusts HHC to ensure high quality, and the State
also was aware that HHC intended to contract 'with American Senior Communities,
LLC to manage these facilities. ASC- is known to be a-high quality Operator.

Third, Indiana also was concerned about an excess of nursing facility 
beds throughout the State. HHC apparently agreed, informally, to remove some
beds from operation in connection with its acquisitions. Indeed, as noted above,
HHC closed one of the facilities it purchased in 2003.

In 2000-01, when the SPA authorizing the nursing home UPL program
was submitted and approved, the State of Indiana and HHC apparently kept CMS
apprised about the precise purpose and operation of the program, so there were no
surprises. By contrast, CMS was not informed when the program was expanded in
this fashion in 2003. Nothing in statute or regulation requires CMS to have been
noti?ed no further SPA was necessary for the expansion but the agency likely
was surprised to see the UPL payment pool increase from $5 million to $30 million
in one year. This appears to be at least one reason for the deferral letter and the

CMS audit.

B. Purchase Terms. Management Arrangements and Profitabilitv

The 12 facilities initially purchased by HHC in January 2003 were
acquired from a company called EagleCare, Inc. (?EagleCare?). EagleCare is owned,
wholly or primarily, by the Jackson family. of Indianapolis. HHC did not purchase
the buildings; rather, the buildings are leased pursuant to relatively long?term (20
year) leases. HHC of?cials claim that the lease payments reflect ?fair market
value,? although they acknowledge that the payments are somewhat in excess of
EagleCare?s mortgage payments, in order to give the Jackson family a return on the
property. HHC di? directly purchase the equipment associated with these facilities
for approximately $9 million, and infused an additional $9 million of working
capital (EagleCare retained the accounts receivable for these facilities at the time of
the transaction, so working capital was needed to fund operations in the initial
months post?Closing). As part of the transaction, HHC also entered into a
management agreement with A80 to operate the facilities. ASC furnishes
essentially all of the services at the homes, and employees all of the staff at these

19

facilities. ASC, too, is owned by the Jackson although 75% of profits
apparently are paid to senior management, and 25% to the acksons.

The single facility subsequently purchased in October 2004 was also
owned by EagleCare, but the ?ve homes purchased in December 2003 were owned
by an unrelated third party. The purchase terms and management arrangement
were essentially the same for these entities as for the first 12 the buildings were
leased and A80 was-brought in to manage the homes (ASC already was managing
all of the EagleCare facilities, but not the five facilities purchased from the
unrelated owner). One of the ?ve facilities acquired in December 2003 was later

closed by HHC.

Pursuant to the management agreement, ASC operates the acquired
facilities on a fairly independent basis. A80 is paid 4% of the gross revenues of
these facilities as a management fee. The company can earn an additional fee equal
to 1% of revenues if there is cash remaining after certain expenses are paid. Then,
if there are pro?ts after a_ll expenses are paid, HHC and A80 split these surpluses,
subject to a cap on share equal to 4% of revenues. Thus, in total, ASC has the
opportunity to earn up to 9% of the revenues of these facilities. Signi?cantly, for
purposes of all management fee calculations, the nursing home UPL payments are
excluded. Thus, ASC does not share in those supplemental Medicaid revenues in

any way.

HHC of?cials stated that the acquired facilities as a whole have been
pro?table from the start, and that HHC earned approximately $1.4 million in its
share of the Operational pro?ts in the ?rst 18 months of the expansion. However,
HHC also ?netted? approximately $18 million in UPL payments related to these
facilities over the same 18 month period. So there is little question that from a
?nancial perspective, the additional UPL dollars are driving these'arrangements.

In fact, HHC of?cials con?rmed that in the absence of the additional
UPL dollars, HHC would not have acquired these facilities. Despite the fact that
the facilities are pro?table, and that the rate of return (excluding the UPL money)
exceeds other current investments, too much ?up front? money is required to
make the purchases and infuse working capital, and HHC typically does not have
suf?cient cash. Also, there are political dif?culties associated with owning nursing
homes that are scattered throughout the State. Although HHC has the statutory

 

32 Apparently, the acksons own 100% of EagleCare and 95% of ABC.

20

authority to operate facilities outside Marion County# competing nursing home
operators understandably are not pleased. Also, as a practical matter, it is more
dif?cult to exercise oversight when facilities are located far from the HHC home
of?ce. Consequently, HHC has a ?put? option, whereby it can return these facilities
to their former owners, for a relatively small price, in the event that the nursing
home supplemental UPL payments are disallowed by CMS or discontinued.?

C. Legitimacy of the Nursing Home Acquisitions

In light of the above, HHC is concerned that the nursing home
acquisitions potentially could be viewed by the federal government as a sham
because HHC does not own the buildings; HHC does not directly operate
these facilities or employ facility sta?; for most of the acquired facilities, the
building ownership and management did not change as a result of the acquisitions,
so residents and others using these homes would not have noticed any changes as a
result of purchase; and the acquisitions were expressly tied to the
supplemental UPL payments by virtue of the fact that they can (and will) be
unwound if these payments are disallowed or discontinued. Indeed, the OIG
subpoena appears geared, at least in large part, toward an examination of these
acquisitions and the relationships between HHC and the sellers and manager of the
purchased facilities.

 

?1 10 ?16-22-8?39 (?On the terms and conditions the board prescribes, the
corporation own or operate nursing facilities located inside or outside

of the county?).

12? Although HHC of?cials acknowledge that the supplemental UPL payments are
driving the expansion of nursing home business, they contend that they
do not allow UPL considerations to affect the day-to-day operation of these
entities. As an example, they note that since the UPL ?gap,? and corresponding
supplemental UPL payment pool, increase with the number of HHC nursing
home Medicaid days, it would be in interest to pressure ASC to increase
the percentage of Medicaid residents at the acquired facilities. In fact, A80 is
doing the opposite attempting to increase the percentage of Medicare
residents at these homes. Since Medicare residents tend to be more profitable
than Medicaid residents on an operational basis, and since management
fee depends on the operational results at these facilities, and is entirely
unrelated to the nursing home UPL payments received by HHC, ABC has an
incentive to increase Medicare days and decrease Medicaid days. HHC of?cials
claim that they have put no pressure on A30 to increase the number of
Medicaid days at the acquired homes.

21

There are, however a number of counterbalancing factors that suggest
that the nursing home acquisitions were, in fact, legitimate First, nothing in
applicable federal or state law requires that nursing home buildings be owned by
the entity that owns the license or operates the facility. Long-term lease
arrangements are fairly common in the health care industry. HHC does own the
equipment at these homes, and has infused working capital. Thus, HHC made real
cash ?investments in these facilities.

Second, management agreements also are common in the health care
industry, particularly for hDSpitals and nursing homes. Nothing in applicable
federal or state law prohibits an owner from contracting with a management
company to operate any part, or all, of a nursing facility.? Similarly, nothing in
federal or state law prohibits a nursing home management company from
employing the nurses and other staff that furnish care at a managed facility?

Third, when HHC acquired these homes, it became the holder of the
nursing home licenses and it became the party, via assignment from the prior
owner, to the Medicare and Medicaid participating provider agreements for these
facilities. All necessary change of ownership forms were properly ?led with the
Indiana Department of Health, the Indiana Of?ce of Medicaid Policy and Planning,
CMS, and AdminStar Federal (the Medicare ?scal intermediary). Thus, HHC is
ultimately responsible for the operations of these facilities. For example, if a
surveyor cites one of these facilities for de?ciencies, and the citation results in state
or federal ?nes or penalties, HHC is ultimately liable (although, admittedly, ASC
may have indemni?cation obligations under its management agreement with HHC).
Similarly, if the facilities suffer huge ?nancial losses, HHC must bear the liability.
Also, if ASC were to go out of business tomorrow, HHC would still be responsible 
to the State as the licensee and as a Medicaid provider, to the federal government

 

Some states, such as New York, limit the ability of some facilities, such as
hospitals, to enter into management contracts. Title 10, New York
Code of Rules and Regulations I am aware of no such limitation
under Indiana law, although this needs to be con?rmed.

Under federal Medicare conditions of participation, some types of providers,
such as home health agencies, are required to furnish some services directly,
through individuals employed by the license holder of the entity. 42
C.F.R. ?484 14(a) (?An HHA must provide at least one of the qualifying services
directly through agency employees, but may provide the second qualifying
service and additional services under arrangements with another agency or
organization?). There are no similar requirements for Medicare participating
nursing facilities. ?g 42 GER. Part 483.

 

22

as a Medicare provider, and to patients for providing continuing, high quality
care at each of the acquired homes.

Fourth, although ASC operates the facilities with a fair amount of
independence, HHC exercise real oversight consistent with its role as license
holder. According to HHC of?cials, ASC management must report regularly to, and
take direction from, the HHC Chief Operating Of?cer (this is re?ected in HHC's
organizational 'chart). 'The Board of Trustees similarly receives periodic
reports regarding the Operation of these facilities and provides overall direction.
HHC, not ASC, makes determinations on matters such as how much insurance to
carry in connection with the facilities. And HHC has retained an independent
auditor, Crows Chizek, to perform quarterly ?nancial and quality audits of these
facilities. The results of these audits are reported directly to HHC of?cials, and -
depending on the results could result in operational changes.

Fifth, all assets, liabilities, revenues and expenses associated with
these facilities are fully incorporated into audited ?nancial statements.

Lastly, although the acquisitions did not result in any material
operational changes for the ?rst, 12 facilities purchased in January 2003, or a 13th
home purchased in October 2003, the ?ve homes purchased in December 2003 id
undergo signi?cant changes in connection with acquisition. As noted, these
?ve homes were not owned by EagleCare or by any entity related in any way to the
Jackson family, and prior to the HHC acquisition they were not managed by A80.
A80 was brought in to manage the homes post-Closing. Existing employees were
evaluated by A80 and either were replaced or were transitioned to payroll.
As was also noted above, one of these homes was closed by HHC after the
acquisition. Thus, for these ?ve facilities at least, and their residents, the
acquisition by HHC had real Operational consequences??

 

15 In addition to managing the acquired facilities, ASC recently assumed the
management of Locke?eld Village, the one nursing facility that historically was
owned and operated by HHC. According to HHC of?cials, ASC was pressured to
assume the management of this entity because the facility was poorly run in the
past. HC is hoping that ABC essentially will train HHC staff, so that HHC
can more ef?ciently operate the facility after the ASC management
arrangement expires. Unlike the acquired facilities, for which the ASC
management agreement is typically 20 years, the agreement for Locke?eld
Village has a short term two years with one possible three-year renewal.
According to HHC officials, ASC did not want to manage Locke?eld Village
because "it cannot make money." The HHC officials did not elaborate, but this
almost certainly is a function of the facility's physical plant, location andjor

[Footnote continued]

23

D. Designation of Acquired Facilities as ?Government?Owned or
Operated?

Even if the HHC nursing home acquisition transactions ultimately are
conceded by the federal government to be legitimate, there remains a question as to
whether these facilities, post~Closing, constitute ?non-state government owned or
operational facilities? entitled to participate in the program. The relevant
"regulation, 42 C.F.R. ?447 .272, does not set forth attributes that qualify a facility as
?government?owned or operated,? but the preamble to the regulation that
implemented the new UPL classifications in 2001 does offer some guidance.
Speci?cally, in response to various comments, CMS (then HCFA) stated that
facilities are categorized as NSGOs ?based on their ability to make
intergovernmental transfer payments back to the State? and based on the
governance structure of the facility and who retains ultimate liability for the
operation of the facility.?? Under these criteria, the nursing facilities acquired by
HHC appear to qualify as ?government-owned or operated? and thus eligible to
participate in the nursing home PL program. First, under Indiana law, these
facilities eligible to make IGTs to the State, by virtue of ownership?

 

[Footnote continued]

payor mix. Thus, although ASC reluctantly agreed to assume the management
of the Locke?eld Village, the company insisted on a relatively short term. Also,
unlike the acquired facilities, where all staff are ASC employees, the staff at
Locke?eld Village remain employees of HHC. It apparently woold have been
administratively and politically dif?cult to transition these government
employees to ASC (ggu it might have adversely affected their pensions and
other government bene?ts), and given the relatively short-term nature of 'the
arrangement, it did not make sense to transition the employees now only to
switch them back in as little as two years.

39?- Admittedly, this factor in determining whether a facility is ?government-owned
or operated? is somewhat circular. By de?ning as ?government owned" those
facilities that can make IGTs, CMS essentially is saying that facilities that can
make IGTs are those that can make IGTs.

if 66 Fed. Reg. 3148, 3151 (January 12., 2001).

The Indiana Code explicitly authorizes HHC operated hospitals to make IGTs in
connection with Medicaid reimbursements. IC This con?rms
that HHC generally is an entity authorized to make IGTs. Further, although
the Indiana Code does not provide the same level of detail with respect to
nursing home Medicaid reimbursement, the Code sections on nursing home

[Footnote continued]

24

Second, under the governance structure of these facilities, HHC is the licensed
owner, and Board of Trustees serves as the governing body of each facility.
As noted above, ASC must report to HHC management, which in turn reports to the
HHC Board with respect to these homes. Third, as also noted previously, HHC
does, in fact, retain ultimate responsibility for the operation of these facilities, by
virtue of the fact that HHC is the license-holder.

It also is worth noting that in order 'to qualify as a government facility
under federal regulations, and thus eligible to make an IGT, a facility can be either
?owned" ?operated? by a governmental entity? OMS expressly cited as an
example of a government entity facilities that "are owned by local governments but
operated by private companies through contractual arrangements with those local
governments as long as the [facility] retains the ability to make an IGT to the
state.?? Thus, even if the facilities acquired by HHC ultimately are viewed as not
being ?operated? by HHC, they should still qualify as government facilities by virtue
of ?ownership.?

IV. OMS Deferral Letter and Audit

A. Deferral Letter and Indiana Response .

In October 2004, CMS sent a ?deferral letter? to the State of Indiana?s
Medicaid agency?l indicating that OMS was questioning approximately $32 million
in federal ?nancial contributions relating to Indiana?s nursing home UPL program.
The questioned amount was the federal share of $49 million in total (state plus

 

[Footnote continued]

reimbursement do refer to ?intergovernmental transfers,? and the Code also
requires the State Medicaid agency to develop IGTs and other nursing home
payment mechanisms that ?maximize the amount of federal ?nancial
participation that the state can 10 Reading these
provisions together, it is clear that HHC is authorized to make IGTs in
connection with nursing home Medicaid reimbursement and that, in fact, the
Indiana legislature expected it to do so.

I33

42 C.F.R. 



66 Fed. Reg. at 315354.

Letter from Dennis G. Smith, Director, OMS Center for Medical and'State
Operations to Melanie Bella, Assistant Secretary, OMPP, dated October 29,

2004 (Attached at Tab F).

It

25

federal) nursing home UPL payments for all of 2003 and three months of 2004. The
letter indicated that approval of these amounts was deferred because CMS needed
?additional documentation of the allowability of these claims.? The letter
Speci?cally requested the following:

1.

Documentation concerning Indiana?s practice of making UPL
payments directly to HHC, rather than to the nursing facilities

'owned by 

Information relating to the nursing homes managed by ASC.
Speci?cally, OMS requested additional information regarding
the ownership of these facilities and their relationship to HHC.

Information relating to an $8.7 million IGT payment made by
HHC in 2004, which was paid to the State in connection with an
$18.7 million nursing home UPL payment made to HHC for
three months of that year. OMS expressed its View that HHC
was prohibited from making IGT payments in excess of the
State?s share of the UPL payment, and CMS therefore indicated
that IGT payment may have exceeded the amount
permitted by law because it accounted for more than 34.73%
(the State share percentage) of the corresponding UPL payment.

Con?rmation that all of the nursing home UPL payments at
issue were utilized for Medicaid services furnished by Medicaid

used to

offset any IGT made by HHC.

Indiana submitted a response with supporting documentation, which

included reasonably detailed answers to three of the four issues raised by 
The State (1) noted that HHC is authorized by state law to own and operate the
nursing homes in question, and therefore to receive UPL payments directly;
(2) con?rmed that HHC is the owner of the nursing facilities managed by ASC, as
evidenced by the change of ownership ?lings and the transaction documents
relating to the acquisition of the facilities; and (3) disputed contention that
individual may not exceed the State?s share of corresponding UPL payments??

 

Letter from E. Mitchell Roob, Secretary, Indiana Family and Social Services
Administration, to Dennis G. Smith, CMS, dated January 24, 2005 (Attached at

As discussed previously, the State?s View is that the only: restriction on the
amount of IGTs is the statutory requirement that these payments not, in total,

[Footnote continued]

26

However, with respect to fourth inquiry regarding use of the
nursing home UPL payments the State furnished only a cursory response stating,
without explanation or supporting documentation, that all of the UPL payments
were provided to Medicaid providers for Medicaid-covered services furnished to
Medicaid patients, and that none of these monies were utilized to offset IGTs.

OMS viewed Indiana?s response to this fourth inquiry as inadequate,
and requested an examination of ??nancial records and fund account
transactions so that the agency could track both the Source of IGT payments
and use of the corresponding supplemental nursing home UPL monies
received from the State. The examination commenced on April 18, 2005.

B. OMS Audit of HHC PL Transactions

The OMS examination is being conducted by Karl Longshore, OMS
?accountant-in-charge? for Indiana. According to both HHC and State of?cials,
Mr. Longshore is an extremely dif?cult person who is rarely satis?ed with a
response and who ?sees fraud everywhere.? Mr. Longshore apparently doesnot
approve of the use of mechanisms, and he previously raised an issue
regarding the Indiana/HHC UPL program for supplemental physician payments.
That issue apparently took several years before it was ?nally resolved favorably; it
was resolved at the Central Of?ce of OMS through discussions with the Director of
Medicaid and State Operations. Nobody at HHC or the State believes that Mr.
Longshore will be satis?ed by the documents he receives from HHC, or that the
questions surrounding the Indiana nursing home UPL program will be resolved at

his level.
C. 2003 Reversing Transactions

Am0ng other concerns, HHC of?cials noted that the 
transactions in 2003 were unusually convoluted, and that Mr. Longshore who
apparently prompted some of the adjusting transactions may be particularly
skeptical of the various payments that year. Recall that a local government entity,
such as HHC, can help generate additional federal Medicaid dollars in two ways. It
can make an IGT to the State, or it can certify that it has made direct Medicaid

 

[Footnote continued]

exceed 60% of the State?s share of Medicaid expenditures. Section 1902(a) of the
Social Security Act, 42 U.S.C. ?1396a(a). There is no statutory or regulatory
limit on the amount of individual IGTs. The State?s response letter to OMS
noted that IGTs, in 13g aggregate, did not hit this 60% threshold.

27

expenditures that qualify for federal matching dollars. In 2003, HHC bo_th made
nursing home IGTs and provided certi?cations regarding qualifying nursing home
eXpenditures. For example, for the calendar quarter ending September 30, 2003,
HHC made an IGT of approximately $1.8 million and certi?ed approximately
$3.0 million in qualifying direct expenditures, and received a corresponding nursing
home supplemental UPL payment of approximately $5.6 million. For the year as a
whole, HHC paid approximately $6.0 million in IGTs and certi?ed another
approximately $10.6 million in? direct expenditures, and received "approximately
$20.0 million in nursing home supplemental UPL payments.

At the time, Mr. Longshore apparently disputed whether the
$10.6 million in direct expenditures certi?ed by HHC actually quali?ed for federal
matching dollars. So, apparently because of Mr. Longshore?s concern, HHC and the
State converted the $10.6 million in previously certified dollars to an IGT. This was
done as follows: On April 21, 2004, HHC repaid the State the $20.0 million that the
State originally paid to HHC as the nursing home supplemental payment for 2003-
In addition, HHC made a $10.6 million additional payment to the State, thereby
converting the previously ?certi?ed? expenditures to an IGT. Thus, in total, HHC
paid the State $30.6 million on April 21. On April 22, 2004, the State made a
nursing home supplemental UPL payment of $30.6 million back to HHC. Thus, the
transactions in April 2004 did not result in any net dollars to the State or to HHC.
Nor were any additional federal matching dollars requested beyond what had
already been claimed in 2003. Rather, these transfers simply ?cleaned up? the
State?s (and paper accounting of prior 2003 ?nancing.
Nevertheless, the transactions did include repayments by HG of previously
received UPL monies (which could be viewed as ?recycling?), as well as reissuance
by the State of UPL dollars (which simply may look strange and which may be
dif?cult to understand). HHC of?cials stated their concern that Mr. Longshore ?will
go crazy? when he sees these correcting adjustments, even though they were made
to address his concerns.

D. Board of Accounts Involvement

As an additional complicating factor, an independent State of Indiana
auditing agency, the State Board of Accounts, apparently has questioned 
ability to make IGTs, as well as ownership of the nursing homes purchased
in 2003. The Board of Accounts apparently has been in contact with Mr. Longshore
and has raised these issues with him. HHC and Indiana have previously responded
to inquiries raised by the Board of Accounts??

 

Most recently, the Board of Accounts has questioned HHC's statutory
authorization to receive state and local tax revenues, and the Board also asked

[Footnote continued]

28

E. Deferral of Federal Matching Payments

So long as CMS is continuing its inquiry into the Indiana nursing
home program, it has not made any additional federal ?nancial
contributions for this program to Indiana, and Indiana, in turn, has not made any
additional nursing home UPL payments to HHC. The most recent nursing home
UPL payment was made to HHC in April 2004. cash ?ow situation varies
greatly from year to year due to the timing of government receivables and other-
issues, and the organization currently is in the unusual position of being ?ush with
cash. Consequently, HHC does not mind the delay on current UPL payments. In
fact, for political reasons, it is best if HHC does not appear too ?rich?, so there is
some bene?t to delaying these payments until early 2006. However, ultimately
HHC is relying on this money. According to HHC officials, Wishard Hospital would
not be solvent without the nursing home UPL money, and if HHC lost of the
UPL money associated with its various IGT programs, the organization ?would be

dead.?

Under law, once CMS has received all requested documentation in
connection with a deferral letter, the agency must make a determination on a
State?s claim for federal matching funds within 90 days? If CMS is unable to
complete its review during this time frame, it must pay the matching funds, subject

 

[Footnote continued]

whether nursing home IGT payments were made from revenues other
than tax receipts. HHC responded by listing its statutory authority to tax;
and restating its position that funds received for providing patient care
services are "public funds" and not "federal funds" within the meaning of 42
C.F.R. ?433.51, and therefore are permissible sources of IGTs.

HHC's taxing authority is found at 10 16-22-8-34(8) (enabling statute contains
authority to tax); 10 16-22-8-41(b) (authority for property tax to support
building fund); 10 16-22-8-43(d) (authority to levy tax to pay for general bonds);
and IC 16-22?50 (authority to levy tax to support HHC budget and capital
expenditures). HHC also receives revenues from certain state taxes that it does
directly levy, including a state tranSportation tax (IC 6354 and 6-3.5-4) and a
state financial institution tax (IC 

is 42 C.F.R. 

29

to a later determination as to However, the 90 day time period does
not begin to run until all the material requested from a state is received. Thus, in
theory at least, CMS can postpone almost indefinitely the payment of matching
funds on the Indiana nursing home UPL by continuing to request additional
documentation by never being satis?ed with the documentation it receives.
In light of Mr. Longshore?s track record, HHC officials raised this as a real

possibility.

HHC of?cials also noted that they currently intend to expand the
nursing home acquisition program further, and therefore need to know, sooner
rather than later if possible, whether CMS intends to disallow any portion of the
nursing home UPL payments. HHC is contemplating a purchase in the near future
of 12 additional nursing facilities (owned by an operator unrelated to the Jackson
family). As with the other purchased facilities, the buildings would be leased from
the current owner and the entities would be managed post-Closing by ASC. But
HHC is reluctant to proceed with the transaction if the corresponding nursing home
UPL payments are not assured.

V. OIG Subpoena

Lastly, as noted, HHC recently received a subpoena ?om the OIG for
the production of documents. The subpoena essentially requests all materials in
possession relating to the Indiana nursing home program, as well
as all materials relating to HHC's nursing home acquisitions and 
management of - the purchased nursing facilities. It is not known at this time
Whether the OIG subpoena is in any way connected to the CMS deferral letter and
audit, or whether the subpoena is the result of a qui tam action or independent OIG
inquiry. The OIG has, in the past, examined programs involving other
states, and has issued critical reports without taking formal legal action? Based
on the documents requested by the OIG, it appears that its investigation is focused
on the legitimacy of the nursing home acquisitions and the additional nursing home
UPL monies that were generated as a result. But that is no more than an educated

guess at this juncture.

 

E. at If CMS ultimately denies the claim for federal matching
dollars, the State would have reconsideration and appeal rights. 45 C.F.R.

Part 16.

111 8?99,, mg? OIG Report: ?Review of Tennessee?s Intergovernmental Transfers? (A-
04?02-02018, May 2004); OIG Report: ?Review of Medicaid Enhanced Payments
to Public Providers and the Use of Intergovernmental Transfers by the State of
Nebraska? February 2001).

30

The return date on the subpoena was originally May 2, 2005, but
local counsel obtained a 60-day extension.

v? 

31