New Jersey Department of Human Services, DAB No. 1339 (1992)
	 Department of Health and Human Services
	       DEPARTMENTAL APPEALS BOARD
		   Appellate Division
SUBJECT:  New Jersey Department of  DATE: June 16, 1992 Human Services
				Docket Nos. 90-118, 90-238, 91-32,
				 91-94, 91-100, and 91-140 Audit Control
				No. A-02-88-01029 Decision No. 1339
			DECISION
The New Jersey Department of Human Services (New Jersey or State)
appealed disallowances by the Health Care Financing Administration
(HCFA) of $7,354,765 in federal financial participation (FFP) claimed by
the State.  The claims were for Medicaid reimbursement for services
provided to individuals aged 22 to 64 at Hudson County Meadowview
Hospital Intermediate Care Facility (Meadowview ICF) during the period
October 1, 1986 through March 31, 1991.  Section 1905(a) of the Social
Security Act (Act) excludes from the definition of "medical assistance,"
for which Medicaid funding is available, care or services provided to
individuals who are in an institution for mental diseases (IMD).  Based
on an Inspector General audit report covering the period October 1, 1986
through December 31, 1988, HCFA found that Meadowview ICF was an IMD.
HCFA regulations define an IMD generally as having the "overall
character" of an institution established and maintained primarily for
the care and treatment of persons with mental diseases.  HCFA has also
issued guidelines for gathering evidence on a facility's overall
character.  Here, HCFA presented no evidence that Meadowview ICF was
licensed as a mental health facility or that it advertised or held
itself out as such; the State's evidence showed instead that Meadowview
ICF was established to be a typical ICF.  HCFA relied primarily on
evidence from a review of patient records performed by psychiatrist
consultants as part of the audit and on testimony by one of these
consultants.  After examining patient records, the consultant's
testimony, and the expert testimony presented by the State, however, we
find that the State's evidence shows it reasonably evaluated the
majority of the patients at Meadowview ICF as being institutionalized
during the audit period because of their physical disorders or because
of organic problems HCFA has exempted from classification as mental
disorders.  HCFA's consultant's testimony was on the whole less credible
than the testimony by the psychiatrist who testified for the State.  In
particular, the consultant's record review was flawed since he did not
follow HCFA's guidelines;  his review of the records focused on
historical diagnoses of the patients, rather than on whether the
patients were receiving or required inpatient treatment for a mental
disorder during the audit period.  Moreover, HCFA's evidence related to
other audit findings either did not support those findings or lacks
probative value concerning the character of Meadowview ICF during the
audit period.
Thus, we find that the record does not support a determination that
Meadowview ICF was an IMD during the audit period.  Accordingly, we
reverse the disallowance for that period.  Since HCFA relied for its
subsequent disallowances entirely on the findings for the audit period,
we also reverse the disallowances for the subsequent periods.
I.  Statutory and Regulatory Background
Title XIX of the Act provides grants to states for medical assistance to
eligible low-income persons.  Section 1905(a), in defining "medical
assistance," specifically excludes payments for services to "any
individual who has not attained 65 years of age and who is a patient in
an institution for . . . mental diseases."  This general prohibition
appears in language following the list of covered services.  The
exclusion also appears as the parenthetical "(other than services in an
institution for mental diseases)" with respect to certain institutional
services, including (during the audit period) ICF services.
There are two exceptions to the IMD exclusion.  Section 1905(a)(14)
provides for inpatient hospital services and nursing facility services
for individuals over age 65 in IMDs, and section 1905(a)(16) provides
for inpatient psychiatric hospital services for individuals under age
21, as defined in section 1905(h).
Since 1988, the term "institution for mental disease" has been defined
at section 1905(i) as a hospital, nursing facility, or other institution
of more than 16 beds, that is primarily engaged in providing diagnosis,
treatment, or care of persons with mental diseases, including medical
attention, nursing care, and related services.  The longstanding
regulatory definition of an IMD, in effect during the entire audit
period, is --
	an institution that is primarily engaged in providing diagnosis,
	treatment or care of persons with mental diseases, including
	medical attention, nursing care, and related services.  Whether
	an institution is an institution for mental diseases is
	determined by its overall character as that of a facility
	established and maintained primarily for the care and treatment
	of individuals with mental diseases, whether or not it is
	licensed as such. . . .
42 C.F.R. 435.1009 (1986-1990). 1/
In December 1982, HCFA issued section 4390 of the State Medicaid Manual
(SMM), which explained to state Medicaid agencies HCFA's guidelines for
determining whether a facility is an IMD.  This section was revised in
1986.  The Manual lists ten factors to be used cumulatively to determine
the facility's overall character.  The factors listed in section 4390
are:
	1.  The facility is licensed as a psychiatric facility for the
	care and treatment of individuals with mental diseases;
	2.  The facility advertises or holds itself out as a facility
	for the care and treatment of individuals with mental diseases;
	3.  The facility is accredited as a psychiatric facility by the
	JCAH;
	4.  The facility specializes in providing
	psychiatric/psychological care and treatment.  This may be
	ascertained through review of patients' records.  It may also be
	indicated by the fact that an unusually large proportion of the
	staff has specialized psychiatric/psychological training or by
	the fact that a large proportion of the patients are receiving
	psychopharmacological drugs;
	5.  The facility is under the jurisdiction of the State's mental
	health authority;
	6.  More than 50 percent of all the patients in the facility
	have mental diseases which require inpatient treatment according
	to the patients' medical records;
	7.  A large proportion of the patients in the facility have been
	transferred from a State mental institution for continuing
	treatment of their mental disorders;
	8.  Independent Professional Review teams report a preponderance
	of mental illness in the diagnoses of the patients in the
	facility (42 C.F.R. 456.1);
	9.  The average patient age is significantly lower than that of
	a typical nursing home;
	10.  Part or all of the facility consists of locked wards.
Section 4390 sets forth how patients should be classified as mentally
diseased or physically diseased for purposes of Guideline 6.
The impact of the IMD exclusion is that FFP is denied for services to
individuals under age 65 (except for those under age 22 and receiving
inpatient psychiatric services) who are in an IMD.  42 C.F.R. 435.1008
and 42 C.F.R. 441.13.
II.  Factual Background
On the Meadowview campus, there are three separate facilities: an ICF
unit with 440 beds, a skilled nursing facility with 110 beds and an
acute psychiatric care unit with 174 beds. 2/  The State's Division of
Mental Health and Hospitals monitors the acute psychiatric care unit
only.  It does not have jurisdiction over the ICF portion of Meadowview.
Meadowview ICF was first certified for Medicaid participation in 1977.
From February 1987 to October 1989, the Office of the Inspector General,
Office of Audit (OIG) conducted a survey and audit of skilled nursing
and intermediate care facilities in New Jersey to determine if any of
these facilities were also IMDs.  The OIG reviewed cost data, licensing
and program information at the State's Department of Human Services,
Division of Medical Assistance and Health Services and the New Jersey
Department of Health and selected Meadowview ICF for review.  The OIG
hired Forensic Medical Advisory Services (FMAS) to review patient
records.  FMAS reviewers visited Meadowview ICF on July 26-27, 1988;
August 6-8 and 20-22, 1988; and September 10-11, 1988.  The FMAS review
team consisted of two psychiatrists and a medical records specialist.
As a result of the OIG/FMAS findings, HCFA determined that Meadowview
ICF met the following guideline factors from section 4390 of the SMM:
	Guideline 4 - Meadowview ICF specializes in providing
	psychiatric/psychological care and treatment;
	Guideline 6 - More than 50% of all the patients in the facility
	have mental diseases which require inpatient treatment according
	to the patients' medical records;
	Guideline 7 - A large proportion of the patients in the facility
	have been transferred from a State mental institution for
	continuing treatment of their mental disorders;
	Guideline 8 - Independent Review Teams report a preponderance of
	mental illness in the diagnoses of the patients in the facility;
	and
	Guideline 9 - The average patient age is significantly lower
	than that of a typical nursing home.
State Exhibit (Ex.) D, pp. 6-14.
HCFA determined that these findings cumulatively establish that
Meadowview ICF had the overall character of an IMD during the audit
period.
The parties agreed that for purposes of determining whether 50% or more
of the patients were institutionalized at Meadowview ICF because of
mental disorders, the State could present evidence on patients
representing 10% of the facility population.  The State could choose the
sample randomly or by picking its most compelling cases.
New Jersey sent a Medical Evaluation Team to Meadowview ICF to conduct a
survey of the patient records of approximately 10% of the facility's
patient population to determine those patients' diagnoses and care.
Thirty-one patients were selected at random for review.  First, a review
was conducted by a review team headed by a physician, the purpose of
which was to determine whether the sample patients fulfilled New
Jersey's Medicaid criteria for needing nursing level of care.  A second
review was then performed by a medical evaluation team headed by a
psychiatrist and physician, the purpose of which was to determine how
many of the sample patients required treatment for a mental disorder.
The team reviewed the patients' medical records for the period October
1, 1986 through December 31, 1988, interviewed Meadowview ICF personnel
who treated the ICF residents and interviewed the patients who were
available (four patients had died and two had been discharged from the
facility).
New Jersey compared its conclusions on these patients with the FMAS
reviewers' conclusions.  New Jersey agreed with FMAS on 16 patients,
seven of whom had primary diagnoses of mental illness and nine of whom
had exempt diagnoses.  See State Reply brief, p. 22; HCFA brief, pp. 14
and 16; State Ex. J,  9a and 9b; State Ex. K., 12b.  New Jersey and
HCFA disagreed on the remaining 15 patients.  HCFA agreed that if the
State established that at least seven of these 15 patients were not
institutionalized for the care and treatment of a mental disorder
according to the patient medical records, we should find that Guideline
6 was not met.
The Board conducted an eight-day hearing during which the parties
presented testimony and evidence relevant to the 15 disputed patients.
Dr. Esquibel, who testified at the hearing, had reviewed 10 of these and
Dr. Santucci, the other FMAS consultant hired by HCFA, had reviewed the
other five patients.  Dr. Santucci, however, died prior to the hearing.
III.    HCFA did not establish that Meadowview ICF has the overall
character of an IMD pursuant to the guidelines.
HCFA contended that the OIG auditor and the FMAS consultants had applied
the guidelines set forth in SMM, section 4390, to determine whether
Meadowview ICF had the overall character of an IMD.   With regard to the
use of the ten guidelines, the SMM provides that --
	no single guideline will necessarily be determinative in any
	given case.  A final determination of a facility's status rests
	on whether an evaluation of the information pertaining to the
	various guidelines establishes that its overall character is
	that of a facility established and/or maintained primarily for
	the care and treatment of individuals with mental diseases . . .
	.
HCFA Ex. 2, SMM, 4390 B.
The guidelines permit assessing the evidence in its entirety and giving
varying weight to evidence relating to different guidelines.
Here, HCFA stipulated that Guidelines 1, 2, 3, 5, and 10 did not apply
to Meadowview ICF during the audit period.  Yet, evidence relating to
the first four of these guidelines has been given the greatest weight in
Board decisions determining that nursing facilities were IMDs.  For
example, in Colorado Dept. of Social Services, DAB No. 985 (1988), we
upheld a disallowance for Phoenix Center, giving great weight to the
undisputed fact that the facility held itself out as a psychiatric
treatment center.
In spite of the lack of any such evidence here, HCFA nonetheless
contended that evidence that Meadowview ICF met Guidelines 4, 6, 7, 8,
and 9 was sufficient to establish Meadowview ICF as an IMD.  As we
discuss below, we conclude that the evidence here either does not
support HCFA's findings on these guidelines or has little probative
value concerning the character of Meadowview ICF.  We first discuss
HCFA's findings on Guidelines 8, 7, and 9, and then turn to the more
difficult questions raised by the patient-counting evidence HCFA relied
on to support its findings on Guidelines 4 and 6.
A.      The FMAS reviewers do not constitute an "Independent
Professional Review" team for purposes of Guideline 8.
Guideline 8 indicates that one of the factors in determining whether a
facility has the overall character of an IMD is whether an "Independent
Professional Review" team reports a preponderance of mental illness in
the diagnoses of the patients in the facility.  HCFA contended that the
FMAS consultants constituted an "Independent Professional Review" team
for purposes of this guideline.  HCFA brief, p. 17; State Ex. D, pp.
8-9.  HCFA argued that since FMAS concluded that the patients at
Meadowview ICF were primarily mentally ill, HCFA had established this
guideline as one of the factors to determine that Meadowview ICF had the
overall character of an IMD.  HCFA brief, p. 17 and Appendix (App.) A at
 26.
We first note that HCFA also relied on the FMAS findings for its
conclusion that Guideline 6 was met.  Even if we agreed with HCFA that
the FMAS consultants were an "Independent Professional Review" team and
that their findings were correct (which we do not), we would not give
those findings any additional weight merely because they could also be
characterized as meeting Guideline 8.  In any event, however, we
disagree that Guideline 8 was met.
Guideline 8 specifically calls for a report from an "Independent
Professional Review" team and cites 42 C.F.R. 456.1.  That regulation
implements section 1902(a)(31)(A) of the Act, which requires a state to
have a program of independent professional review by a team composed of
a physician or registered nurse and other appropriate health and social
services personnel.  This team's job is to review the plan of care
developed for each patient and the care actually provided to each person
receiving medical assistance, to make a determination regarding the
adequacy of services available to meet the current health needs of each
patient, to determine the necessity and desirability of continued
placement in the facility, and to evaluate the feasibility of meeting
the patient's needs through alternative institutional and
non-institutional services.
Contrary to HCFA's arguments, the term "Independent Professional Review"
team has a specific meaning in the Medicaid program.  The reference in
Guideline 8 to the applicable regulations supports our conclusion that
Guideline 8 was intended to apply to the state teams which are required
to review facilities in accordance with the utilization control
requirements.  Section 1903(a)(31)(A) of the Act; 42 C.F.R. 456.1.  The
FMAS consultants did not meet the requirements of such a team; they did
not review each patient in those areas outlined by the statute.  The
FMAS consultants did not review the written plan of care for each
patient to determine its adequacy nor evaluate the adequacy of the
services actually received.  Moreover, at the time the review was
performed, the FMAS reviewers did not determine the necessity and
desirability of each patient's continued placement and whether the
patient's needs could be met in an alternative placement.
Thus, we conclude that there is no support in the record for HCFA's
finding that Guideline 8 was met.
B.      HCFA's evidence on patient transfers is insufficient to show
that Guideline 7 was met, and, in any event, has no probative value here
since most transfers were made long before the audit period.
HCFA contended that a large number of Meadowview ICF patients were
transferred from mental hospitals for continuing treatment of their
mental disorders.  HCFA brief, pp. 17-19; State Ex. D, pp. 13-14.  HCFA
reasoned that since the medical records indicated that patients were
admitted to Meadowview ICF with primary diagnoses of mental disorders,
it is logical to conclude that these patients would be treated there for
mental illness as well as any other disability.  HCFA brief, p. 19.
While the records may show that many Meadowview ICF patients were
transferred from mental institutions, this factor alone is not
conclusive evidence that the patients were admitted to Meadowview ICF
for continuing treatment of their mental disorders.  As we discuss
below, treatment means more than general nursing care.  The State
presented evidence that, at the time most of these patients were
transferred to Meadowview ICF in 1977, the State had evaluated these
patients as patients whose needs could be met in a typical ICF.  HCFA
was relying primarily on historical diagnoses, which stigmatize forever
as a psychiatric patient any patient who is transferred into a nursing
facility from a psychiatric hospital.  HCFA's conclusion does not
logically follow from primary diagnosis, given evidence that the primary
diagnosis does not always reflect a patient's need for inpatient
treatment of that disorder.  Furthermore, HCFA's position ignores the
fact that a patient may have physical problems that necessitate
placement in a nursing facility.
Even if we agreed with HCFA that we should equate a primary diagnosis of
a mental disorder with a need for a continuing treatment of that
disorder, HCFA's evidence would not be probative here since it relates
to most patients' admission to Meadowview ICF in 1977.  As we discuss
below, the issue here is the character of the facility during the audit
period, October 1, 1986 through December 31, 1988.
C.      HCFA's findings on patient age under Guideline 9 were
inadequately supported and, in any event, have little probative value
here.
HCFA argued that Meadowview ICF met Guideline 9 (i.e., the average age
of the facility's residents was significantly lower than that of a
typical nursing home).  We previously found that evidence of young
average age was not by itself probative of a facility's overall
character as an IMD.  Colorado, supra, at 17; Washington Dept. of Social
and Health Services, DAB No. 785, at 14, n. 10 (1986).  We found that
the relatively young age of patients could have a reasonable explanation
other than that the facility is an IMD.
In this case, the audit findings on this Guideline were also
inadequately supported.  The audit report indicated that the average age
of patients in nursing homes nationally is about 78 and that the average
age for Medicaid patients in Meadowview ICF was 66.  The report also
stated that the age distribution of the patients in this facility was
uncharacteristic of New Jersey nursing home patients.  State Ex. D, p.
13.  However, the OIG auditor testified that he used an age study from
another region as a source for the national average cited.  He could not
verify the validity or accuracy of this data; he did not know where the
data came from or how the study was made.  Tr. at 1291-1292.  The
auditor also admitted that there was no basis for the statement in the
audit report that the age distribution of the patients in Meadowview ICF
was uncharacteristic for New Jersey nursing home patients.  Tr. at
1253-154.
Consequently, we conclude that HCFA did not have an adequate basis for
its findings on Guideline 9 and that, even accepting HCFA's national
average as accurate, the age disparity has little, if any, probative
value.
D.      The record does not show that Guidelines 4 and 6 were met.
Guideline 4 requires evidence that the facility specializes in providing
psychiatric or psychological care and treatment.  The Guideline states
that this may be determined through a review of patients' records, by an
unusually large proportion of the staff having specialized psychiatric
or psychological training, or by the fact that a large proportion of the
patients are receiving psychopharmacological drugs.  Guideline 6 calls
for evidence that more than 50% of all the patients in the facility have
mental diseases which require inpatient treatment according to the
patients' medical records.  Since HCFA primarily relied on the FMAS
review for its findings on both these guidelines, and since treatment is
an important aspect of patient evaluation, we consider these guidelines
together.
In this section, we first discuss general considerations regarding the
role of diagnosis in patient classification, the relevant time period
here, the nature of schizophrenia, and the nature of the treatment
received or required by the patients.  These considerations apply to
most or all of the patients at issue here and lead us to conclude
generally that the approach used by the FMAS reviewers was flawed from
the beginning (since it was inconsistent with HCFA's guidelines and past
Board decisions) and that HCFA's evidence presented here was similarly
flawed.  We then discuss in detail the seven patients where the State's
evidence most persuasively shows that the State reasonably evaluated the
patients as institutionalized primarily for their physical disorders (or
for mental disorders HCFA considers exempt) and as receiving and
requiring only general nursing care.
	1.              HCFA's consultants' approach improperly focused
	on historical diagnoses of patients.
As this Board explained in Washington, at 9-10, several early court
decisions overturning Board findings that facilities were IMDs reflected
the courts' underlying concerns with patient counting.  The courts were
concerned that discrimination against patients on the basis of diagnosis
(which is prohibited) might be present to the extent that patients were
classified according to historical diagnoses which did not reflect the
patients' current conditions.  The courts therefore emphasized the
importance of evidence about what treatment the patients were receiving
because such evidence can ensure that patients are not simply being
labeled based on historical diagnoses.  (See our discussion of treatment
below.)  If patients are classified based on historical diagnoses, the
resulting evidence is not truly probative of the character of the
facility.
Another reason for caution in applying patient-counting factors is that
an ICF may properly treat patients with mental conditions.  Section
1905(c) of the Act (prior to amendment by Pub. L. 100-203); section
1919(a) of the Act (as added by Pub. L. 100-203).  Thus, the mere
presence of such persons in an ICF is not sufficient to render the
facility an IMD.  We have recognized in our past decisions that when a
facility was not established as a facility specializing in care and
treatment of persons with mental diseases, but begins taking on more and
more patients with mental diseases, it is difficult to draw the line in
determining at what point the facility would attain the overall
character of an IMD so clearly that the state should have known that FFP
would not be available for the services provided at the facility.
HCFA's current guidelines for examining IMD status reflect these
concerns.  The guidelines state that "the reviewers must determine
whether each patient's current need for institutionalization results
from a mental disease."  They also state:  "Classification is to be
based on current diagnosis . . . ."  The guidelines then go on to set
out classification categories according to whether it is the patient's
physical or mental disorder which requires "inpatient treatment."
Although the OIG auditor and other OIG officials met with
representatives of FMAS prior to the on-site review and referred to
HCFA's guidelines, apparently this information was not passed on to the
actual reviewers before they arrived at Meadowview.  They were given the
HCFA guidelines at an initial meeting with the auditor at the facility,
but Dr. Esquibel, one of the two consultants who actually performed the
review, testified that his understanding of the review was that he was
to "examine the records and establish my own diagnosis on each patient
based on the information in the record . . . . "  Tr. at 1710 (emphasis
added); see also Tr. at 1711-1712, 1470. 3/   HCFA has argued in past
IMD cases, however, that it is the record diagnosis (even if wrong)
which establishes how the facility views and treats the residents and
which therefore reflects on the character of the facility.  More
important, Dr. Esquibel's statements illustrate an approach to the
review which is inconsistent with past Board decisions and HCFA's
guidelines.  From this statement, from the patient information sheets
Dr. Esquibel completed on the patients, and from his testimony as a
whole, it is evident that Dr. Esquibel was primarily concerned during
his review in determining which type of schizophrenia each patient had
been diagnosed as having and whether he agreed with that diagnosis.
Dr. Esquibel also stated that he was to "establish what was, in my
opinion, the primary reason why that patient was in that facility."  Tr.
at 1710.  This is closer to HCFA's guidelines, but is undercut by his
statement that the "primary diagnosis reflects the reason for
hospitalization."  Tr. at 1712.  He made this statement in reference to
the reason the patient was admitted.   We find several problems with
this.  First, HCFA's guideline refers to the "current need for
institutionalization." 4/ Second, while in some instances we have found
that reasons for admission may reflect on the character of a facility,
in this case we have determined that the critical time period is the
audit period, rather than 1977, when most of these patients were
admitted to Meadowview ICF.  (Our reasons for this conclusion are set
out below.)  Third, it is apparent from some of the patient worksheets
that the reviewers were confusing admission to Meadowview Hospital with
admission to Meadowview ICF, but HCFA did not allege here that
Meadowview ICF was part of a larger institution rather than a separate
one.  Finally, the patient records here illustrate that one cannot
reasonably equate primary diagnosis with the reason why these patients
were institutionalized at Meadowview ICF.  In many instances, the
primary diagnosis simply reflected the patient's history.  Moreover,
while any psychiatrist consulting on the patient would automatically
list schizophrenia as the primary diagnosis, sometimes a contemporaneous
evaluation by a non-psychiatrist would list a physical disorder as
primary.
The reviewers' focus on historical psychiatric diagnoses and symptoms
rather than on the current need for institutionalization is also
apparent because many of the patient information worksheets completed by
the reviewers describe patients as having no significant physical
disorder, even though their records clearly show that they were
evaluated by their attending physicians during the audit period as
having serious physical disorders (which were their primary diagnoses).
This may be explained in part by the lack of guidance the reviewers
received on the purpose of the review.  There also may have been some
bias introduced by the terms of the contract under which FMAS agreed to
do the review. 5/
Flaws in the initial review approach would not be significant if HCFA's
evidence presented to us supported the reviewers' conclusions.  Prior to
the hearing, Dr. Esquibel again reviewed the patient records of those
patients at issue here, and at the hearing, he elaborated on his
findings and the reasons for them and in some respects attempted to
compensate for flaws in the original review.  It was apparent at the
hearing, however, that Dr. Esquibel's further review was primarily an
attempt to justify the original review findings, rather than to
accurately apply HCFA's guidelines.  This is one of many reasons,
discussed more fully below, why we reject HCFA's position that we should
give more weight to Dr. Esquibel's opinions than to those of the State's
experts.
	2.              The patient-counting here should relate to the
	audit period, not the time of admission.
In this case, unlike other cases where there was evidence that the
facilities specialized in treating mental diseases when they were
established, HCFA presented no evidence of any intent to establish
Meadowview ICF as such a specialized facility.  While most of the
patients were transferred from the old Hudson County Meadowview
institution (which as a whole probably would have been considered an IMD
at one time), the State presented unrebutted testimony that the intent
when the ICF was established was to create a facility for residents who
did not need specialized services above and beyond those offered by a
typical ICF.
Moreover, the State insisted when the facility was established that
patient assessments be performed to ensure that patients were not being
inappropriately placed in the Meadowview ICF.  HCFA argued that, because
patients with mental diseases may appropriately be placed at the ICF
level, this fact has no significance.  We disagree.  First, the State's
evidence suggests that the State's assessments included whether the
patient's functional needs could be met by this particular facility.
Thus, approval of placement of these patients in Meadowview ICF even
though it did not have specialized staff (other than those available on
a consulting basis) reflects a judgment of the patients' needs.  Also,
at the time Meadowview ICF was established in 1977, there was little
published guidance on IMD status, and internal field memoranda issued by
HCFA primarily indicated a concern that states were inappropriately
dumping patients from state mental institutions into nursing facilities
to avoid the IMD exclusion (and thus the nursing facilities should be
consider de facto IMDs).  The State's evidence indicates that such
dumping was not occurring here.
If HCFA had shown that Meadowview ICF was established as a facility with
the overall character of an IMD, the burden might then have shifted to
the State to show that Meadowview no longer had that character during
the audit period.  Since HCFA failed to make such a showing, however,
the issue here is whether the State should have known, by examining the
character of the facility during the audit period, that it was an IMD.
Examining the facility during this time period also makes sense since up
until 1986 policies on how to determine whether an ICF was an IMD and
what should be considered a mental disease were still evolving.  While
we have found that some facilities could be classified as IMDs prior to
this time because they were IMDs under any reasonable reading of the
regulatory definition, those facilities were determined to be IMDs
primarily on the basis of persuasive evidence other than
patient-counting information.  See Massachusetts Dept. of Public
Welfare, DAB No. 413 (1983); Washington, supra; and Colorado, supra.
Thus, in examining the evidence here, we consider the appropriate time
period to be the audit period, not 1977 when most of these patients were
admitted to the ICF (and certainly not the time the patients were
admitted to the original institution known as Meadowview Hospital).
	3.              HCFA's position on the role of schizophrenia and
	its process in classifying these patients is not fully supported
	by the record.
HCFA relied heavily on Dr. Esquibel's explanation at the hearing of
schizophrenia and its symptoms.  We find, however, that his testimony is
not fully supported by the written record, raises significant questions
about what symptoms should be attributed to the disease process of
schizophrenia, and further supports our conclusion that Dr. Esquibel
focused too heavily on the patients' history.
HCFA has long used a disorder classification system called the ICD (and
its further refinement in the system called the DSM-III) for determining
what is a mental disease.  In the context of determining IMD status,
however, HCFA has exempted certain diagnoses listed as mental disorders
in these systems.  In excluding persons with senile dementia or organic
brain syndrome (OBS), HCFA stated:
	These diagnoses appear frequently among the elderly.  These
	conditions are essentially untreatable from a mental health
	point of view, but these patients frequently require general
	nursing care.  (Many times they are used by physicians as a
	shorthand characterization for patients whose behavior may be a
	manifestation of underlying neurological damage.)  These
	diagnoses should not be considered mental diseases if the
	facility is appropriately treating the patients by providing
	only general nursing care.
HCFA Ex. 2, fourth page. 6/
While schizophrenia is a psychosis which the layman considers
indisputably a mental disease (and its various forms are listed as
mental disorders in the ICD and DSM-III), Dr. Esquibel's testimony at
the hearing raised several issues concerning how to evaluate patients
who have been diagnosed as having schizophrenia and their treatment
needs.  He testified that schizophrenia results from a defect in the
dopaminergic reactions in the brain.  Dopamine is a "neurotransmitter,"
and the psychotropic drugs prescribed for schizophrenia operate either
by reducing the amount of dopamine produced by the brain or by blocking
the related "receptors."  Tr. at 1372-1383.  Dr. Esquibel further
testified that the "positive" symptoms associated with schizophrenia
(delusions, hallucinations, loosening of associations, incoherence, and
catatonic behavior) can be controlled by such medication.  Tr. at
1383-1384. 7/   This testimony, thus, raises the question of whether
schizophrenia can be rationally distinguished from senile dementia and
OBS, which HCFA exempted since they are neurologically based and not
amenable to treatment with traditional psychiatric or psychological
methods.  While we do not for purposes of this decision categorize
schizophrenia as an exempt diagnosis, Dr. Esquibel's testimony is a
factor in why we conclude below that the mere prescription of a
maintenance level of a psychotropic drug should not be considered
treatment for a mental disorder which gives a facility the character of
an IMD.
Dr. Esquibel's testimony also raises the question of whether patients
whose active symptoms are controlled by the drugs should be considered
as "having" the disease.  Dr. Esquibel took the position, however, that
no person is ever "cured" of the disease of schizophrenia because the
person would still have an abnormality in his/her dopamine production.
8/  His opinion that schizophrenic patients could not be cured appears
to have contributed to Dr. Esquibel identifying schizophrenia as a
current primary diagnosis even for patients whose record diagnosis was
"schizophrenia in remission" and who had shown no active symptoms for
years.
We do not here specifically reject Dr. Esquibel's position that
Meadowview ICF patients had not been cured.  The DSM-III distinguishes
schizophrenia in remission from "No Mental Disorder" (a diagnosis which
"requires consideration of overall level of functioning, length of time
since the last episode of disturbance, total duration of the
disturbance, and whether prophylactic treatment is being given").  HCFA
Ex. 83, p. 195.  This statement supports a view that the patients
continue to have the disorder (assuming they were correctly diagnosed
initially), even if it is in remission.  However, it also points up the
importance of not relying solely on diagnosis or the prophylactic
(preventative) use of psychotropic drugs as a basis for classifying
these patients.  See also Tr. at 121-122.
Dr. Esquibel's testimony describing "negative" symptoms of schizophrenia
also points up complications in evaluating the cause of these patients'
needs and the type of treatment which might be effective.  Dr. Esquibel
took the position that patients who had a primary record diagnosis of
OBS or senile dementia should nonetheless be considered in light of
their histories of schizophrenic disorders simply to have "negative"
symptoms of schizophrenia (which are not decreased by psychotropic
drugs). 9/  He presented a list of symptoms of schizophrenia, stating
that this list was derived from the DSM-III.  HCFA Ex. 89; Tr. at 1363.
He identified as "negative" symptoms:  memory deficit, lack of insight,
poor judgment, and disorientation.  Tr. at 1370; compare Tr. at 1427.
While he acknowledged that these symptoms were not exclusive to
schizophrenia, Dr. Esquibel emphasized that the history of the patient
was important in evaluating the cause of the symptoms.
While history is important in evaluating patients, Dr. Esquibel in our
view overemphasized the patients' history here to support his original
evaluations, ignoring evidence pointed out to him on how treating
physicians or psychiatrists who had examined the patients had evaluated
their symptoms during the audit period.  Moreover, the DSM-III does not
in fact track Dr. Esquibel's list of positive and negative symptoms;
instead, it describes active and residual phases of the disease.  The
DSM-III also states:  "Even though an active phase of Schizophrenia may
begin with confusion, the presence of persistent disorientation or
memory impairment strongly suggests an Organic Mental Disorder."  HCFA
Ex. 83, p. 192.  Dr. Esquibel's own testimony describes the type of
memory deficit common in schizophrenia as an inability to recall events
because of a failure to register events in the active stages of the
disease.  Tr. at 1406-1407.  Excerpts from a textbook on psychiatry
submitted by HCFA discuss differences between this type of memory
deficit and deficits caused by organic brain disease, indicating that
distinctions can be drawn (although this may not be easy).  HCFA Ex. 96.
We see no reason to accept Dr. Esquibel's judgment on which type of
deficit was present in the patients here with record diagnoses of OBS or
senile dementia, rather than the judgment of treating physicians or
psychiatrists who observed the patients.  Those actually observing the
patients over a period of time were in a better position to make the
distinctions required. 10/
Even where there is no record diagnosis of OBS or senile dementia,
however, evaluating patients with symptoms such as inability to make
judgments, self care deficits, disorientation, lack of interest, and
lack of volition is further complicated since these are also symptoms of
chronic institutional syndrome.  Tr. at 1421-1422.  This syndrome is not
classified as a mental disorder in the DSM-III.  Dr. Esquibel testified
that physical disabilities can contribute to institutional syndrome and
that this type of syndrome may develop in a patient in any type of
institution (for example, even a tuberculosis sanitorium).  Tr. at
1707-1708.  All of the patients at issue here had been institutionalized
for lengthy periods of time.  Some patients had other problems which may
have in a broad sense been a "result of a mental disorder," such as
physical side effects from taking psychotropic drugs, but we do not
think these patient characteristics should be a basis for classifying a
facility as an IMD if they are appropriately being addressed through
general nursing care.
All of these considerations further support our conclusions that HCFA's
evidence is not persuasive because it focused too heavily on historical
diagnoses, rather than on the nature of the treatment the residents of
Meadowview ICF were receiving or in fact required.
	4.              HCFA's evidence is not persuasive either on the
	treatment the patients were receiving or on what they required.
In Minnesota v. Heckler, 718 F. 2d 852 (8th Cir. 1983), the court stated
that --
	the characteristics of an IMD must fundamentally center on the
	type of care or nature of services required, not on the mere
	presence in a facility of patients who have, or at one time did
	have, diagnoses of a mental disease.
718 F. 2d at 863.
In the past we have found that the lack of specialized treatment
actually received by patients is not conclusive on the issue of whether
a facility is an IMD.  We recognized HCFA's genuine concern that states
could avoid classification of a facility as an IMD by simply not
providing appropriate treatment to patients.  The Court in Minnesota
reasoned that emphasis on the degree of care and treatment required by a
patient (as opposed to solely examining the degree of care and treatment
furnished to a patient) should eliminate this concern.
We previously found that an ICF can be an IMD and this holding was
ultimately upheld by the Supreme Court.  Connecticut v. Heckler, 471
U.S. 524 (1985).  This means that treatment received in an ICF must be
evaluated in light of the level of services appropriately provided in an
ICF.  Consequently, an ICF not providing the same level of services or
intensity of services as a psychiatric hospital would provide may still
be considered an IMD.  See Massachusetts.  Thus, as we found in
Massachusetts, an ICF may have the overall character of an IMD even
though the services provided do not amount to active psychiatric
treatment or intervention.  Id., at 13.
Services such as psychoanalysis or individual and group therapy with a
qualified therapist may constitute treatment.  Dr. Esquibel also
testified that manipulation of the environment and psychodrama are types
of social therapy used in treating mental disorders.  Tr. at 1424-25.
Moreover, in Massachusetts, we found that therapy in activities of daily
living skills may be considered treatment of a mental disorder where
there is evidence that these services were needed to improve the
patient's mental functioning.  Similarly, in Iowa Dept. of Human
Services, DAB No. 1179 (1990), we determined that a comprehensive
program operated by a full-time staff psychologist using behavior
modification techniques to help patients develop independence in
self-care and assistance with activities of daily living skills to
implement the program was consistent with the needs of severely and
chronically mentally handicapped persons and constituted treatment for
mental diseases.
We have, however, distinguished between assistance with activities of
daily living that constitutes "treatment" in that these therapies are
designed to enable the resident to move out of the institution, or at
least reduce the degree of care and treatment required in the
institution, and assistance with activities of daily living which does
not constitute treatment.  We found that in order to constitute
"treatment" any program or therapy must be more than the type of
psycho-social program to help a patient adjust to life in an ICF which
would be typical of any nursing facility.  Washington at 11.
The Board has also considered that psychotropic drugs may constitute
treatment where the medication is prescribed by a psychiatrist providing
ongoing monitoring of a resident's progress and where a psychiatrist has
evaluated the dosage and concluded that the medication was treatment for
mental illness.  See Iowa at 11 and Massachusetts at 14.
The instant case, however, is distinguishable from Massachusetts and
Iowa.  The auditors found that patients of Meadowview ICF had "periodic
encounters with a psychiatrist or other mental health professional
during the period under review" and that "this type of continued care
under the direction of a psychiatrist, more closely resembles care in an
IMD rather than an ICF."  State Ex. D, p. 12.  Unlike the facilities in
Massachusetts and in Iowa, however, Meadowview ICF had no staff
psychologists or psychiatrists or other staff with specialized training
such as psychiatric social workers or psychiatric nurses.  Tr. at
468-470.  Apparently, an audit finding regarding the staff at Meadowview
ICF was based in part on a document attached to a provider application
which listed staff for all the facilities on the Meadowview campus
including the ICF and the hospital.  HCFA Ex. 85.  The auditor assumed
that the psychiatrists listed were on the staff of Meadowview ICF.  HCFA
brief, App. A,  24 at 13-14; Tr. at 1165, 1175 and 1187-1190.  Dr.
Esquibel testified that he also assumed that the ICF staff had
specialized psychiatric training.  Tr. at 1743-1744.  The testimony of
the assistant medical director for the Meadowview complex of facilities,
however, indicated that there were no psychiatrists or psychiatric
social workers or nurses on staff of the ICF.  Tr. at 458-461; 463-468.
Consequently, there was no evidence of specialized staff of the ICF or
of special training of the nursing staff.  Specialized staff of
Meadowview Hospital, however, were available only on a consulting basis
(as required for any ICF during the audit period), if a patient required
such a consultation.  42 C.F.R. 442.317 (1986).
HCFA also failed to present any evidence of any individual or group
therapy prescribed or provided at Meadowview ICF by specialized staff or
any evidence the ongoing caregivers determined that the patients
required such services during the audit period.  Nor did HCFA present
any evidence that the other types of psychological or social therapies
described by Dr. Esquibel were provided by specially trained staff. 11/
Furthermore, while some of the patients here required and received
supervision of some activities of daily living (ADL) by the nursing
staff, this was not clearly a result of a mental disorder, as opposed to
physical disorders or chronic institutional syndrome.  In any event,
mere supervision is different from the kind of ADL services necessary to
develop a resident's potential for independence, which we previously
considered to be psychological services.  It was only after questioning
at the hearing by the Board that Dr. Esquibel belatedly testified with
regard to some of the patients at issue that they could have benefitted
from psychological services to overcome dysfunctions in ADL.  This
testimony, which was more of an afterthought, was not persuasive because
it was not part of Dr. Esquibel's original evaluation of the patients.
It appeared to be an attempt to tailor testimony to respond to the
Board's concerns expressed at the hearing, rather than a considered
opinion.  In any event, the patients' records indicate that for most of
these patients, the caregivers made ongoing determinations and
assessments of each patient and concluded that such services were not
needed.  Given the organic and physical problems of these patients, the
caregivers could have reasonably concluded that these patients would not
benefit from such services. While psychotropic drugs may be considered
treatment in some instances, at least two patients of the 15 patients in
dispute did not receive any such medication and the rest received very
low dosages.  Even though Dr. Esquibel contended that the use of
psychotropic medication constituted treatment, Dr. Erlich, the State's
psychiatric expert, indicated that the low dosage of psychotropic
medication here amounted to maintenance of the patient's well being and
did not constitute treatment.  The State's view is not unreasonable.
The record showed that for the most part, these patients had no symptoms
of active schizophrenia for years.  The use of psychotropic medications
here could reasonably be viewed as being for prophylactic purposes to
prevent recurrence of symptoms of active schizophrenia.  The DSM-III
recognizes that schizophrenics may be in remission whether or not on
medication, if the medication leaves them free of all signs of the
disturbance.  HCFA Ex. 83, p. 195.  Moreover, HCFA's reliance on the
Physician's Desk Reference as supporting its view that maintenance
dosages of psychotropic drugs constituted treatment is misplaced.  That
publication's description of a maintenance dosage for Haldol, for
example, states:  "Upon achieving a satisfactory therapeutic response,
dosage should be gradually decreased to the lowest effective maintenance
level."  HCFA Ex. 63, p. 1335.  The purpose of examining treatment here
is to determine the overall character of the facility.  If the patient
has achieved a therapeutic response and does not need ongoing monitoring
and adjustment of medication by a psychiatrist, the receipt of the drugs
has no significant affect on the character of the facility that would
distinguish it from a typical nursing home.  Also, even Dr. Esquibel
acknowledged that a maintenance dosage could be administered outside an
institution, so the need for a maintenance dosage does not constitute a
need for inpatient treatment.  Tr. at 1404-1405.
The patient records showed that the patients here receiving such
medication did not need ongoing monitoring and adjustment of the
medication.  In fact, the records did not show any patient receiving
ongoing care from a psychiatrist.  The records showed that some patients
received a psychiatric consultation with a psychiatrist, but these were
routine and were prophylactic in nature such as where, for example, a
resident required an operation for a physical problem and the attending
physician wanted to make sure that the procedure would not trigger any
psychological effects.  In some instances, the consultations resulted in
a primary diagnosis of senile dementia or OBS.
Finally, HCFA did not present any evidence that Meadowview ICF held
itself out as providing specialized services.  Instead, unlike
facilities which the Board determined were IMDs because they were
established primarily to provide specialized services, the testimony
showed that Meadowview was established to be a typical ICF, providing
general nursing care. 12/
	5.  HCFA misclassified at least seven patients.
In our review next of individual patients who were at issue here, we
have based our conclusions primarily on the patient records and
undisputed interpretations of those records by the experts who testified
at the hearing.  Where necessary, we have resolved disputes between the
parties' experts.
HCFA argued generally that we should give more weight to Dr. Esquibel's
opinions than to Dr. Erlich's.  We find, to the contrary, that on the
whole Dr. Esquibel's evaluations of the patients were less credible and
persuasive than those of Dr. Erlich, for the following reasons:
o  As discussed above, Dr. Esquibel's initial approach was flawed.  At
the hearing, Dr. Esquibel sought to justify his initial conclusions,
even in the face of relevant evidence from the patient records which he
had clearly disregarded in reaching his initial opinions.  Dr. Erlich,
on the other hand, was more straightforward and was willing to
reevaluate his original opinion for one patient where it appeared for a
time that the records would not support it.  Ultimately, however, the
records provided more support for his opinions than for those of Dr.
Esquibel.
o  While Dr. Esquibel had excellent credentials as a psychiatrist, Dr.
Erlich's credentials were also impressive, and he was no less
knowledgeable in general about the disease of schizophrenia.  Dr.
Esquibel clearly was focused more on theory, but Dr. Erlich had more
experience with aging patients in nursing homes like those at issue here
and a better understanding of their needs.
o  Dr. Esquibel's evaluation of the patients' physical disorders was not
only contradicted by their records, but he appeared to evaluate the
disorders serially, rather than considering the whole complex of
physical problems exhibited by each patient.  His comments on particular
physical disorders were anecdotal and general, rather than directly
related to the particular patients at issue.  Dr. Erlich was more
convincing in his evaluations of the patients' physical disorders, and
his opinions on the physical disorders were supported by Dr. Flaig, who
was a medical doctor.
o  Dr. Esquibel did not appear impartial; rather, he seemed to take the
approach of ignoring any evidence which did not support the conclusion
OIG had already reached.  While Dr. Erlich was an employee of the State,
HCFA did not establish any reason for bias on his part other than the
inference that he might be affected by the State's potential loss of
Medicaid funding.  The sincere and straightforward manner in which Dr.
Erlich testified indicated that his opinions were unbiased and genuine,
and not merely contrived to support the State's appeal.
In sum, we give more weight to Dr. Erlich's opinions than to Dr.
Esquibel's.  Even if we found only that Dr. Erlich's opinions were
reasonable, however, this conclusion would support a result for the
State since we must be able to say that the State should have known that
Meadowview ICF was an IMD during the audit period in order for HCFA to
prevail.  We next discuss seven of the individual patients, explaining
why we conclude that the State could have reasonably determined that
they were institutionalized during the audit period because of their
physical disorders, rather than for inpatient treatment of a mental
disorder, and that they were appropriately receiving only general
nursing care.  We do not need to evaluate the remaining patients to
support our conclusion that Meadowview ICF did not have the overall
character of an IMD during the audit period, given the parties'
agreements discussed in Section II above.  We note, however, that few of
the remaining patients had active symptoms of schizophrenia, all had at
least some physical problems contributing to their need for
institutionalization, and few clearly received or required services that
would constitute inpatient treatment of a mental disease.
Wahlis
This patient was in his mid to late seventies during the audit period.
When this patient was first institutionalized in 1939, he was diagnosed
as a schizophrenic, hebephrenic type.  However, during the audit period
when the patient was at Meadowview ICF, the medical records
overwhelmingly support a different reason for institutionalization.  The
patient's annual medical care plans for 1981 through 1988 indicate
primary diagnoses of OBS, Inactive Tuberculosis, Emphysema, and Chronic
Schizophrenia with, in most instances, OBS listed first.  These plans
are completed by staff physicians annually at the ICF in order to
determine the proper care, treatment and placement of the patient for
the next year.  State Ex. 34.  The records indicate the patient received
only a maintenance dose of Activan (State Ex. J, 13), a psychotropic
medication, which Dr. Esquibel admitted is properly prescribed for
patients with OBS.  Tr. at 1761.  As the State pointed out, there is no
evidence of positive symptoms of schizophrenia during the audit period,
and HCFA could point to only one psychiatric consult during that period.
One consultation can hardly be considered treatment for mental illness.
State Ex. 34, pp. 12-13; Tr. at 1477 and 1765; HCFA Ex. 75, pp. 20-21.
The patient information worksheet and the narrative comments filled out
by the FMAS reviewer at the time of their review completely disregarded
this relevant information.  Instead, FMAS listed the primary diagnosis
as only schizophrenia, ignoring other information in the record to the
contrary.  Dr. Esquibel testified that OBS was a physical illness (Tr.
at 1753), but even though Mr. Wahlis's medical records indicated OBS,
emphysema and inactive pulmonary tuberculosis as diagnoses for this
patient, Dr. Esquibel did not note these on his worksheet.  Dr. Esquibel
admitted that his diagnosis disagreed with the everyday caregivers who
diagnosed the patient with OBS.  Tr. at 1756.
Dr. Erlich testified that the mental dysfunctions listed in the patient
records (forgetfulness, poor memory, emotional lability, and poor
judgment) were characteristic of OBS and not usually characteristic of
schizophrenia.  Tr. at 156-158.  Thus, we conclude that the patient
records amply support Dr. Erlich's determination that during the audit
period, this patient was institutionalized primarily for physical or
organic disorders for which he was properly receiving general nursing
care, and the patient did not need nor receive specialized services.
State Ex. J, 13(m); Tr. at 155 and 156.
Wyrowski
This patient was in her early seventies during the review period.  This
patient was first institutionalized in 1937 with an admitting diagnosis
of schizophrenia, simple or hebephrenic type.  In 1964 she developed
kyphoscoliosis which progressively got worse.  The kyphosis of the spine
required her to use a walker.  Her medical records indicated the
kyphoscoliosis was at 90 degrees which required the social worker to
either kneel on the floor if the patient was standing or to sit her down
to talk with the patient.  State Ex. 33, Tab 32, p. 6  The social
worker's notes indicate the patient could not lift her head higher than
the table and this limited her participation in any activities.  State
Ex. 33, Tab 32, p. 10  The record also indicated that this was a severe
and handicapping problem which affected all aspects of the patient's
demeanor.  State Ex. 33, Tab 32, p. 8.
Dr. Esquibel testified that he reviewed the records for this patient.
HCFA App. B,  24; Tr. at 1897; HCFA Posthearing brief, p. 31.  In his
affidavit and in the narrative comments for this patient, Dr. Esquibel
indicated that the admission diagnosis into Meadowview ICF in 1978 was
schizophrenia - chronic residual type and the current diagnosis at the
time of the review was still schizophrenia chronic residual type.  HCFA
App. B,  24; HCFA Ex. 37.  He claimed she was receiving treatment from
a psychiatrist with a psychotropic medication.  HCFA App. B, 24.  In
his declaration, Dr. Esquibel stated that he disagreed with not only
with Dr. Erlich's primary diagnosis of senile dementia, but also with
Doctors Kuo and Pino's primary diagnosis of senile dementia in 1986 and
1988, stating that the record revealed no entry to substantiate such a
shift in diagnosis.  HCFA App. B, 24; HCFA Posthearing brief, p. 31.
The patient records, however, fail to support Dr. Esquibel's findings.
The records indicate that during the audit period, this patient had a
psychiatric consultation in June 1988, the result of which was that the
psychiatrist listed her primary diagnosis as senile dementia, her
secondary diagnosis as a history of chronic schizophrenia, disorganized
type and her third diagnosis as kyphoscoliosis.  HCFA Ex. 76, p. 10.  In
1985, the patient had had a consultation with a psychiatrist, Dr. Pino,
who also diagnosed senile dementia and ordered the psychotropic
medication for this patient.  Dr. Esquibel admitted during the hearing
that psychotropic medication is also indicated for senile dementia
patients.  Tr. at 985.  Therefore, the fact that this patient was
receiving such medication is not conclusive evidence that she was
receiving treatment for schizophrenia.  Moreover, her maintenance dose
of Haldol was discontinued on June 1, 1988.
Dr. Esquibel here deliberately chose to overlook the diagnoses in the
patient records, substituting his judgment based on a brief review of
the medical records with the judgment of the patient's everyday
caregivers.   He admitted that his attitude during this review was "to
make what diagnosis I think is appropriate" and that he substantiated
his diagnosis with material he found.  Tr. p. 1902.  As we stated above,
the medical records, however, indicate a different diagnosis.  Moreover,
Dr. Esquibel glossed over this patient's physical condition; the record
indicates an extreme physical handicap affected this patient's ability
to interact and get about.  Dr. Esquibel's review failed to take into
account not only the diagnoses but the total clinical picture for the
patient and how her conditions cumulatively required her to receive ICF
care for her senile dementia and her kyphoscoliosis.  As a result, the
credibility and reliability of the FMAS findings here are questionable
and appear biased in favor of finding a psychiatric disorder for this
patient.
Dr. Erlich's testimony supported the caregivers' view that the type of
memory defects and other symptoms the patient had were not just
"negative" symptoms of schizophrenia but indicated senile dementia.  Tr.
at 167.  Thus, we conclude that Dr. Esquibel's findings are not
supportable for this patient.  The records support the State's
conclusion that during the audit period this patient was
institutionalized because of senile dementia, an exempt diagnosis, and
physical disorders for which she was properly receiving general nursing
care, and the patient did not need nor was she receiving specialized
services.
Milici
This patient was 66 years old at the time of the review and had been
institutionalized since 1956.  The patient died from a myocardial
infarction on May 5, 1987.  When the patient was admitted to Meadowview
ICF she had been diagnosed with chronic schizophrenia and hypertension.
State Ex. 37, Tab 36, p. 3.  Just prior to the beginning of the audit
period, this patient had two major surgical procedures: a left
nephrectomy (removal of left kidney) and subtotal parathyroidectomy and
excision of thyroid nodules surgery.  She also suffered from
hypertension, chronic obstructive pulmonary disease, hypercalcemia,
congenital heart failure and thyroid cancer.  State Ex. 37, Tab 36, pp.
2 and 26.  During the period of audit prior to her death (a seven-month
period), the patient had been admitted to the hospital for physical
disorders at least twice.
Dr. Santucci, the original FMAS reviewer for this patient, made some
arguably contradictory statements in his narrative.  HCFA Ex. 41.  He
stated that the patient received treatment for her mental illness yet
did not receive treatment from a psychiatrist or other mental health
professional.  The treatment he indicated she received was "milieu
therapy."  He also indicated that she "required an inpatient facility
that had medical supervision and could observe her health with its
variations and direct its care on a weekly basis," and used this
evaluation of a need for a higher level of care for her physical
disorders to support a conclusion that she was institutionalized for a
mental disorder.
Both Dr. Santucci's original findings and Dr. Esquibel's testimony
disregard medical records showing a patient with severe, continuous
physical problems.  We find that this is another instance where the FMAS
reviewers glossed over the medical condition of the patient where there
was a history of the patient being at one time diagnosed as
schizophrenic.
Dr. Esquibel's opinion that but for her mental disability this patient
could have been taken care of outside an institution is not only
contradicted by Dr. Erlich's opinion that her physical disorders
required nursing facility care, but is simply inconsistent with the
patient records for the audit period.  Moreover, Dr. Esquibel originally
described the patient's schizophrenia as requiring only the "protective,
custodial care" of an institution.  Tr. at 1523.  He only belatedly
testified that she could benefit from mental health services.  Tr. at
1527.  This testimony is simply not credible, for the reasons stated
above.  Finally, we note that the "milieu therapy" referred to by Dr.
Santucci was not mentioned in the patient records provided.  In any
event, the patient worksheet indicated that this patient did not receive
any treatment from a psychiatrist or other mental health specialist.  A
psychiatric consultation during the audit period occurred just prior to
her surgery.  HCFA Ex. 80.  The purpose of this was to obtain consent
for the surgery given her past history of schizophrenia and to authorize
transfer to a psychiatric unit if the surgery put her into an acute
psychiatric episode.  This consultation cannot be considered in the
nature of treatment.  There was only one other psychiatric note in the
record for the audit period due to some aggressive behavior.  However,
this one consultation does not indicate a continued acute episode for
which treatment was required.  Thus, we conclude that the State could
have reasonably determined that this patient was receiving and required
only general nursing home care.
Norian
At the time of the review, this patient was 79 years old and had been
institutionalized for 49 years.  Again, the FMAS reviewer ignored
information in the medical records relevant to the audit period.  The
records indicate the patient's diagnosis when she was admitted into the
Meadowview ICF in 1977 was schizophrenia, residual type and cerebral
arteriosclerosis.  HCFA Ex. 72, pp. 1, 3, and 11.  Dr. Esquibel,
however, classified this patient as a patient with a mental disability
necessitating nursing home care who has no significant physical
problems.   While the record indicates some history of diagnoses of
schizophrenia, the record also establishes the diagnoses of cerebral
arteriosclerosis and OBS, as well as other physical conditions such as
arteriosclerotic heart disease (ASHD), anemia, hyperlipidemia, and
status post cholecystectomy during the audit period.  HCFA Ex. 72, pp.
16 - 19.  While Dr. Esquibel noted that because of the patient's age she
might have organic brain syndrome, he substituted his own judgment that
"her behavior has not substantially changed to indicate that the primary
diagnosis should be chronic brain syndrome" with that of the patient's
caregivers who had determined that this patient suffered from OBS.  HCFA
Ex. 33.
The record does not support Dr. Esquibel's finding that this patient had
no significant physical problem.  During the audit period, this patient
was not seen or treated by a psychiatrist.  The only arguable treatment
was the use of psychotropic medication which was at maintenance dosages.
State Ex. J,  13j.  While Dr. Erlich acknowledged that this patient had
not given up all of her psychiatric symptoms, he testified that she was
not a suitable candidate for any kind of psychiatric intervention in
view of her age and past history, including her organic conditions.  Tr.
at 127-128.  The record supports the finding that this patient was
institutionalized in Meadowview ICF during the audit period because she
required and received general nursing care.  Thus, we cannot sustain
HCFA's finding with regard to this patient.
Cardwell
This patient was 83 years old at the time of the review.  She had been
in an institution on and off since 1932 and steadily from 1964.
HCFA's reviewers characterized this patient's primary diagnosis as
schizophrenic, chronic, residual type.  While this patient had a history
of schizophrenia, the records during the audit period fail to support
the current diagnosis ascribed to this patient by Dr. Esquibel.  Rather,
the medical records do not show any mention of any positive symptoms
during the audit period.  HCFA Ex. 67, p. 4.  In fact, during that
period, a psychiatrist consultation on the patient, the only one during
the period, indicated that her chronic schizophrenia was in remission
and her dosage of medication should be decreased as a result.  The
doctor also took note of her other physical symptoms of ASHD and
hypertension and the fact that the patient was having problems with her
aging process.  HCFA Ex. 67, p. 4.
During the review and during Dr. Esquibel's testimony, HCFA
mischaracterized the medical records.  While the records certainly
indicate a history of schizophrenia, the records from the audit period
do not state that schizophrenia was the primary diagnosis for this
patient.  We agree with the State that the records generally show
primary diagnoses other than schizophrenia.  Tr. at 1841-1842, 1847,
1849, 1851-1852, 1853; HCFA Ex. 67, pp. 4, 6, 8, 14, 16, and 17; State
Ex. 41, pp. 15, 18, 19, 20, and 29.  The records also show that the
patient suffered from impaired mobility and as a result had a partial
self-care deficit.  HCFA Ex. 67, p. 12.  She was diagnosed having
diabetes mellitus, osteoporosis (or osteoarthritis), and hiatal hernia,
in addition to ASHD and hypertension.  HCFA Ex. 67.  While HCFA used
records before the audit period to illustrate a history of schizophrenia
in this patient, HCFA chose to ignore other records from before the
audit period which indicated that this patient was aging and that she
was becoming progressively senile.  The social worker remarked in 1983
that "[g]oal-setting for this 78 yr. old patient includes supportive
therapy in the method in which we handle her advancing senility" and,
later in 1987, a social worker stated "ICF remains an appropriate level
of placement . . . still can only foresee an eventual recommendation for
a SNF transfer as her level of deterioration advances."  State Ex. 41,
pp. 30 and 31.
Dr. Erlich testified that this patient's mental condition was not
contributory to her basic level of functioning and that she did not
require institutionalization for her psychiatric conditions.  Tr. at
46-47.  While Dr. Esquibel testified that it was important to look at
the functionality of the patient, we are not convinced that he in fact
looked at all of this patient's physical ailments and advanced age
together in determining the reason she was institutionalized during the
audit period. Tr. at 1606.  Because he did not consider all of the
patient's physical ailments together, we cannot reasonably conclude,
given the other evidence, that this patient's deficit in functionality
was because of a mental disorder.
Therefore, we do not sustain HCFA's findings for this patient.
Kellerman
This patient was about 73 years old during the audit period.  During
this period, the patient was not treated by a psychiatrist, received no
psychotropic medication and was free of any symptoms of active
schizophrenia.  The records show that his schizophrenia had been in
remission since at least 1977.  State Ex. 42, p. 2; see also pp. 11 - 17
(the patient's medical care plans which indicate no diagnosis of mental
illness during this period for which he would require any treatment).
The record indicates that during this period the primary diagnoses for
this patient were for physical disorders.
In fact, the record supports a finding that this patient's medical needs
were acute during this period.  Just prior to the review period, the
patient was hospitalized because of chest pains and shortness of breath.
In the hospital, he was placed in the ICU (intensive care unit), his
lung collapsed twice and he was determined to have significant chronic
obstructive lung disease (COPD).  State Ex. 27, Tab 28. p. 15.  This
patient was readmitted to the ICF with the primary diagnosis of Post-Op
Thoracotomy, COPD, Peptic Ulcer, and ASHD.  He also had a left hip
prosthesis a few months later.  State Ex. 42, p. 62.  During 1987, this
patient suffered a fractured left ankle which confined him to a wheel
chair off and on for most of the year and made him walk with a slight
limp.  State Ex. 27, Tab 28, p. 3 and 9; State Ex. 42, p. 68.  He also
suffered edema and bursitis of the left elbow, as well as a fractured
finger of the left hand.  State Ex. 42, pp. 64-67.  For this and his
ankle, he was receiving physical therapy at least three times a week.
In 1988, this patient had surgery again on his left hip, was
hospitalized again due to his COPD and cardiac arrhythmia, had surgery
on his right elbow, which later had some swelling over the next months.
State Ex. 28, pp. 19-23.
Clearly, this patient suffered from acute physical problems which
required medical treatment and nursing care.  HCFA failed to give
appropriate attention to the records from the audit period here and
virtually ignored the medical problems of this patient.  The State's
challenge to the reliability of Dr. Esquibel's review seems justified
here given these circumstances and the fact that his review of this
patient overlooked significant factors relating to this patient's
condition. 13/  Dr. Erlich testified that "this patient were it not for
his medical condition would be able to adjust fairly well on the outside
without having to be in a nursing facility."  Tr. at 101-103.
Thus, we do not sustain HCFA's findings for this patient. Denoia
This patient was 74 years old during the review period. HCFA argued that
during the audit period the patient's "primary diagnosis was
schizophrenia as documented by the medical records and history."  HCFA
Posthearing brief, p. 45.  HCFA further claimed there are records of
psychiatric consultations, physical assessments, and nurses' notes which
document that the primary diagnosis was schizophrenia.  Id.
While the record indicates that this patient had a secondary diagnosis
of schizophrenia, undifferentiated type, HCFA did not establish that
this was her primary diagnosis or the reason for institutionalization
during the audit period.  Furthermore, we fail to find any psychiatric
consultations during the review period, or any medical records during
the review period which indicate that schizophrenia is this patient's
primary diagnosis.  However, the records do show that this patient was
diagnosed just prior to the beginning of the review period with a
primary diagnosis of diabetes mellitus, with ASHD and OBS as a secondary
diagnosis.  State Ex. 31, p. 16 and 28; see also Nurses' notes, dated
10/86 (indicating diagnoses of diabetes mellitus, chronic cholecystitis,
ASHD, OBS, and schizophrenia, hebephrenic type), p. 9.
These diagnoses are consistent with diagnoses made in 1985.  State Ex.
31, p. 13, 18, 36, 38, and 39.  In fact, the record indicates that a
secondary diagnoses of OBS along with diabetes mellitus, chronic
cholecystitis, and ASHD was made by attending physicians at two general
hospitals this patient was transferred to from the ICF for
hospitalization.  State Ex. 31, pp. 36 and 38.   The record also shows
these same diagnoses throughout the remainder of the audit period.
State Ex. 31, pp. 16, 29, 30, 31, and 34.
While the fact that the reviewers ignored the OBS diagnosis leads us to
question the reliability of their conclusions, the fact that Dr.
Esquibel indicated that this patient's primary diagnosis during this
period was schizophrenia, residual type, chronic, is further reason to
doubt HCFA's findings.  Tr. at 1878-1880, and 1882.  The records do not
show this as a diagnosis for this patient; there is only a mention of a
secondary diagnosis, among others, of schizophrenia, undifferentiated
type, in the records.  This is another example of Dr. Esquibel
substituting his own judgment, based on a limited review of the records,
with the judgment of the patient's caregivers.
Dr. Erlich testified that the dosage of Loxitane this patient was
receiving was a maintenance dose.  Tr. at 61.  He also expressed a view
of this patient's capabilities and their causes consistent with the
caregivers' evaluation indicating she would not have benefitted from
mental health services.  Tr. at 54, 59.  Dr. Esquibel's opinion to the
contrary is simply not persuasive, for reasons explained above.
Therefore, we conclude that HCFA's findings for this patient cannot be
sustained on the basis of the records here.
Conclusion
For the reasons explained above, we find that the record does not
support a determination that Meadowview ICF was an IMD during the audit
period.  Accordingly, we reverse the disallowances totaling $7,354,765
in FFP for the period October 1, 1986 through March 31, 1991.
	_____________________________ Cecilia Sparks Ford
	_____________________________ Donald F. Garrett
	_____________________________ Judith A. Ballard Presiding Board
	Member
1.  This regulation was revised in 1991 to follow the statutory
provision and now reads that an IMD means "a hospital, nursing facility,
or other institution of more than 16 beds that is primarily engaged in .
. . ."  The rest of the regulatory language remains the same.
2.  HCFA did not allege that the three facilities were one institution.
Rather, the issue here was whether the ICF facility was an IMD.
3.  The auditor's notes of the meeting with FMAS representatives
indicates that the FMAS reviewers may have thought they were to validate
patients' diagnoses, but that the auditor simply intended them to
validate that the diagnosis codes were correct.  HCFA Ex. 19, second
page.
4.  The auditor's notes of the meeting with FMAS representatives discuss
use of the primary diagnosis and describe the primary diagnosis as the
reason for admission.  HCFA Ex. 19, second page.  The auditor testified
that it was later determined that current diagnosis should be used, but
he did not know whether this change was ever communicated to FMAS.  Tr.
at 1269.
5.  The task order for that contract stated:
	The purpose of this review is to provide information to
	confirm/support a determination that an audited Title XIX
	facility (ICF/SNF) is a de facto IMD, and thus ineligible for
	Federal matching funds.
HCFA Ex. 17, p. 1.
6.  HCFA has also exempted diagnoses of mental retardation and, based on
the Board's decision in Granville House, Inc., DAB No. 529 (1984),
recognized that a diagnosis of alcoholism is not sufficient without an
examination of the type of treatment being given, since such treatment
does not always follow a psychiatric model.  HCFA Ex. 2, fifth page.
7.  In light of this testimony, and the evidence in the records of the
patients discussed below showing that most of the patients had no
"positive" symptoms of the disease, we reject HCFA's assertion in its
reply brief that the Meadowview patients were unable to take care of
their physical illnesses outside of an ICF setting because of an
impairment in their mental processes resulting in a "barrier with
reality."  Reply br., p. 13.  HCFA's assertion was based on a
description of the active stages of the disease, which HCFA
unpersuasively tried to extrapolate to "the schizophrenic" in general,
even those with no signs of the disturbance.
8.  Dr. Esquibel's own testimony seemed in part to contradict this; he
also testified that 30% of patients "recover" from the disease and one
"could even say they are cured, . . ."  Tr. at 1396, 1401.
9.  In fact, Dr. Esquibel's testimony suggested a theory that an
increase in negative symptoms during the chronic stage may be the result
of psychotropic drugs, rather than the disease of schizophrenia.  Tr. at
1398.
10.  With respect to a few of the patients at issue here, Dr. Erlich
(the psychiatrist who testified for the State) evaluated the patients as
having senile dementia or OBS, even though neither diagnosis was
reflected in their records.  We consider the record diagnoses to have
more weight in determining the character of the facility, but we do not
here reach the issue of whether these particular patients had organic
damage since it is not necessary to our decision.  We note, however,
that Dr. Erlich's view of these patients depended in part on his
observation of the patients and on their history of having had numerous
electric shock treatments prior to the 1950's.  Dr. Esquibel strongly
disagreed with Dr. Erlich on whether such treatments could cause organic
brain damage.  However, we agree with the State that the testimony and
evidence which Dr. Esquibel presented is not sufficient to rebut Dr.
Erlich's opinion on this point.  Dr. Esquibel's evidence did not
distinguish such treatments as they were likely administered to these
patients from the current state of the art of electric shock therapy.
11.  This lack of evidence of any mental health services being
prescribed has added significance because New Jersey law in effect at
the time required that, if mental health services were recommended and
authorized following a consultation, a specific form had to be made a
part of the patient's record.  State Ex. M, p. 63-15.
12.  In posthearing briefing, HCFA took the position that "custodial
care" was treatment.  This position is, in our view, inconsistent with
HCFA's own guidelines.
13.  The State pointed out that this patient had one leg shorter than
the other.  See Tr. at 1625.  Dr. Esquibel disagreed with this
conclusion.  Tr. at 1625.  However,  there are several mentions on two
separate occasions by the physical therapist that this patient's left
leg was shorter than the other.  HCFA Ex. 78, p. 14 and 15; State Ex.
42, p. 68.  Moreover, the social worker notes indicated he "walked with
a left leg limp."  State Ex. 42, p.