00811

GAB Decision

17

November 19, 1986

Pennsylvania Department of Public Welfare; Docket Nos. 85-224; 86-131;

Ballard, Judith A.; Teitz, Alexander G.

Garrett, Donald F.

(1) The Pennsylvania Department of Public Welfare (State), in Docket No. 85-224, appealed a determination by the Health Care Financing Administration (HCFA or Agency) disallowing $17,855,471 in federal financial participation for operation of the State's Medicaid program from July 1, 1981 through March 31, 1982 and from July 1, 1982 through June 30, 1983. The State, in Docket No. 86-131, subsequently appealed a determination by HCFA disallowing $10,556,111 in funding for the period July 1, 1983 through June 30, 1984. The parties agreed to consolidate the appeals since they concerned identical issues.

The basis for the disallowances was HCFA's determination that the State had not met the requirements of section 1903(s) of the Social Security Act (Act) and implementing regulations, which provided a one percent offset to reductions in Medicaid funding to states for fiscal years 1982 through 1984. Section 1903(s) of the Act provides for progressive percentage reductions in federal Medicaid funding for each of these years, which could nevertheless be offset by an amount equal to one percent of funding (the "one percent offset") if certain criteria were met. The State here sought the one percent offset by virtue of having performed activities that allegedly met the regulatory criteria for the detection of fraud and abuse. The Agency determined that some categories of the State's activities would be countable towards the offset and that two major categories would not be. The categories found to be non-qualifying, both of which were here appealed by the State, were: (1) amounts which the State allegedly prevented from being paid to providers ("diverted") by virtue of the State's Concurrent Hospital Review system, and (2) amounts allegedly recovered from nursing homes as a result of certain onsite audits of the homes. In addition to arguing that the above categories should qualify for the offset, the State alleged that the Agency could not in any event effectuate the percentage reductions of Medicaid funding because it had failed to comply with certain statutory prerequisites. (2) As explained below, we uphold the disallowance in full. Our reasons can be summarized as follows:

* We conclude that the Agency met the applicable statutory prerequisites for implementing percentage reductions of funding. As required by section 1903(s), the Agency promulgated interim final regulations implementing certain other provisions of the Act by the first day of the first quarter of the fiscal year in which reductions of funding were taken. Contrary to the State's arguments, we find that section 1903(s) did not also require the Agency to amend these regulations at a later time to accommodate subsequent legislation, nor did it require the Agency to issue in final form the interim regulations which were promulgated in full satisfaction of the statutory prerequisite.

* We conclude that amounts that the State allegedly prevented from being paid to hospitals by virtue of its Concurrent Hospital Review System do not qualify for the offset because the State's system does not deny actual claims for payment through the use of screens in a claims processing system. The State's process reviews a hospital's requested length of stay for individual patients shortly before or after the patient has been admitted or shortly before a requested extension of stay. We find that the review does not come within the plain meaning of a "screen" in a "claims processing system" since it does not review a demand for payment from the hospital for services actually rendered. Indeed, if the requested stay is denied by the State under its process, the services quite possibily may never be provided and the hospital is in any event prohibited from billing for them. In addition to relying on the commonly accepted meaning of the regulatory language, we find that contrary to what the State alleged, the preamble to the final regulations does not support the State's position that its process would qualify. We also conclude that the Agency's position furthers a major statutory purpose in limiting diversions to what can be documented as actual, rather than estimated, savings.

* Finally, we conclude that amounts allegedly recovered from nursing homes as a result of onsite audits do not qualify for the offset. The State here failed to demonstrate that the audits in question were not routine and that they were undertaken under suspicion of fraud or abuse, as the regulation expressly required.

(3) Statutory and regulatory background Section 1903(s) of the Act provides for reductions in federal Medicaid funding of 3 percent for FY 1982, 4 percent for FY 1983, and 4.5 percent for FY 1984. Section 1903(s)(1)(A). The section further provides, however, that these percentages shall be "reduced . . . by one percentage point if the total amount of the State's third party and fraud and abuse recoveries for the previous quarter is equal to or exceeds one percent of the amount of Federal payments that the Secretary estimates are due the State . . . for that previous quarter." Section 1903(s)(2)(C). "Third party and fraud and abuse recoveries" are defined as:

the total amount that State demonstrates to the Secretary that it has recovered or diverted . . . in the quarter on the basis of (I) third-party payments . . ., (II) the operation of its State medicaid fraud control unit . . ., and (III) other fraud or abuse control activities. . . .

Section 1903(s)(5)(A)(i). "Diverted" funds from "fraud and abuse control activities" are not defined in the statute. Regulations implementing section 1903(s), however, provide:

. . . Definitions.

For purposes of this subpart -- "Abuse" means provider practices that are inconsistent with sound fiscal, business or medical practices, and result in unnecessary cost to the Medicaid program, or in reimbursement for services that are not medically necessary or that fail to meet professionally recognized standards for health care.

"Diverted funds" means program funds not spent because claims were denied or reduced in amount as a result of the following:

* * *

(3) Use in claims processing systems of prepayment screens that are --

* * *

(ii) Specifically designed to detect fraud or abuse and applied to all claims submitted by all providers or by a general category of providers.

(4) 42 CFR 433.203 (1982). /1/ The section in the fraud and abuse offset regulations pertaining to audits provides that fraud and abuse recoveries:

* * *

(2) May include . . . funds recovered as a result of

* * *

(ii) Audit activities that are initiated as a result of suspicion or complaint of fraud or abuse (. . . but not including . . . fraud and abuse uncovered through routine audits). . . .

42 CFR 433.213(b). I. The Statutory Prerequisites for the Reductions The State argued that, before examining whether the State was entitled to the one percent offset, the Board should find that the Agency was precluded from initially reducing Medicaid payments to the State because it failed to meet certain(5) prerequisites provided in section 1903(s) of the Act. The State argued that the Agency failed to comply with the following provision:

(1)(B) No reduction may be made under subparagraph (A) for a quarter unless, as of the first day of the quarter, the Secretary has promulgated and has in effect final regulations (on an interim or other basis) implementing paragraphs (10)(C) and (13)(A) of section 1902(a) (as amended by the Medicare and Medicaid Amendments of 1981).

Section 1903(s)(1)(B). The State argued that HCFA should be precluded from taking the reductions under subparagraph (A) because HCFA did not properly promulgate final regulations implementing these other provisions of the Act. State's Opening Brief, pp. 12-13. The State presented two arguments as to why HCFA did not fulfill the statutory requirement that regulations be promulgated to implement paragraphs (10)(C) and (13)(A) of section 1902(a) of the Act. /2/ First, the State maintained that, although regulations were promulgated in interim final form at the proper time to implement these two provisions, these regulations "were in conflict with" section 1902(a)( 10)(C), because of subsequent legislation which made changes in this section of the Act. Second, the State maintained that the Agency violated the intent of the statutory requirement by not finalizing its interim regulations which implemented section 1902(a)(10)(C). The State's first argument that regulations "were in conflict with" the statutory provisions was based upon subsequent amendments of the Act in 1982 which, as explained by the State, in effect rendered obsolete the regulations implementing section 1902(a)(10)(C) and therefore "statutorily overruled" the regulations. State's Opening Brief, pp. 5-6. The State further noted that the later legislation, the Tax Equity and Fiscal Responsibility Act (TEFRA), provided that it "shall be effective as if it had been originally included as a part of" the original enactment of section 1902(a)(10)(C) of the Act. Section 137( d)(2) of TEFRA, Pub. L. 97-248. (6) We reject the State's argument here that the interim regulations did not meet the requirement of section 1903(s) by implementing section 1902(a)(10)(C). The statutory prerequisite provided in section 1903(s) was precisely and narrowly defined: the Secretary must have promulgated regulations implementing the two provisions of the Act by the first day of the quarter in which reductions would be taken. The State admitted that the Secretary in fact did this. Nowhere does the Act provide that such regulations must then be subsequently amended based on later legislation. If Congress had intended such a result, it could easily have so required in section 1903(s) or in other legislation. Indeed, section 1903(s)(1)(B) is not silent on the issue of the possible effect of later legislation, but specifically refers to the implementation of section 1902(a), "as amended by the Medicare and Medicaid Amendments of 1981." (The 1981 amendments of the Act were those that created section 1903(s).) Since the statutory language specifically limits the relevant amendments to those made in 1981, it seems to us an unreasonable interpretation that the statute also intended to consider later amendments, as well. The State argued that, since the TEFRA amendments of 1982 related back to earlier versions of the Act, Congress had "legislatively blocked implementation of the reductions" authorized by section 1903(s). State's Opening Brief, p. 7. As noted by the Agency, this position leads to the absurd result of nullifying the major purpose of 1903(s) in allowing reductions in Medicaid funding. If Congress had indeed intended to nullify section 1903(s), it seems reasonable that it would have instead explicitly repealed section 1903(s) or altered the period for which reductions could be taken. We also see no merit in the State's argument that the Agency's regulations were not properly promulgated since they were only issued in "interim" form and not finalized. The State cited the Conference Report on the legislation including section 1903(s) of the Act, which indicated that Congress expected any interim regulations implementing sections 1902(a)(10)(C) and 1902(a)(13)(A) to be eventually issued in final form. See H.R. Rep. No. 208, 97th Cong., 1st Sess., Vol. II., p. 960 (1981). Nevertheless, these comments do not alter the plain language of seciton 1903(s), which allows the promulgation of regulations "on an interim or other basis" in order to take the reductions in Medicaid funding. We therefore conclude that the Agency complied with the prerequisite of section 1903(s) that final regulations be promulgated to implement paragraphs (10)(C) and (13)(A) of section 1902(a) of the Act. (7) II. Diversions from Operation of the Concurrent Hospital Review (CHR) System

A. The basis for the disallowance

The Agency's primary basis for the disallowance of funds allegedly diverted by the CHR system was that CHR was not a "claims processing system," as required by the fraud and abuse offset regulations. The regulations defined the phrase "diverted funds" to mean "program funds not spent because claims were denied or reduced in amount as a result of . . . (use) in claims processing systems of prepayment screens that are -- . . . (specifically) designed to detect fraud or abuse. . . ." 42 CFR 433.203 (definition of "Diverted funds"). The Agency interpreted a "claims processing system" to encompass only the processing of the hospital's "invoice," or bill for services, that is submitted to the State Medicaid agency for reimbursement. Since the State's CHR system examined the provision of services before the patient's discharge and thus before the hospital submitted an invoice for the services provided, the Agency concluded that any diversions from operation of the system were ineligible.

B. The CHR system

The State's CHR system involves a review of a patient's status by both the hospital and the State either before or shortly after admission to evaluate the medical necessity of the assigned length of hospitalization. Upon admission, the hospital assigns an initial length of stay (LOS) to the patient based upon a schedule of expected lengths of stay for the patient's medical condition and other characteristics of the patient. The hospital then completes a State form MA-87 based on this information and sends the form to the State Bureau of Utilization Review (BUR). The State BUR reviews the form, making its own determination of an appropriate LOS. If the State's determination is that the patient's admission was unnecessary or that a shorter LOS was appropriate, this would serve as a "denial" of those days of hospitalization and would be used to calculate the amount of diverted funds. Where the patient's attending physician recommends some additional period of hospitalization (an "extension" of the initial LOS) following a further review by the hospital of the patient's medical status, the State again makes its own review of the need for an extension and may again deny days, which would also be calculated as diverted funds. See State's Appeal File, p. 51a. /3/

(8) C. Analysis

At the outset, it is important to understand precisely what the State's CHR process accomplishes. CHR is a review of a hospital's requested lengths of stay for its admissions. The hospital's requests are made either before or immediately following admission (or before the "extension" of a length of stay) and thus are routinely made before the hospital has provided the full length of stay requested. Following a denial by the CHR process for a requested LOS, the hospital presumably would be deterred from providing denied days of services because the denial effectively precludes the hospital from billing the State for the services and from receiving Medicaid reimbursement. The alleged diversion under CHR, therefore, results from denials of requested, not actual, days of service. The diversions as computed by the State are thus estimates of what the denied length of stay at the hospital would have cost if the services had been provided and the hospital had eventually sought Medicaid reimbursement for those services. The fraud and abuse offset regulations define "diversions" as program funds not spent because of denials of claims through the use in claims processing systems of prepayment screens designed to detect fraud and abuse. 42 CFR 433.203. We find that the State's CHR system does not meet the basic requirements for a diversion under the regulations because it is not a prepayment screen occurring as part of a "claims processing system" and leading to the actual denial of a claim. The regulations clearly contemplate the existence of a "claim" from the hospital and the provision by the State of a "screen" in its "claims processing system" to determine whether that claim is abusive. Consistent with the Agency's position, we find that a "claim" is a demand for payment for services rendered, as in the case of an invoice which the hospital presents to the State Medicaid Agency. (Webster's Third New International Dictionary defines a "claim" to be "a demand for compensation.") This, in our view, is the only reasonable interpretation of the provision at issue and is consistent with the definition of "claim" in Medicaid regulations as a(9) whole. For example, although in a different context, program regulations elsewhere specifically define a "claim" to be a "bill for services." 42 CFR 447.45(b). We thus find that the State was on notice that its CHR system would not be eligible for the offset since it was not a part of the State's "claims processing system." /4/ The State in this appeal never attempted to explain how the language referring to denial of a "claim" by means of a prepayment screen in a "claims processing system" could reasonably be interpreted to include denials of requested lengths of stay under its CHR process. Nor did the State specifically allege that it relied on any such interpretation in attempting to use the CHR system as a means of qualifying for the offset. /5/ Instead, as primary support for its(10) position, the State relied on a discussion of qualifying screens in the preambles to the interim and final regulations implementing the offset. See 46 Fed. Reg. at 47999 (September 30, 1981) (preamble to interim regulations), 47 Fed. Reg. at 43344 (September 30, 1982) (preamble to final regulations). The State noted that prior authorization processes, of which CHR is an example, were listed as non-qualifying screens in the preamble to the interim regulations, but were not listed as non-qualifying in the preamble to the final regulations. (A prior authorization process is one that requires approval from the State prior to delivery of the service as a prerequisite for reimbursement. State Medicaid Manual, Agency's Ex. 10.) The State argued that since prior authorization processes were no longer specifically excluded from qualifying in the preamble to the final rule, they should be thought to qualify even in the absence of any express evidence in the preamble discussion of the final rule. The fundamental problem with the State's argument is that the reference to "prior authorization" in the regulatory preamble was not a reference to the prior authorization process itself, but rather to a prepayment billing screen that denies claims because of the prior authorization process. Such screens review claims for compensation from providers to see if services claimed had received prior authorization. Claims lacking prior authorization would be denied. Thus, while an argument could be made that this type of prepayment billing screen might now be a qualifying screen because it had not been designated as non-qualifying by the preamble to the final regulations, there is absolutely no indication anywhere in the preamble to the final regulations that the prior authorization review itself could constitute a prepayment screen for the detection of abuse in a claims processing system. While we agree with the State that the final regulations were expanded to include manual screens to uncover overutilization or lack of medical necessity, those screens must take place as part of a claims processing system after the services have been provided and a claim for the services actually made. Contrary to the State's general assertion that the preamble intended to accept "pre-invoice" systems, the preamble is consistent throughout in indicating that screens in claims processing must review claims for reimbursement for (11) services actually provided. Indeed, the term "prepayment screen" connotes a screen that is performed just prior to payment in response to a demand for payment for services rendered. It does not reasonably refer to a screen performed shortly after a patient's admission to the facility in response to the facility's requested length of stay. Finally, if the regulations had been amended to include prior authorization reviews, such a significant change would certainly have warranted some form of Agency comment in the preamble and, indeed, explicit recognition in the actual language of the regulation. The State here conceded that CHR denials would not qualify as offset amounts under the interim final regulations. We find no basis for concluding that they could qualify under the preamble or language of the final regulations. We further find that the Agency's position should be upheld because it furthers a major statutory purpose. The Agency noted that Congress intended diversions to be limited to what can be actually documented as having been fraudulent and abusive. The House Report on the legislation which included section 1903(s) stated:

Generally, the intent of the Committee is that recoveries must be documented; claims of reduced expenditures because fraud and abuse has been 'discouraged' would be considered too subjective to establish the right to a smaller reduction to Federal fundings.

H.R. Rep. No. 158, 97th Cong., 1st Sess., Vol. II, p. 290 (1981). The Agency noted that, prior to this appeal, it had never specifically assessed the efficacy of the State's methodology for computing diversions under CHR, since the State's system could not in any event qualify under the regulations as a "claims processing system." /6/ Nonetheless, the Agency questioned whether CHR denials could ever accurately reflect the detection of program abuse. The Agency submitted that the use of a methodology which only estimated possible abuse would(12) raise serious questions whether the alleged diversions under CHR had actually been documented. Agency's letter of July 23, 1986, pp. 1-2. Moreover, the Agency specifically identified examples of situations under CHR which could result in an inaccurate measure of unnecessary days of service where the hospital requests an "extension" of the initial LOS. Id., p. 2. The Agency also questioned whether the type of review that takes place in CHR might "involve disagreements in professional judgment which cannot be simply assumed to involve fraud or abuse" (Agency's letter of July 23, 1986, p. 7) or might include matters such as coverage of services which the preamble to the final regulations specifically excluded as a qualifying screen. 47 Fed. Reg. 43344; State's Appeal file, p. 44a. In addition to these specific objections to CHR that were explained by the Agency, we note that the State's CHR may be an inaccurate reflection of actual program abuse in other respects. It is unclear from the record how the State's computation of diversions under CHR could take into account instances where the patients would have transferred out of the facility during their denied length of stay or where their medical condition might have improved (or where the patients might have died) during a denied length of stay. It is also possible that the hospital could have changed its requested treatment plans and lowered the anticipated lengths of stay through the hospital's own re-evaluations. It is also possible that facilities might feel inclined to request inflated or overly long extensions of lengths of stays if they know they still will have time to modify their treatment plans if the extension request is denied and no reimbursement would be lost as a consequence. The need to adequately document diversions and to avoid speculation and subjectivity regarding the amounts diverted supports the Agency's position that the diversions can result only from reductions or denials of actual claims for services rendered. /7/ In conclusion, while the State's CHR process may have been commendable in that it performed valuable utilization control functions for the program and may even have prevented the(13) actual provision of unnecessary services, such a system is simply not what the offset regulations authorize. /8/ III. Onsite Audits of Nursing Homes The State argued that amounts recovered from certain onsite audits of nursing homes should be considered as "recovered" funds to count toward the fraud and abuse offset. The State maintained that the audits resulted in countable recoveries, since they fulfilled the purpose of the fraud and abuse regulations. There were two reasons cited by the State for this. First, the State annually audited approximately one third of all nursing homes, an amount in excess of a 15 percent level which federal regulations had once required states to audit. Second, the State alleged that its auditing of the homes was conducted under a "generalized suspicion of abuse" and that one factor used in determining whether a particular home should be audited was whether it was classified as a "problem home." State's Opening Brief, p. 18, n. 9; State's letter to Board of May 12, 1986. The fraud and abuse offset regulations require that funds recovered as a result of audit activities must be "initiated as a result of suspicion or complaint of fraud or abuse." 42 CFR 433.213(b). The regulations further specifically(14) exclude fraud and abuse uncovered "through routine audits." Id. We conclude that the State's onsite audits of nursing homes were "routine," as the term is used in the regulation, and in any event were not "initiated as a result of suspicion or complaint of fraud or abuse." /9/ The State's policy of auditing one third of all nursing homes annually does not demonstrate to us that the audits weere any more than "routine" and does not demonstrate that they were undertaken "as a result of suspicion or complaint of fraud or abuse." The federal requirement that 15 percent of providers(15) participating in the Medicaid program be audited, 42 CFR 447.293(a) (1980), was no longer in effect for the period in dispute, so the State clearly was not exceeding any existing requirements. Even if the regulation had remained in effect, however, the rule by its own terms was meant to be a minimal auditing requirement, not a definition of a "routine" effort. Furthermore, the fact that the State audited some larger percentage of homes than once required by regulation does not make such audits other than routine. The record indicates and the State did not dispute that its regular practice was to audit one third of the nursing homes. State's Appeal File, p. 6a (Agency's Final Report). While the percentage audited may have been greater than in some other states (a point not substantiated in the record), this particular quantity of audits was clearly the State's "routine" which was followed year by year. Id.; State's Opening Brief, p. 18. The State argued that the practice of auditing one-third of the nursing homes fulfilled the requirement that they be undertaken as a "result of suspicion or complaint of fraud or abuse," since the audits were "conducted under a generalized suspicion of abuse." State's Opening Brief, p. 18, n. 9. The State presented no documentary or other evidence to support this statement. As argued by the Agency, to accept for purposes of the offset audits which were conducted under a "generalized suspicion of abuse" would render meaningless the regulation's requirements. Any and all audits could be described as being undertaken under a "generalized" suspicion of abuse, since one purpose of any audit would be to identify the "abuse" that might exist in any program. The State's argument that a "problem home" factor is used in deciding which nursing homes should be audited also does not demonstrate to us that the State's audits of nursing homes met the regulatory requirements. In a memorandum prepared for this appeal, the State's Chief of Medical Assistance Nursing Home Audits stated that during the period October 1, 1981 through September 30, 1983 (corresponding to most of the time in dispute), "too many field audits were selected" by the State's usual method for determining which of the State's nursing homes should be field audited or "desk audited." Attachment to State's May 12, 1986 letter to Board. Since there were "not enough staff resources to cover all field audits selected," the writer of the memorandum explained that his agency "randomly determined" which homes that were initially intended for field audit were instead only desk(16) audited, based upon "criteria such as problem homes, timing, the regional location of the facility, or the reporting period last field audited." /10/ In response to specific questions by the Board as to the significance of the problem home factor, the State's counsel at the hearing estimated that five or ten percent of homes subject to field audits were selected because of the problem home factor. Tr., p. 38. Even if we accepted this undocumented estimate, it is apparent that the State could not use the problem home factor as a basis for viewing all of the homes audited as meeting the regulatory requirements. Moreover, even for those audits which the State might have documented as having actually involved problem homes, the State did not present enough information about the "problem home" criterion and how it was applied to enable us to determine whether the audit of such homes could qualify as being initiated as a result of suspicion or complaint of fraud or abuse. The State, for example, did not even explain specifically how it defined a "problem home." Accordingly, on the basis of the foregoing, we conclude that amounts recovered from certain onsite audits of nursing homes do not qualify as "recovered funds" for purposes of the fraud and abuse offset. (17) Conclusion For the reasons discussed above, we uphold the Agency's disallowance in full.

##FN001 /1/ Regulations implementing section 1903(s) were first published on September 30, 1981 in interim final form, which provided for a comment period. The Agency subsequently published a final rule on September 30, 1982. 47 Fed. Reg. 43340. The preamble to the final rule implied that the final rule would apply to the FY 1982 period by stating that "it is essential that these regulations be finalized in order to complete actions necessary on the FY '82 reductions." 47 Fed. Reg. at 43348 (September 30, 1982). The parties assumed throughout the appeal that the final regulations published on September 30, 1982 would apply for the entire period in dispute, even though part of the disallowance pertained to three quarters of FY 1982. The changes between the 1981 and 1982 versions of the regulations that are relevant for our purposes had the effect of liberalizing the Agency's policy as to whether a state would be eligible for the fraud and abuse offset, by "expanding" the definition of diverted funds. 47 Fed. Reg. at 43344 (September 30, 1982). Therefore, we find the 1982 regulations to be the applicable authority for the entire period of the disallowances. Unless noted otherwise, the regulations cited in the decision refer to the final rule published on September 30, 1982. ##FN002 /2/ These two paragraphs of the Act have no substantive connection to funding reductions under section 1903(s), but rather provide other rules pertaining to the Medicaid program, including rules relating to eligibility requirements for the payment of Medicaid benefits to certain individuals. ##FN003 /3/ The State's offset claim was also based on diversions from a predecessor system called a Pre-Discharge Utilization Review system (PDUR). The State alleged that CHR and PDUR systems worked similarly (State's Opening Brief, p. 13), and the parties agreed that any differences between the systems were not relevant to the Board's consideration. Accordingly, the Board's analysis of the CHR system in this decision would apply equally to alleged diversions under the PDUR system. ##FN004 /4/ In addition to the actual language of the regulations and the preambles (which we discuss at length in the text below), the State's hearing exhibits suggest that the State may have had notice of the Agency's position by being privy to correspondence between the Agency and officials from other states. See State's Hearing Exs. A and B; Agency's Hearing Exs. 1 and 2. The Agency's response in March 1983 to questions raised by states concerning the effect of the regulations demonstrates a contemporaneous position on the Agency's part that is consistent with the Agency's position in this appeal. ##FN005 /5/ The State did argue during the hearing in this appeal that CHR as one form of a prior authorization process was a part of the State's Medicaid Management Information System (MMIS), and hence would qualify as part of the State's claims processing system. Tr. pp. 26-29. (As we discuss in the text below, prior authorization processes require approval prior to delivery of certain services.) The Agency, however, clarified that no Agency instruction had ever included the actual prior authorization process itself as part of an MMIS. Agency's letter to Board of July 23, 1986, pp. 3-4. Rather, the MMIS included only processing that occurred before the prior approval process and processing that introduced approved authorization requests into the system. The Agency argued, and we agree, that this definition of MMIS is confirmed by relevant provisions of the State Medicaid Manual and the State's own description of CHR. See Agency's Ex. 3 to its July 23, 1986 letter and State's Appeal File 51a. Moreover, even if the actual prior authorization process itself could be viewed as part of the MMIS, that would not necessarily mean that the process could be viewed as part of the State's claims processing system since the MMIS serves functions other than purely claims processing. 42 CFR 433.111. ##FN006 /6/ The Agency stipulated as a general proposition that under the CHR process a claim would have resulted but for a CHR denial. See Agency's letter to Board of March 30, 1986. However, this cannot be viewed as a concession by the Agency that the anticipated claim in every instance would have been equal to what was computed as the CHR diversion. For the reasons explained above, the amount of the CHR diversion in many cases would be entirely speculative. ##FN007 /7/ Other types of prior authorization systems such as those identified in State Hearing Exhibits A and B (prior authorization systems for admission or continued stay in a skilled nursing facility or an intermediate care facility) might be even more problematic in terms of computing amounts of actual program abuse. ##FN008 /8/ Our decision ultimately rests on the type of process at issue and not specifically on the technical fact that the CHR process occurs prior to the hospital's submission of an invoice. In a companion decision, which we also issue today, we conclude that a medical necessity review that occurs after the hospital renders the services and following discharge may qualify as a prepayment screen under the regulations even though the review takes place prior to the actual submission of an invoice. See Maryland Department of Health and Mental Hygiene, Decision No. 812, November 19, 1986. We found in Maryland that the facts clearly showed that the review in question, just as the invoice, was an essential part of the processing of a hospital's demand for compensation for days of services actually rendered, and as such, fits within the commonly accepted or plain meaning of "claim" and "claims processing." In addition to finding the State's position consistent with the language of the regulations and the preambles, we noted that there was no question that Maryland's review furthered legislative purposes of particular concern to the Agency since, under Maryland's process, the State would only receive credit for documented actual savings to the program. ##FN009 /9/ The State made the point that audit activities need not actually be "initiated as a result of suspicion or complaint of fraud or abuse," since the regulation only listed such audit activities as an example of what fraud and abuse recoveries "may include. . ." (Emphasis added). The State thus maintained that "(the) regulations are silent as to whether other audit related recoveries can be counted." State's Opening Brief, p. 18. Alternatively, the State argued that, even if the regulation were to be interpreted as requiring that audits be initiated because of suspicion or complaint of fraud or abuse, the State here fulfilled such a requirement, since the large number of audits which the State undertook implied that such audits were "conducted under a generalized suspicion of abuse." Id., p. 18, n. 9. We disagree with the State's argument that, under the regulations, audit recoveries need not be "initiated as a result of suspicion or complaint of fraud or abuse." The regulation indicated merely that fraud and abuse recoveries may include diverted funds or funds recovered under three specified circumstances, including audit recoveries. While the regulations use the term "may" in describing acceptable recoveries, we do not necessarily conclude that they intended to authorize further unlisted circumstances which might qualify as recoveries. The better reading is that the State is limited to methods specifically identified and merely has the option to choose among them. Moreover, the regulation is clear that if a state specifically choose to count the recovery of funds from audit activities toward the one percent offset, only one type of audit activities is countable, those "initiated as a result of suspicion or complaint of fraud or abuse." Thus, even if the listing of "audit activities" as one type of recovery could somehow be read as non-exclusive, the stated requirement of what particular audit recoveries might qualify is clearly mandatory. ##FN010 /10/ The State appeared to maintain that the determination here to field audit less nursing homes than initially expected did not cause the State to audit less than the usual one-third level of homes. See Tr., p. 34. While no evidence was presented by the State on this issue, we note that this conclusion is difficult to understand, since, as explained by the State, whether a facility was a "problem home" was one of several factors examined in reducing the number of homes initially selected for field audit. The memorandum presented by the State clearly indicated that the number of homes originally selected for field audit was based upon the State's usual practice (which was presumably to audit one-third of homes) and the State needed to reduce this number of field audits during the specified period because of a shortage of resources.

394

APRIL 25, 1987

00810

GAB Decision

16

November 19, 1986

New York State Department of Social Services; Docket No. 86-28;

Settle, Norval D.; Teitz, Alexander G.

Ballard, Judith A.

(1) The New York State Department of Social Services (State, NYSDSS) appealed a disallowance by the Health Care Financing Administration (HCFA) of $55,596,244 in federal financial participation (FFP) claimed under Title XIX (Medicaid) of the Social Security Act (Act). The disallowance was based on three HCFA regional office reviews designed to identify and initiate the recovery of the federal share of overpayments paid by the State to providers of Medicaid services. In the course of the appeal, after the submission of documentation by the State, the parties entered into a stipulation which reduced the amount in dispute to $17,737,603.

The major issues presented are whether section 1903(d)(2) of the Act authorizes HCFA to demand that the State repay the FFP share of identified overpayments to medicaid providers, even though the State may not have yet recovered the overpayments from the providers, and whether HCFA can base the disallowance on draft audit reports and other records which the State alleges were never finalized or were merely tentative findings. For the reasons discussed below, we affirm our previous decisions in holding that HCFA may adjust under section 1903( d)(2) for overpayments prior to any State recovery from the providers, and that HCFA does not have to wait until completion of a provider's appeal of an overpayment determination to recoup the federal share from the State, where the State itself would recover at an earlier point. We additionally find, however, that HCFA cannot use draft audit reports prepared by the State as a basis for disallowing FFP. Accordingly, we uphold the disallowance in part, and reverse it in part. General Background Title XIX of the Act provides for the payment of federal monies to states to aid in financing state medical assistance programs. Any state that wishes to participate in the Medicaid program must develop and submit a plan that meets(2) certain requirements set forth by the Secretary of the Department of Health and Human Services (HHS). Realizing that many states might have difficulty financing a Medicaid program even if subsequently reimbursed by the federal government, Congress also established a funding mechanism by which HHS advances funds to a state, on a quarterly basis, equal to the federal share of the estimated cost of the program. After review of the state's quarterly statement of expenditures, the Secretary may adjust future payments to reflect any overpayment or underpayment which was made to the state for any prior quarter. Section 1903(d) of the Act. Specifically, section 1903(d)(2) of the Act states:

The Secretary shall then pay to the State . . . the amounts so estimated, reduced or increased to the extent of any overpayment or underpayment which the Secretary determines was made under this section to such state for any prior quarter and with respect to which adjustment has not already been made under this subsection. . . .

Section 1903(d)(3) of the Act states:

The pro rata share to which the United States is equitably entitled . . . of the net amount recovered during any quarter by the State . . . with respect to medical assistance furnished under the State plan shall be considered an overpayment to be adjusted under this subsection.

As we discuss below, previous Board decisions have upheld HCFA's interpretation that section 1903(d)(2), and not 1903(d)(3), governs the recovery of the federal share of payments made to providers in amounts in excess of the rate authorized under the State Medicaid plan. The Board has examined circumstances under which HCFA can reasonably rely on state documents for a disallowance, including those situations where a state itself considers the determination of an overpayment sufficiently reliable so as to allow the state to act to recover the overpayment. Case Background HCFA conducted a series of reviews of various State records that, according to HCFA, revealed three categories of overpayments (discussed below) to Medicaid providers where the State had not yet recovered the overpayments and credited the federal share to HCFA. HCFA disallowed $55,596,244 FFP, citing section 1903(d)(2) of the Act and various Board and federal court decisions. HCFA declared(3) that its calculation of the amount of the overpayments was based only upon the best figures available, because the State had failed to comply with requests for further documentation of the actual amount of the overpayments. A. Overpayments resulting from adjustments in providers' per diem reimbursement rates. This category of overpayments was based on HCFA's report, "A Review of Cash Management Procedures in New York State Department of Social Services" (FO 5.36), dated March 22, 1985. (State Ex. 3) This report concluded that the federal share of overpayments in this category totalled $47,249,598. /1/ The report was based on the following State documents:

-- a State Bureau of Audit (BOA) "Summary of Draft Reports Sent to Providers for Period Ending March 21, 1984." (State Ex. 4) This report covered 318 providers which allegedly had received Medicaid overpayments of $60,325,213.

-- a May 9, 1984 internal State memorandum entitled "Status of Cases" detailing a backlog of audits from the State Department of Health (DOH). (State Ex. 5) This memorandum detailed audits which needed either meetings or final reports. The total amount in this category was $42,500,000. /2/

The BOA summary, detailing the amounts owed by the 318 providers, carried a handwritten footnote on the amount of overpayments due, which read:

At draft report stage, represents an estimate. Based on audit experience, this impact will be substantially reduced due to DOH & provider comments and drafts, computation of rates by DOH & approval by DOB (Department of Budget), hearing results and court review.

(4) The memorandum detailing the DOH audit backlog stated in its opening paragraph:

(It) should be understood that based on audit experience the estimated Medicaid impact will be substantially reduced due to appropriate DOH and provider comments on the merits of the audit adjustments, certification of final rates by DOH and DOB, formal hearing and court decisions.

The stipulation entered into by the parties in the course of this appeal reduced the amount of FFP at issue in this category to $14,389,924. B. Overpayments made to closed or bankrupt providers. HCFA's "1984 Financial Management Segment of the State Assessment Report," dated December 7, 1984 (State Ex. 7), identified $9,000,000 ($4,500,000 FFP) as amounts overpaid to closed or bankrupt facilities as of May 9, 1984. This figure was apparently taken from the May 9, 1984 memorandum. (State Ex. 5) The report did not identify the closed or bankrupt providers by name, relevant time periods, or individual amounts at issue. The stipulation reduced the amount of FFP at issue in this category to $2,243,665. C. Overpayments identified and awaiting collection by the New York Deputy Attorney General (DAG). This category of overpayments was based on HCFA's report, "Review of Overpayments Identified at New York State Department of Social Services" (FO 5.29), dated May 24, 1984. (State Ex. 8) The report found that a review of DOH's Central Control Log as of January 31, 1984 indicated that there was $3,728,825 ($1,864,413 FFP) in overpayments which had been referred to the DAG for collection. The report stated that this amount had been in this status since May 31, 1981. This figure was apparently based on a February 4, 1984 HCFA memorandum identifying 28 providers' audits which had been forwarded to the DAG. (State Ex. 9) The stipulation reduced the amount of FFP at issue in this category to $1,104,014. The State Audit Process For the period during which the alleged overpayments at issue occurred, DOH had responsibility in New York State for the audit of provider-submitted financial and statistical(5) reports used to calculate rates of payment for various types of Medicaid providers. Effective April 1, 1983, that responsibility was transferred to NYSDSS. After cost reports are presented to NYSDSS by a provider, a brief entrance conference is conducted with the provider. Next, NYSDSS audits the provider-supplied cost reports and reviews supporting documents to determine if the submitted claims are proper. An exit conference is held with the provider where NYSDSS presents its findings and asks for further information. After giving the provider the opportunity to furnish additional information, NYSDSS issues a draft audit report. The draft report "identifies the items on the cost report which are being disallowed and advises the provider of the basis for the proposed action and the legal authority therefor." 18 N.Y.C.R. R. 517.5(a). The report also contains a statement of any estimated overpayment, or "Medicaid impact" in the State's terminology. The provider has 30 days to comment. Any comments by a provider are then evaluated by NYSDSS audit personnel. Upon completion of their review, NYSDSS issues a final audit report to the provider. At this time, DOH sets reimbursement rates based upon the final report. Originally, a provider had only 30 days to request a hearing after receipt of the final audit report, according to former 18 N.Y.C.R.R. 518.1(f). Effective January 2, 1986, however, new New York State regulations, at Part 17 of N.Y.C.R.R., give a provider 60 days to request a hearing. The new procedures are also available to providers contesting overpayment determinations covering periods prior to January 2, 1986. After the administrative hearing is conducted, the hearing officer recommends a decision to the NYSDSS Commissioner who renders the final decision. After the Commissioner's determination is issued, a provider has four months to commence an action contesting an adverse determination in the New York State judicial system. A court decision may serve to change the rates set in the audit process. In response to Board questions as to when in the audit process the State may act to recover an overpayment from a provider, the State explained that 17 N.Y.C.R.R. 517.15 provides that withholding of payments constituting the amounts identified in the final report shall commence after issuance of a decision after hearing or, if no hearing was requested, within 60 days of receipt of the final report. Section 517.16 of 17 N.Y.C.R.R., however, specifies that the State may commence recoupment of overpayments not sooner than 15 days after issuance of the final audit report, upon notice to the provider. Further, section 517.16(b) provides that if a hearing is timely requested but not scheduled to (6) commence with 90 days of receipt of such request, the recoupment of overpayments shall be stayed until the hearing begins. In line with the above regulations, the State explained that as a general rule it waits at least 15 days after the final audit report is issued before acting to recoup overpayments by withholding current or future payments on claims submitted by the provider. Analysis The State contended that HCFA is not entitled to its share of a Medicaid overpayment until it has been firmly established and recovered. The State stressed that the cooperative federalism concept behind the Medicaid program, designed by Congress as a joint federal-state funded program, supported its position that section 1903( d)(3) of the Act, and not section 1903(d)(2), should govern HCFA's recovery of the federal share of Medicaid overpayments. In addition to generally disputing HCFA's right to recoup the federal share of overpayments, the State contended that the particular facts of this appeal warrant reversal of the disallowance. The State claimed that HCFA's disallowance letter was deficient because it failed to provide specific details of the alleged overpayments. The State further attacked HCFA's use of State documents in its reports for the determination of overpayments. These documents, according to the State, merely referred to draft audit reports or estimates and were, therefore, inaccurate and unreliable. We discuss each of this arguments in turn. I. Whether HCFA can demand the federal share of overpayments paid to providers prior to their recovery by a state. The general question of whether HCFA has the authority to demand from states the federal share of identified Medicaid overpayments to providers prior to the actual recovery of the overpayments by the states has been examined by the Board in a series of decisions. In these decisions, the Board has held that improper or excess payments to providers do not constitute "medical assistance" within the meaning of the Act, and that, therefore, HCFA is empowered by section 1903(d)(2) of the Act to adjust the federal share of these payments, even if a state has not yet recovered the amounts from the providers. For a summary of the Board's reasoning on this question, see, e.g., New York State Department of Social Services, Decision No. 311, June 16, 1982, and California Department of Health Services, Decision No. 619, January 28, 1985. A number of the Board's decisions on this issue have been reviewed in court; the district courts have(7) split on the question, but three Courts of Appeals have upheld the Board's reasoning. /3/ The State's arguments as to how sections 1903(d)(2) and (d)(3) should be interpreted and why 1903(d)(3) should govern HCFA's recovery of overpayments have been previously raised by the State and rejected by the Board in Decision No. 311. The Board's reasoning in rejecting the State's arguments was upheld by the Second Circuit Court of Appeals in Perales v. Heckler, 762 F.2d 226 (2d Cir. 1985). In telephone conferences with the Board, however, the State maintained that the Board's upholding of HCFA's interpretation of section 1903(d)( 2) subverts the spirit of the Medicaid program as a cooperative federal-state effort. Asserting that the themes of "partnership" and "cooperative federalism" run throughout the Act and were recognized by various courts, the State argued that requiring states to return the federal share of overpayments prior to actual recovery would violate Medicaid's partnership concept by placing the full financial burden of uncollectible overpayments on the states. As to this issue of the compatibility of HCFA's position on recovery of overpayments with the cooperative federalism(8) foundation of the Medicaid program, the Board has previously concluded:

(While) it is true that Congress devised the Medicaid program as a joint federal-state endeavor, the states have the primary responsibility of administering the program, including the duty to take steps to prevent improper payments in the first instance and to identify and recover overpayments in a timely manner when they do occur. . . . Viewing the program as a whole, therefore, we think that the Agency is not unreasonable in requiring the states to bear the burden of unrecovered overpayments.

Decision No. 311, p. 7.

The district court in Perales, cited in footnote 3, supra, supported this view for similar reasons, and concluded that:

The partnership upon which plaintiff relies does not in and of itself entitle the State to disclaim or abdicate its own obligations in order to make its own responsibilities easier to bear.

Slip op., p. 21.

The Court of Appeals for the First Circuit said in the Massachusetts case:

Since Medicaid is a joint program of the state and federal governments for providing health care, it is appropriate to inquire whether imposing that portion of the rate differential at issue on Massachusetts or the Secretary will better conserve the limited pool of resources available for that purpose. Since only Massachusetts deals directly with the providers, and since the state is empowered to perform on-site audits of these institutions, it is clearly the party best able to minimize the risks resulting from dealing with insolvent providers. The fact that Massachusetts will in any event bear a share of the loss, and so already has some incentive to minimize these risks, diminishes but does not destroy the force of this observation. Placing an additional burden on the state will increase its incentive to take care, whereas the Secretary remains powerless to reduce the risks no matter what the costs imposed on her.

749 F.2d 89, at 96.

(9) The State cited several cases which the State had not referred to in earlier cases before the Board for the general proposition that Medicaid is a partnership program. The State did not argue specifically how these cases would change the Board's analysis, upheld in Perales and Massachusetts, of how the partnership concept affected the issues here. In light of the State's failure to offer any new arguments as to why our past decisions and the courts' opinions supporting HCFA's interpretation of section 1903(d)(2) are incorrect, we affirm, once again, that HCFA is entitled to recover the federal share of Medicaid overpayments prior to any actual recovery by the State. /4/ II. Is there a sufficient factual basis for a disallowance here? In its appeal the State made parallel arguments as to why the disallowance should be reversed on factual grounds. First, the State attacked the disallowance letter as inadequate to support a disallowance because it failed to provide detail sufficient to enable the State to respond to the disallowance. The unreasonableness of HCFA's disallowance, the State asserted, was shown by the fact that the stipulation so greatly reduced the amount at issue between the parties. Closely related to that argument, the State emphasized that the disallowance itself lacked factual support. In compiling its disallowance, HCFA, according to the State, merely transferred figures from various State documents and used them as a basis for the disallowance without any independent verification or analysis of the figures. The State maintained that the documents cited by HCFA in its reports were not accounting records, but were management records based on estimates and non-finalized audit reports. The State claimed that HCFA chose to ignore the explicit warnings on some of the documents (e. g., State Exs. 4 and 5) that the documents' conclusions were tentative and likely to(10) be significantly altered as more information became available and the audit resolution process developed. Therefore, the State continued, HCFA's reliance on these documents as a basis for a disallowance cannot stand. HCFA responded by claiming that the disallowance letter contained sufficient information and that there was more than adequate factual basis for HCFA to take a disallowance. As to the sufficiency of the disallowance letter, HCFA argued that on the basis of the disallowance letter and the documents cited therein, the State was able to produce in the discussions that lead to the stipulation detailed lists of individual providers, their respective audit years, and their respective original and adjusted overpayment amounts. HCFA contended that any lack of information for individual providers was directly attributable to the State's failure to comply with HCFA's repeated requests for further documentation before the disallowance was issued. HCFA cited a March 15, 1985 letter from a HCFA official in which the official informed the State that, if no additional records were made available, HCFA would have to proceed on the information before it. (State Ex. 11, p. 2) HCFA also referred to its disallowance letter, which reiterated that the State's failure to furnish further information had forced HCFA to base its disallowance on the only figures ever supplied by the State. As to the reliability of the information contained in those records, HCFA asserted that the figures in those records had been supplied to HCFA by the State only after there had been an initial determination that an overpayment had occurred. HCFA pointed out that the overpayments at issue were made by the State during the period 1970 through 1980 and were identified as overpayments by the State prior to April 1, 1983, and that each overpayment had been the subject of some type of audit report issued to the affected provider. HCFA claimed that under New York State law the audit reports should have become final within 30 days unless the provider objected. Therefore, according to HCFA, the only reason the audit reports continue to be non-final is the State's own failure to respond to a provider's objection by issuing a final report. Because the finality or non-finality of the audit reports is a matter within the State's power and beyond HCFA's control, HCFA concluded that to allow the State to postpone indefinitely, by refraining from issuing a final report, the determination that an overpayment had occurred would undermine the express provisions of section 1903(d)(2) of the Act. Furthermore, HCFA contended that there is no requirement for absolute finality when it comes to recouping overpayments, arguing that the entire Medicaid funding system is based on the use of estimates which are always subject to later revision. Therefore, according to (11) HCFA, the fact that the amount of the overpayments in dispute remains subject to possible revision does not constitute a valid reason for delaying the recovery of the federal share. A. The sufficiency of the disallowance letter. The required contents of a disallowance letter and HCFA's reliance on state records and findings as the sole basis for a disallowance have been previously examined by the Board. In California Department of Social Services, Decision No. 244, December 31, 1981, the Board reversed a disallowance because HCFA's basis for determining the amount of overpayments was insufficiently supported by the record. The Board held:

Where . . . a federal audit merely adopts the figures from State records, assuming that overpayments for federal purposes, and where the State has shown that this assumption may not be warranted, the Respondent must provide more specific evidence and authority to support its allegations.

p. 10.

In California and other decisions, the Board has developed standards for use of state audits or other findings as a basis for disallowance. The Board has determined that HCFA may reasonably rely on state findings provided:

* The Agency provides sufficient detail as to the audits or other sources from which the disallowed amounts are derived; and

* The State is provided the opportunity to show that

-- adjustments have been made to the State findings;

-- the findings are not reliable for some reason;

-- the State has already recovered the amount identified as an overpayment and has already adjusted the federal share; and

-- the State never claimed FFP in the overpayment in the first place.

(12)Ohio Department of Public Welfare, Decision No. 637, April 2, 1985, p. 12.

The Board's analysis depends on various factors such as the nature of the overpayments involved; the nature of the state findings involved; the extent to which HCFA independently determined that the state had claimed unallowable costs; the issues raised by the state; and the evidence the state has provided in support of its positions. In each case, the Board will consider the particular circumstances in determining the adequacy of the record before it. In support of its position that the disallowance letter was inadequate, the State specifically cited California Department of Heath Services, Decision No. 734, March 28, 1986. There the Board stated, at page 11:

In evaluating whether the Agency has provided sufficient detail to enable a state to respond, the Board generally will find that HCFA meets its burden by identifying the names of the providers which allegedly received overpayments, the respective amounts, and the relevant time periods. If HCFA does this, the burden shifts to the State to make the showings listed above. The Board must then analyze the record as a whole to see whether there is a factual and legally supportable basis on which to uphold the disallowance.

If we were to apply this standard literally to the facts of this appeal, we might agree with the State that the disallowance letter was deficient. The disallowance letter did not mention providers by name, respective amounts, or relevant time periods. The disallowance letter did, however, refer to three HCFA regional reports that had been made available to the State. At least one of these reports (State Ex. 3) did explicitly refer to the BOA March 31, 1984 summary, which did list providers by name, with respective amounts and relevant time periods. The other two HCFA reports, cited in the disallowance letter, did not refer to any specific State documents which listed individual providers by name, but it is clear from our reading of the record how HCFA arrived at those figures from State documents. The Board's concern in Decision No. 734 and other decisions was that HCFA had to supply enough information to a state to enable it to respond effectively to the disallowance. Clearly a state would find it extremely difficult, if not impossible, to contest a disallowance that summarily declared, without providing any details, that overpayments( 13)had occurred. In this particular case, we find that the State has been able, quite effectively, to respond to the disallowance. Furthermore, as HCFA pointed out, the State was not so handicapped by the alleged lack of factual detail in the disallowance letter that it was not able to produce extensive lists of providers that provided the basis for the stipulation. We also note that the record shows repeated HCFA requests for information and documentation with which the State failed to comply. We disagree with the State that the stipulation's reduction of the amount in dispute showed that HCFA's taking of the disallowance was incorrect. HCFA has always shown a willingness to reduce a disallowance if a state produces evidence that the initial disallowed amount is no longer accurate (usually because of subsequent state actions such as collecting the overpayments or reversing its initial findings). Here, once the State did produce documentation, HCFA accordingly reduced the disallowance. We thus find that HCFA did act with the best information available to it and did supply the State with enough detail to contest the disallowance. /5/ B. The use of draft audit reports. Having found that HCFA met its primary obligation under the standards set forth in Ohio, supra, we now turn to the State's contention that the findings on which the disallowance was based were not reliable. Essentially, the State claimed that its auditors never definitively established the existence of overpayments, but merely issued draft reports or made tentative conclusions. Our past decisions have concluded that HCFA is entitled to recoup the federal share of an overpayment based on a state determination which is sufficiently final and which has not been modified by the state. Here the State is arguing that it never formally identified overpayments because any findings of overpayments were tentative under New York State law as they were based on non-final audits. The State argued that in its audit process draft audits did not have the status of definitive findings by auditors. HCFA responded that those findings, even at the non-final audit(14) stage, were sufficient identification of the existence of an overpayment for HCFA to recoup its share. /6/ HCFA focused on the fact that the payments in question occurred anywhere from six to sixteen years ago. HCFA cited Missouri Department of Social Services, Decision No. 448, June 30, 1983, arguing that it would be unreasonable to require HCFA to wait indefinitely for a state to refrain from establishing an overpayment until a provider completed the appeals process. Our decisions in this area have recognized the role that auditors and their expertise have in the Medicaid reimbursement system. One of the tools that auditors traditionally employ is the draft audit. It focuses on concerns that auditors have and allows the audited party to address those concerns. The draft report is a preliminary step that does not necessarily reflect the auditors' ultimate conclusions. HCFA's auditors themselves use this approach. In a typical case, a draft report is sent to a state. The state's(15) comments are then examined and evaluated. The auditors then issue a final report, and, on the basis of the final report, only then does HCFA take action. The Board has held that in instances where HCFA relies on state documentation HCFA can recover the federal share only when a state itself could act to recover the overpayment from the provider. Usually that stage has been, as here, when the final audit report is issued. Cf. Pennsylvania Department of Public Welfare, Decision No. 765, July 10, 1986. In Missouri the question was whether an overpayment determination was firmly established when a provider was appealing the overpayment determination through the administrative and judicial appeal systems of Missouri. The Board held there that HCFA did not have to wait to recoup the federal share of the overpayment until completion of the appeals procedure because Missouri itself considered the overpayment sufficiently final to recover the overpayment from the provider and did not have to wait for completion of the appeals process. Here, contrary to HCFA's implication, the State asserted that final audit reports were not issued because all of the draft audit reports were contested, and we have no reason to believe that the State was merely delaying the issuance of final reports. The State explained that under its regulations it cannot recover the overpayment unless a final audit report is issued. If for State recovery purposes, then, an overpayment is not "identified" until completion of the final audit stage, we hold that likewise HCFA should not be allowed to recover the federal share, based solely on the State's determination, until that stage is reached. HCFA was quite understandably concerned about when the final audit reports will be issued, given the length of time since the draft audits were prepared. Part of the delay was probably due to the transfer of functions from DOH to NYSDSS. The stipulation is evidence that NYSDSS is beginning to resolve the backlog of draft audit reports. There is nothing, however, to prevent HCFA from independently reviewing the providers' claims for FFP, particularly for providers which have closed or gone bankrupt, and reaching its own determination as to whether adjustments are called for under section 1903(d)(2) and then issuing a disallowance. Furthermore, HCFA could resolve by regulation the controversy over the use of state audit findings to identify overpayments. On April 5, 1983, HCFA proposed new regulations to require states to establish procedures to identify overpayments to providers and report them to HCFA. 48 Fed. Reg. 14664. The proposed regulations would require states to identify at each stage of the reimbursement(16) process, including the receipt of audit results, tentative overpayments to providers. The states would be required to make an adjustment of FFP within certain time periods, e.g., two years if a tentative finding was appealed. HCFA, however, has so far failed to issue a final regulation or to clarify at what stage state determinations should be used as a basis for adjusting FFP. In these circumstances, we find that the State had adequately shown that under New York State regulations it could not have recovered the overpayments at the draft audit stage. The State has thus shown that the draft audits were not sufficiently reliable to justify HCFA's use of them as the basis for this disallowance. We do accept, however, HCFA's position that HCFA is not precluded from recouping the federal share of an overpayment solely because the provider is appealing the overpayment determination. We concluded that that position was reasonable in Missouri, supra. The State is in no way prejudiced by our rejection of its argument to the contrary. HCFA has always adopted the policy of adjusting a State's FFP if the provider is successful in the appeals process. If the provider proves the original overpayment determination erroneous, any correspondint FFP, previously recouped, will be restored to the State. Conclusion For the reasons cited above, we find that that part of the disallowance attributable to draft audit reports should be reversed. We sustain the disallowance for all the overpayments to providers which have received final audit reports.

##FN001 /1/ This figure was calculated with a FFP rate of 46%. In its disallowance determination, HCFA stated that the correct FFP rate was 50%. Consequently, the amount of disallowed FFP in this category was adjusted to $51,412,500. ##FN002 /2/ Adding the total overpayment figures from the BOA summary ($60,325,213) and from the DOH memorandum ($42,500,000), we arrive at a total of $102,825,213. Using a 50% rate of FFP, HCFA's disallowance figure totals approximately $51,412,500 in this category. ##FN003 /3/ In Massachusetts v. Heckler, 576 F. Supp. 1565 (D. Mass 1984), the Board's decision in Massachusetts Department of Public Welfare, Decision No. 262, February 26, 1982, was reversed on the grounds that HHS had not established that payments to a provider at an interim rate higher than a final rate constituted an overpayment for purposes of section 1903(d)(2). In Massachusetts v. Secretary, 749 F. 2d 89 (1st Cir. 1984), cert. denied, 105 S.Ct. 3478, however, the United States Court of Appeals for the First Circuit reversed the judgment of the District Court and upheld Board Decision No. 262. That court found HCFA's interpretation of section 1903(d) reasonable and based on sound policy considerations. On October 1, 1984, the United States District Court for the Northern District of New York affirmed Board Decision No. 311 in Perales v. Secretary, Case No. 83-CV-900, aff'd sub nom. Perales v. Heckler, 762 F.2d 226 (2d Cir. 1985). On November 4, 1986, the United States Court of Appeals for the Eighth Circuit, in Department of Social Services v. Bowen, Appeal No. 84-2483, reversed a District Court decision and upheld the Board's decision in Missouri Department of Social Services, Decision No. 448, June 30, 1983. ##FN004 /4/ Congress modified the overpayment recovery rules in the Consolidated Omnibus Budget Reconciliation Act of 1985, Pub. L. 99-272. Section 9512 of this act amended section 1903(d)(2) of the Act to provide that in cases where a state is unable to recover an overpayment due to a provider's bankruptcy, HCFA would no longer be able to recoup the federal share. This provision, however, applies to only those overpayments identified for quarters beginning on or after October 1, 1985. ##FN005 /5/ As a practical matter, now that the State has finally supplied HCFA with updated lists of providers and overpayments in dispute, we find that it would essentially be a hollow exercise for the Board, after the extensive briefing that has occurred, to declare the disallowance reversed on the basis of a deficient disallowance letter. If the Board were to so rule, HCFA could immediately reissue the disallowance letter, with the updated lists attached. ##FN006 /6/ The State initially made an argument that HCFA has inconsistently interpreted when an overpayment becomes sufficiently firmly established so as to initiate recovery of the federal share. The State cited a December 26, 1984 letter from a HCFA official which stated that the federal share of an overpayment must be credited to HCFA "after issuance of the final audit report." (State Ex. 11) The State also declared that at a Medicaid conference another HCFA official stated that an overpayment occurs when "the provider has gone through all the appeal systems. . . ." (State Ex. 13) When, in a series of telephone conferences, the Board sought to narrow the issues in dispute between the parties, the State did not repeat this argument. HCFA had explained that the alleged former interpretation applied to only one category of overpayments -- overpayments identified in draft audit reports by NYSDSS -- where HCFA was willing to wait for final audit reports. As to the alleged latter interpretation, HCFA stated that it was an expression of one individual's opinion that the State could not have reasonably relied upon. Inasmuch as the State has not pursued this argument and we are finding that HCFA may not recover the federal share of an overpayment until the issuance of a final audit report -- a position similar to that enunciated in the December 26, 1984 letter, we find no need to rule as to whether HCFA had, in fact, issued contradictory interpretations which would be binding on it.

394

APRIL 25, 1987

00809

GAB Decision

10

November 18, 1986

Oklahoma Department of Human Services; Docket No. 86-100

Ford, Cecilia S.; Settle, Norval J.

Teitz, Alexander G.

(1) The Oklahoma Department of Human Services (State) appealed a determination by the Office of Family Assistance (Agency) disallowing $67,495 in federal financial participation (FFP) claimed by the State under Title IV-A of the Social Security Act (Act) on its Quarterly Statement of Expenditures filed August 2, 1983, for expenditures made in its Aid to Families with Dependent Children (AFDC) program for the period October 1, 1980 through June 30, 1981. The Agency disallowed the costs on the basis that the claim was filed later than the two-year time limit provided in federal statute and regulations. The State maintained that the two-year time limit was not applicable because its claim fell within the statutory exception to that time limit for claims resulting from an audit exception or as an adjustment to prior year costs.

Based on our analysis below, we reverse the disallowance on the ground that the State's claim did result from an audit exception, and is therefore not subject to the two-year claiming deadline. Factual Background The Health Care Financing Administration's (HCFA) Division of Financial Operations performed a review of the Administrative and Training (A&T) expenditures claimed at the 75 percent FFP rate for Skilled Professional Medical Personnel (SPMP) under Title XIX of the Act. /1/ State's Appeal File, Exhibit J. The State conceded that claims included for certain consultant services were erroneously charged at 75 percent. The review also resulted in a determination that the State was not allocating certain administrative expenditures in accordance with the State's Cost Allocation Plan (CAP). (2) The review involved, among other things, an examination of the State's financial records which traced the allocations of the costs of SPMP to the various programs under which they had been claimed. One program was the Early Preventive, Screening, Diagnostic and Treatment (EPSDT) program under Title XIX. As a result of the review of SPMP costs charged to the EPSDT program, HCFA also challenged the allocation of certain administrative costs charged to the Division of Services to Adults and Families (DSAF), a portion of whose costs were passed on to EPSDT. State's Appeal File, Exhibit J. Specifically, HCFA challenged two of the three payroll locations included in the calculation of DSAF administrative costs. Before the review, three payroll locations were being combined to determine the total DSAF costs to be allocated to various public assistance programs, including EPSDT. These were payroll location 62C, which included salaries and benefits for workers within DSAF; payroll location 77G, which is not involved in this appeal; and payroll location 33A, which included salaries and benefits for workers in the Services and Eligibility Unit (SEU). The review interpreted the State's approved CAP in effect beginning March 1982 to permit only payroll location 62C to be included in the DSAF cost pool. See State's Appeal File, Exhibit R. Further, HCFA also challenged the combination of payroll locations 77G and 33A with payroll location 62C from October 1980 through February 1982. /2/ After the State's own review, the State agreed that it was necessary to remove payroll locations 77G and 33A from DSAF and reallocate them in order to comply with HCFA's instructions and the State's approved CAP. In addition to DSAF, the reallocation affected the SEU and Division of Assistance Payments (DAP) cost pools. The adjustment in the amounts properly allocated to these cost pools would in turn affect the share of administrative costs properly charged to specific public assistance programs. (3) Under the State's approved CAP for the period at issue, joint charges, those not solely identifiable and directly chargeable to a single program, were allocated among programs "on the basis of factors reflecting the distribution of work among programs." State's Appeal File, Exhibit Q. Joint charges from DAP and DSAF were apportioned among the relevant assistance programs according to the percentage of county costs charged to each program. However, joint charges from SEU were not apportioned immediately among programs because SEU did not have direct administrative responsibility for any federal/state assistance or services program. Instead, SEU was responsible for establishing policies and procedures affecting the service and financial assistance programs under the supervision of DSAF and DAP. Therefore, SEU's joint charges were divided between and charged to DAP and DSAF on the basis of the ratio of total costs of the respective payrolls of those two divisions, before being passed on to particular programs. Thus, any change to DSAF affected both SEU and DAP. Payroll location 33A, which had been incorrectly charged entirely to DSAF, was removed and charged to SEU. The increased SEU total then had to be reallocated between DSAF and DAP according to the ratio of their respective total payrolls, as required by the CAP. /3/ Removal of payroll locations 33A and 77G from DSAF also altered the payroll ratio between DSAF and DAP, giving DAP a larger share of the divided SEU costs. This increase in the total allocation to DAP increased the total DAP administrative expenditures that were properly charged to the AFDC program. State's Appeal File, Exhibit H. This also increased the total indirect costs charged to AFDC because those costs were calculated on the basis of the ratio that State and local salaries for each program bore to the total State and local salaries in the Department of Human Services. State's Appeal File, Exhibit Q. The State made adjustments to its prior period claims in its expenditure reports for the quarter next following the review. Although no new amounts of FFP were claimed, a redistribution of costs, some up and some down, was necessary among various Social Security Act programs. See State's Appeal file, Exhibit H. (4) On August 2, 1983, the State filed prior period adjustments in the AFDC program for the period October 1, 1980 through June 30, 1981. State's Appeal File, Exhibit B. /4/ The Agency disallowed the State's claim for FFP in the AFDC program based on the State's failure to comply with the timely filing regulations promulgated at 45 CFR 95.7. Statutory and Regulatory Background Section 1132(a) of the Act requires claims by states for expenditures during a calendar quarter under the various public assistance programs to be filed "within the two year period which begins on the first day of the calendar quarter immediately following such calendar quarter," or payment will not be made. It further provides that this requirement is not to be applied "so as to deny payment with respect to any expenditure involving court-ordered retroactive payments or audit exceptions, or adjustments to prior year costs." These statutory provisions are implemented by 45 CFR Part 95, Subpart A (1981). The regulatory provisions on time limits in general track the statutory requirements; the exceptions in the statute are restated in 45 CFR 95.19. (5) The pertinent section for this appeal is 95.4, Definitions. It includes the following:

Adjustment to prior year costs means an adjustment in the amount of a particular cost item that was previously claimed under an interim rate concept and for which it is later determined that the cost is greater or less than that originally claimed.

Audit exception means a proposed adjustment by the responsible Federal agency to any expenditure claimed by a State by virtue of an audit.

Analysis

A. THE REVIEW PERFORMED BY THE DIVISION OF FINANCIAL OPERATIONS WAS AN AUDIT.

The State argued that the statutory time limit does not apply because the adjustments at issue were made as the result of an audit. The State argued that although the review was not officially labeled an "audit," it bore all the relevant characteristics of one. Most importantly, the State contended, the effect on the State was identical to the effect of a formal audit, and, therefore, the State is entitled to make its adjustment regardless of the filing deadline. Further, the State argued that audits are reviews of State agency operations conducted to ensure that funds are being "properly expended," 45 CFR 201.12(a) (2), and to determine "the allowability of costs," 45 CFR 201.12(b). In contrast, the State maintained that program reviews involve examinations of program administration, the emphasis of which is on examination of case records and quality control systems monitoring recipient eligibility. 45 CFR 201.10. The State asserted that the review of SPMP charges had nothing to do with case records or eligibility quality control. See State's Appeal File, Exhibits I and J. Moreover, the State maintained that during the "program review," the Agency reviewed financial and payroll records in order to trace charges made for SPMP at the enhanced 75 percent matching rate. The State asserted that these activities bear a closer resemblance to the regulations' description of an audit than to a program review. Moreover, the State cited previous Board decisions for its position that the review performed here comports with all the characteristics of an audit that the Board has identified in past decisions. See State's brief, p. 14. (6) Finally, the State argued that the fact that the regulations at 45 CFR 201.12 describe only audits performed by the Audit Agency of the Department of Health and Human Services does not preclude the Board from recognizing that de facto audits are performed by other federal offices. The Agency did not address the question whether the review was an audit. In maintaining that the disallowance should be upheld, the Agency made its arguments on the assumption ("arguendo") that the review was an audit. We are persuaded by the State's argument on this issue and find that the review, for all practical purposes, was an audit. Neither the statute nor the regulation providing for the audit exception define the term "audit." However, an audit is commonly understood to involve the formal inspection of accounting or financial records. See definition of "audit" in Black's Law Dictionary, Fifth Edition; Webster's New World Dictionary, Second College Edition, cited in Illinois Department of Public Aid, Decision No. 715, January 6, 1986. In this case, the review examined the same financial and accounting records that would have been inspected during an audit by the HHS audit agency. Moreover, to find that this review was not an audit because it was not conducted by the HHS Audit Agency would ignore the facts of this case and set a standard that is unduly restrictive.

B. THE STATE'S CLAIM WAS AN AUDIT EXCEPTION.

The Agency maintained that the Board should uphold the disallowance because the review did not question the State's cost allocation system but, rather, sought to determine the appropriate FFP rate to match Medicaid costs allocated to a specific function. Therefore, the Agency maintained that the claim at issue does not fall within the "audit exception" of 45 CFR 95.19. The Agency argued that the review had only the effect of causing appellant to remove certain non-qualifying costs from its claim for 75 percent Medicaid FFP and to properly claim them elsewhere within the Medicaid program at the proper 50 percent FFP rate. The reviewers did not look at or in any way concern themselves with the State's claims for FFP under the Title IV-A AFDC program. The Agency argued, therefore, that no audit exception is available for claims under the State's Title IV-A AFDC program. Further, the Agency argued that a federal review of expenditures resulting in an "audit" exception in one federal program does not waive the timely filing requirement for expenditures under a different federal program. Illinois Department of Public Aid, supra. (7) The State argued that, unlike the situation in Illinois, supra, there was a direct cause and effect relationship between the audit exception and the claim. In this case, the State argued it did not choose unilaterally to shift claims from one program category to another after claims under one program category were denied. Moreover, the State reasoned that it could not refuse to remove the challenged payroll costs. If it had not done so, HCFA would have disallowed them. Nor could the State refuse to reallocate the removed costs because that would have put it in violation of its CAP, which in turn would have invited a disallowance of other administrative costs by the Division of Cost Allocation. Although the review was initially instituted to examine expenditures claimed under the enhanced SPMP FFP rate, the audit directly impacted on the AFDC-related costs. In Illinois, supra, we said that the "regulatory language 'any claim resulting from an audit exception' implies a direct cause and effect relationship between the audit exception and the claim." However, this does not stand for the proposition that the costs must always be within the same program to have such a relationship. The specifics of each case must be examined and judged on its own merits. In the present case, we find a direct cause and effect relationship between the audited costs and the costs at issue. When the Agency directed the State to remove two payroll locations from DSAF, it was clearly foreseeable that, if DSAF costs were interrelated with costs of other units, as is the case here, those costs would be reallocated to other units to reflect the ordered change.

C. THE STATE'S CLAIM WAS NOT AN ADJUSTMENT TO PRIOR YEAR COSTS.

Additionally, the State argued that the adjustment at issue here is analogous to the claim at issue in Maryland Department of Human Resources, Decision No. 483, November 30, 1983. /5/ The State maintained that the specific cost items at issue in this case are those administrative costs incurred by the Oklahoma Division of Assistance Payments and properly charged to the AFDC program under the State's approved CAP. The State maintained that it had(8) previously claimed, and been reimbursed, $215,629 in FFP for AFDC-related administrative costs in DAP for the period October 1, 1980 through June 30, 1981. State's Appeal File, Exhibit H. The Agency contended that the claim at issue was not an adjustment to prior year costs. The Agency asserted that an "adjustment to prior year costs means an adjustment in the amount of a particular cost item that was previously claimed under an interim rate concept and for which it is later determined that the cost is greater or less than that originally claimed." Agency brief, p. 6. The Agency argued that the Title IV-A AFDC program does not utilize interim rates; therefore, the exception for adjustment to prior year costs is simply not applicable to the facts of this appeal. Although the State primarily argued that it was entitled to an audit exception, it also argued, in the alternative, that it was entitled to claim the costs at issue as an adjustment to prior year costs. We cannot accept the State's position. The regulation at 45 CFR 95.4 defines an adjustment to prior year costs as an adjustment in the amount of a particular cost item that was previously claimed under an interim rate concept. The costs at issue were not originally claimed based on an interim rate and later adjusted. Therefore, as advanced by the Agency, the adjustment to prior year costs exception does not apply in this case. However, since we find for the State on other grounds, further discussion of this issue is not necessary.

D. THE DECISION IN OKLAHOMA DEPARTMENT OF HUMAN SERVICES, DECISION NO. 484, IS NOT APPLICABLE TO THIS APPEAL.

The Agency maintained that the decision in Oklahoma Department of Human Services, Decision No. 484, November 30, 1983, is directly applicable to this case. The Agency argued that in the former Oklahoma case, as here, the State claimed certain costs in other programs and sought to transfer and reclaim those costs in the Title XX program after two years from the incurrence of the costs. Further, in the present appeal, as in the former, the Agency maintained that the subject costs were eligible to be filed in either program but were transferred between programs after the filing limitation had run. The State argued that the Board's ruling in Oklahoma, Decision No. 484, supra, does not support the disallowance in the present case. The State maintained that Decision No. 484 involved a series of purely voluntary State adjustments in which the State first inadvertently caused a shortfall of valid claims under the Title XX social services program and then attempted to(9) cover that shortfall by submitting entirely new categories of claims transferred from non-Title XX programs. The state argued that the critical difference between the cases is that a State may control the distribution of service costs among programs with overlapping purposes but it has no control over the exact distribution of administrative costs governed by an approved CAP, so long as that particular plan is in effect. Although Decision No. 484 briefly discussed adjustments to prior year costs, the main focus of the decision involved audit exceptions and claims. In Decision No. 484, the State attempted to transfer claims for expenditures from two separate programs to its Title XX program after the filing deadline. Further, in that case, the Board found that no audit had occurred, and that the State had no basis on which to pursue its claim for an exception after the filing deadline. In the present case, as discussed above, we have found that the Agency's review constituted an audit, and, as a result of the audit, the State is entitled to an audit exception for the costs at issue here. Our Decision No. 484 does not preclude the State's claim for an audit exception as an exception to the timely-filing limitation.

E. OTHER AGENCY ARGUMENTS.

Finally, the Agency maintained that "while a state must claim allocated costs according to its approved CAP, the existence of an approved CAP does not: (1) require a state to claim a cost which it may properly allocate under its approved cost allocation plan, or (2) obviate the requirement that the allocated cost be otherwise allowable under program requirements." Agency brief, p. 9. Of course the State was not required to claim the increased AFDC administrative costs resulting from the HCFA review. A state is never under compulsion to claim FFP for costs it has incurred. However, that is no reason why it should not be entitled to FFP in costs it properly elects to claim. So, also, the allocated costs claimed must be "otherwise allowable" under program requirements. The Agency, however, seems somewhat circular in its argument that the allocated costs were not eligible to be claimed in the AFDC program because they were not timely filed in that program. If the costs come under the audit exception to the timely filing requirements, there is no time limit on their filing in any program. (10) Conclusion Based on the foregoing reasons, we reverse the Agency's disallowance of $67,495.

##FN001 /1/ Expenditures qualifying for the SPMP rate receive FFP at 75 percent; administrative costs generally, under both Medicaid and AFDC, are entitled to FFP at only the 50 percent rate. ##FN002 /2/ HCFA did, however, acknowledge that the CAP in effect prior to March 1982 was silent with regard to which payroll locations should be combined to form the DSAF cost pool, and, in fact, payroll location 33A had been removed from the DSAF cost pool beginning in July 1981. State's Appeal File, Taylor Affidavit. For the purposes of this case, we are concerned only with the October 1, 1980 through June 30, 1981 period. ##FN003 /3/ Payroll 77G was removed from DSAF and charged directly to the cost pool for the Teaching Hospital Medical Eligibility Unit. The effect on the cost pool for this unit is not at issue in this appeal. ##FN004 /4/ The State also filed at the same time the following claims based on the reallocation: (1) a prior period net increasing adjustment claim with HCFA for $45,389 ($8,973 in FFP) for the period October 1, 1980 through June 30, 1981, in State administrative costs under Title XIX Medicaid; (2) a claim with the Office of Child Support Enforcement for an increasing adjustment of $1,199 ($899 in FFP) in State administrative expenses for the child support enforcement program during the same period; and (3) a claim with the Children's Bureau of DHHS for a prior period adjustment in State administrative costs for the Title IV Foster Care program. The reallocation of payroll locations for the period October 1, 1980 through June 30, 1981, caused a net increase in those costs of $3,738 ($1,869 in FFP). All of the above claims were paid without a timely filing objection. ##FN005 /5/ The Board found that restrictions in the appropriations act did not bar Maryland's $2,344 claim resulting from clerical errors that caused its initial timely claims for the same expenditures to be either over or understated. The Maryland case did not deal with the claiming restrictions of section 1132, as in this case.

394

APRIL 25, 1987

00808

GAB Decision

06

November 17, 1986

University of North Dakota; Docket No. 86-116

Garrett, Donald F.; Teitz, Alexander G.

Ballard, Judith A.

(1) The University of North Dakota (grantee or appellant) appealed the decision of the Public Health Service (PHS or respondent) to disallow $38,118 in salary and associated fringe benefit costs charged to a PHS grant during the period March 1980 to June 1982. PHS based its decision on grounds that the salary arrangement between the grantee and a National Health Service Corps doctor violated a PHS Grants Policy Statement provision specifying conditions under which salary payments by a grantee to a federal employee are allowable.

We uphold the disallowance because PHS reasonably concluded that the salary arrangement was unacceptable since the duties covered by the grant payments were also within the scope of the doctor's federal employment in the National Health Service Corps. As discussed below, however, we do not here completely adopt other aspects of the PHS position in this case. In particular, we think that PHS incorrectly implied that the grantee and doctor knowingly engaged in improper conduct. This decision is based in the written record, including documents filed in an earlier case (Docket No. 84-208), which the Board remanded to PHS. It is the PHS decision on that remand that is at issue here. Background The costs in question here were charged to a Health Careers Opportunity Program (HCOP) grant awarded to the grantee for its Indians Into Medicine (INMED) Program. The purpose of the INMED Program, as the name implies, was to develop Indian health professionals to provide health services to the Indian people. The facts are complicated because more than one subagency of PHS provided support to the INMED Program. The essentials are: (1) two subagencies of PHS provided grant funds to the program and one also provided a National Health Service Corps (Corps) physician; (2) the physician was not a Corps officer at the time the grantee requested approval of her employment as project director under the HCOP grant; and (3) the grantee did not subsequently inform HCOP officials that the physician had become a Corps doctor or inform Corps officials that the physician would be receiving a salary under the HCOP grant in addition to her Corps salary. When(2) HCOP officials learned of this in 1982, PHS sent a team to investigate the matter. This team found that, while the doctor should have obtained prior approval for the arrangement, there was no fraud involved and no improper dual compensation. Nonetheless, HCOP grant officials later determined to disallow all salary and fringe benefits paid over and above what the doctor was receiving under her Corps assignment. This determination was later upheld by a PHS review committee and appealed to this Board. Although PHS first focused on statutory and regulatory provisions on dual compensation and conflict of interest, PHS later asked the Board to rule on a single question which PHS contended was dispositive of the case: whether the undisputed fact that grantee did not obtain approval from PHS prior to making the salary payments from grant funds established that grantee had failed to comply with a provision in the PHS Grants Policy Statement. That provision reads as follows:

Federal (U.S. Government) employees. --

The following rules apply to payments made from a grant to Federal employees:

* * *

3. Salaries and travel: Allowable when the employee is:

a. Working under a grant to a Federal institution.

b. During nonduty hours, in leave-without-pay status, or on detail to a State or local government, provided (1) reimbursement is in accordance with terms mutually acceptable to the grantee institution and PHS, and (2) all parties concerned are assured that there is no possibility of dual compensation or a resulting conflict of interest. (1976) /1/

In University of North Dakota, Decision No. 707, November 22, 1985, the Board decided the issue posed by PHS. The Board rejected the grantee's argument that PHS had previously approved the salary arrangement. While noting that the bureaucratic structure within PHS was confusing, the Board found that neither subagency had full knowledge of the situation. The Board further ruled, however, that the provision did not, as PHS had alleged, preclude PHS from granting approval retroactively. On remand, PHS considered the matter and issued a second decision. That decision again disallowed the salary payment. (See Respondent's May 30, 1986 decision) (3) PHS determined that item 3b of the applicable Grants Policy Statement provision contains three separate conditions, all of which must be met for the salary payment to be allowable:

1. The employee must be performing the work during nonduty hours, or on leave-without-pay status, or be on detail to a state or local government; and

2. Reimbursement must be in accordance with terms mutually acceptable to the grantee institution and PHS; and

3. All parties concerned must be assured that there is no possibility of dual compensation or a resulting conflict of interest. /2/

PHS concluded that it could not now approve the salary payment because the payment did not meet any of these conditions. PHS noted that failure to meet any one of the conditions was a sufficient basis for the disallowance. The grantee appealed this determination to the Board, but failed to submit its brief in a timely manner. PHS moved to dismiss the appeal. The Board denied this motion. Since grantee had not shown good cause for its delay, however, the Board determined to proceed to decision based on the record previously made in this case, including the grantee's submissions in the earlier proceedings. (See Board's Ruling dated October 16, 1986) There, the grantee presented a number of arguments relevant here about why salary payments should be allowed. Basically, the grantee argued that the Corps doctor performed numerous duties that justified the salary payment, that the salary arrangement did not constitute dual compensation under applicable law, that the PHS investigative report found no knowing improper conduct, and that the doctor's services promoted the goals of the INMED Program, as shown by the success of the program and awards given to the Corps doctor for her outstanding service. Discussion While we do not here adopt PHS' rationale completely, we are constrained ultimately by the terms of the PHS Grants Policy Statement provision, which applies here and which conditions allowability of PHS grant payments to a federal employee on the (4) reimbursement being acceptable to PHS and on PHS being assured that there is no dual compenstion or conflict of interest. This affords PHS with discretion to apply its programmatic expertise, and we will not substitute our judgment for that of PHS so long as the PHS decision is reasonable. Based on our review of the record, we have determined that the conclusion by PHS not to approve the arrangement has a basis sufficient to support PHS' judgment as a reasonable one. One of the key premises of the grantee's arguments concerning the reasonableness of paying the doctor from grant funds is the allegation that she was performing duties in addition to those she was required to perform under her Corps assignment. PHS found that these "additional duties" were within the scope of the assignment. This finding is sufficiently supported by the record. The grantee stated that the doctor's Corps assignment was to be project director for the INMED Program and to provide medical services to patients at various underserved reservations in North Dakota and to INMED students. The grantee further stated that the doctor was assigned by the University to be Instructor of Family Medicine and INMED Director. (Appellant's brief dated April 30, 1985, p. 1) In support of its argument that the doctor performed duties separate and distinct from her Corps assignment, the grantee listed the following as duties that the doctor performed in addition to her Corps assignment: lecturing at University classes, liaison on topics concerning Indian health, University tribal activities, curriculum development for the University to further the goals of Indian students, representation of the University at various meetings, dealing with minority issues and Indian health issues, and services as Minority Student Affairs Officer for the American Association of Medical Colleges. (Id., p. 5) PHS concluded that all of these duties were within the scope of her Corps assignment based on various descriptions of the duties under her assignment. (Respondent's May 30, 1986 decision, pp. 3-4) While PHS provided no analysis in support of this conclusion, we agree with PHS that most of the so-called "additional duties" could fit within her assignment. For example, the objectives of the assignment as stated in the agreement between the doctor, the grantee, and the Corps were described as follows:

The major objective is the management of the overall operation, administration, and program development of the INMED Program, including recruitment and working with staff and students. Secondary objectives are to communicate at the National, regional and local levels on Indian health-related activities. The development of a quality clinical educational program at the undergraduate and graduate levels, with additional attention focused on the service aspects of the program. (Respondent's May 30, 1986 decision, Att.3, p. 1)

(5) This is extremely broad and appears to encompass the duties described by the grantee, such as lecturing in University classes, attending meetings, and developing curriculum. /3/ Other descriptions of the Corps assignment are similarly broad. (See Respondent's May 30, 1986 decision, pp. 3-4) Moreover, the flaw in grantee's argument is that, to the extent the duties may have fit more with her role as an instructor with the University, rather than with her role as project director of INMED, they are not the duties for which she received compensation under the HCOP grant. The grantee's own reports indicate that the payment of grant funds was for 50% (and later 30%) of her salary as project director. (See Respondent's Brief, August 9, 1985, Att.10; see also Appellant's Brief dated April 30, 1985, AFll, p. 2) Her Corps assignment also was to serve as project director, and there is no indication in any of the documents related to the assignment that she was expected to work only as a half-time project director rather than a full-time project director. Thus, we think that PHS reasonably determined that it would not approve the salary arrangement where grant funds would be used to reimburse the doctor for activities covered by her Corps assignment. In reaching our conclusion here, we have considered grantee's argument (which PHS failed to address) that the PHS investigative report found no dual compensation. That report did state that the investigators did not feel that the doctor's activities "constituted improper dual compensation." (Appellant's Brief dated April 30, 1985, AF11, p.4 (emphasis added)) In context, however, we read this finding as indicating no more than the investigators' belief that no fraudulent intent was involved, a finding with which we concur. The investigators expressly viewed their role as determining whether there was any evidence of "impropriety, fraud, (or) any attempt to hide the information that (the doctor) was receiving additional compensation to her salary." (Id.) We also note that the grantee argued that the salary arrangement did not fall within the meaning of "dual compensation" in the statutory provision originally cited by PHS as a basis for the disallowance, 5 U. S.C. 5534. The grantee's arguments on this point were premised on its view that the compensation was for duties separate and distinct from her Corps assignment. As discussed above, the record does not support this view. Moreover, both the grantee and the PHS investigative team viewed the "dual compensation" issue as involving the question of whether the doctor received payments directly from more than one federal source. (6) Even if the payment from the grant funds does not fall within this technical definition of "dual compensation," however, PHS could reasonably determine that the terms of reimbursement were not acceptable to it. While the grantee argued that extra pay was reasonable, considering the low level of pay the doctor received under the Corps commission, the amount her predecessor had received as project director, and the amount of time that she devoted to her duties, PHS reasonably was concerned that the extra pay was simply not a necessary grant cost if she could have been required to perform the duties under her Corps assignment. Moreover, while the Corps salary does seem low for the duties performed, the purpose of the Corps assignment was in part so that the doctor could, in effect, pay back PHS for scholarship support she had received. Thus, it is to be expected that a Corps salary would be lower than a civilian salary. The record does support the grantee's position that the doctor performed her services well and that neither the grantee nor the doctor intentionally engaged in improper conduct. Moreover, there is no evidence that there was in fact any conflict of interest in the situation, and it appears that all of the doctor's activities were consistent with the project goals. We are concerned that the PHS decision on remand did not fully consider the grantee's arguments or the findings of the PHS investigative team regarding these points. In light of the clearly applicable PHS Grants Policy Statement provision, however, the grantee simply could not rely on the extra salary payments being considered allowable charges to grant funds without PHS approval of the arrangement. Since PHS reasonably denied that approval, the grantee is not entitled to the funds and must return them. Conclusion For the reasons stated above, we uphold the PHS decision to disallow $38,118 as a charge to HCOP grant funds.

##FN001 /1/ The grantee did not dispute the applicability of this provision. Moreover, as discussed at page 2 of the Board's decision remanding the initial PHS disallowance, the provision was a term of the grant. (See University of North Dakota, Decision No. 707, November 22, 1986) ##FN002 /2/ PHS specifically noted that item 3a did not apply because grantee was not a federal institution (but rather a state agency). (See Respondent's May 30, 1986 decision, p. 3) Grantee did not dispute this or allege that the payment was allowable under the terms of 3a. ##FN003 /3/ Although the assignment agreement was not signed until a year after her assignment began, there is no allegation or evidence that the agreement did not reflect the duties and objectives from the beginning of the assignment.

394

APRIL 25, 1987

00807

GAB Decision

06

November 17, 1986

New York State Department of Social Services; Docket Nos. 86-117; 86-146

Ford, Cecilia S.; Settle, Norval D.

Teitz, Alexander G.

(1) The New York State Department of Social Services (State) separately appealed two disallowances by the Health Care Financing Administration (HCFA, Agency) of funds claimed under title XIX of the Social Security Act (Act). The amount disallowed in Docket No. 86-117 was $966,947 and in Docket No. 86-146, $85,293. The funds were disallowed on the ground that the claims were not timely filed in accordance with the requirements of section 1132 of the Act. The State appealed only $785,394 of the amount disallowed in Docket No. 86-117, conceding that the remaining $181,553 represented claims which were not timely filed.

We consider the cases jointly here since the State argued in both cases that the disallowance must be reversed based solely on the Agency's failure to follow proper procedures in deferring the claims. At the State's request, the Board agreed to rule on this procedural question first, inasmuch as a ruling in the State's favor would render further consideration of the cases unnecessary. For the reasons discussed below, we conclude that reversal of the disallowances on this basis is not warranted. Accordingly, the parties should proceed to brief the substantive issues in Docket No. 86-117 in accordance with the schedule established elsewhere by the Board. In Docket No. 86-146, the State requested that, if the Board rejected its argument with respect to the deferral procedures, the Board issue a summary decision upholding the disallowance based on New York State Dept. of Social Services, DGAB No. 521 (March 6, 1984). Accordingly, a summary decision will be issued separately. Facts The claim disallowed in Docket No. 86-117 was filed on the State's Quarterly Statement of Expenditures for Medical Assistance for the quarter ending September 30, 1985, dated December 5, 1985. The claim related to periods prior to September 30, 1983. The grant award issued by the Agency for(2) the second quarter of fiscal year 1986, dated February 3, 1986, showed a decreasing adjustment applicable to prior periods in the amount of $966,947, which was explained in a footnote as follows:

$-966,947 represents claims over two years old that are deferred pending review to determine allowability (deferral #NY/85/4/E/09/MAP).

(Docket No. 86-117, State's appeal file, Ex. 1) By letter dated May 30, 1986, the Agency notified the State of its decision to disallow $966,947 on the ground that the claim was not timely filed. The Agency noted:

In accordance with 45 CFR 201.15 this amount was deferred on your grant award for the second quarter of fiscal year 1986, dated February 3, 1986.

The claim disallowed in Docket No. 86-146 was filed on the State's Quarterly Statement of Expenditures for Medical Assistance for the quarter ending December 31, 1985, dated February 31, 1983. The grant award issued by the Agency for the third quarter of fiscal year 1986, dated April 25, 1986, showed a decreasing adjustment in the amount of $85,293 for the quarter ended December 31, 1985, which was explained in a footnote as follows:

$-85,293 represents line 6 claims over two years old that are deferred pending determination of allowability, (deferral #NY/86/1/E/ MAP)

(Docket No. 86-146, State's appeal file, Ex. 1) By letter dated June 20, 1986, the Agency notified the State of its decision to disallow $85,293 on the ground that the claim was not timely filed. The disallowance letter did not mention that this amount had previously been reduced on the grant award dated April 25, 1986. Applicable Regulations The State argued that because the Agency failed to follow proper procedures in deferring the claim, the subsequent disallowance was invalid. The deferral process is established by 45 CFR 201.15, and applies to all the claims for federal financial participation pursuant to, inter alia, title XIX. 45 CFR 201.15(a). Deferral action is defined as "the process of suspending payment with respect to a claim . . . pending the receipt and analysis of further information relating to the allowability of the claim. . ." 45 CFR 201.15(b) (1). (3) The procedures outlined in the regulation provide for the Administrator of HCFA to take a deferral action within 60 days after receipt of the Quarterly Statement of Expenditures, 45 CFR 201.15(c) (1), and to give written notice to the State within 15 days of the action, identifying the claim and reason for deferral. 45 CFR 201.15( c) (2). Within 60 days of receipt of that notice, the State "shall make available to the Regional office, in readily reviewable form, all requested documents and materials. . . . If the State requires additional time to make the documents and material available, it shall upon request be given an additional 60 days." 45 CFR 201.15(c) (3). If the Regional Medicaid Director finds that the documents and materials are not in readily reviewable form or that supplemental information is required, he must notify the State, and the State then has 15 days from the date of notification to complete the action requested. 45 CFR 201.15 (c) (5). The Administrator has "90 days after all documentation is available in readily reviewable form to determine the allowability of the deferred claim." 45 CFR 201.15(c) (6). At that point, he may disallow the claim, allow the claim, or pay the claim subject to a later determination of allowability. 45 CFR 201.15(c) (5) and (6). State's Position The State argued that the Agency's failure to send it a notice of deferral in accordance with section 201.15 rendered the Agency's withholding of the funds illegal. The State asserted that this withholding of funds by the Agency caused financial harm to the State, which must continue to provide medical services for eligible individuals regardless of the availability of federal financial participation. The State also asserted that the Agency's failure to send a notice of deferral deprived the State of an opportunity to document its claims. Although the State acknowledged that it would have, on appeal to the Board, an opportunity to submit documentation in support of its claims, the State asserted that it might have already destroyed certain documentation supporting the claims which it would have retained had it been notified that the Agency found the claims of questionable allowability. Agency's Position The Agency argued that it gave the notice of deferral required by section 201.15 by indicating in the notice of grant award that claims over two years old were being deferred. The Agency argued that this gave the State adequate notice of the ground on which the Agency questioned its claims, and that the State could have proceeded to provide documentation in support of the claims. The Agency also asserted that the State had not in fact shown that the documentation necessary to support its claims was no longer available because of the Agency's(4) failure to defer the claims properly. The Agency also took the position that deferral was not a condition precedent for a valid disallowance, so that any failure to comply with section 201.15 was immaterial. Finally, the Agency argued that reversal of the disallowances was not an appropriate remedy for the failure to comply with section 201.15, since the Agency could not be required to pay untimely claims in violation of section 1132 of the Act. Discussion We agree with the Agency that deferral of the claim in Docket No. 86-146 does not appear to have been required, so that any failure by the Agency to follow the deferral procedures does not affect the validity of the disallowance in that case. There was no reason for the Agency to request any additional documents or material in support of the claim before proceeding to disallowance if, as the State acknowledged, the claim was on its face untimely under the Board's reasoning in DGAB No. 521. Thus, it is immaterial that the Agency for some unexplained reason deferred the claim and, in so doing, may have failed to follow appropriate procedures. We do not agree, however, with the Agency's assertion here that this Board has previously held that deferral is never a condition precedent to a valid disallowance. In New York State Dept. of Social Services, DGAB No. 542 (June 4, 1984), the Agency, took the position, which we did not contradict, that deferral was required only when the Agency could not determine that the claims were clearly allowable or unallowable. Deferral of the claim in Docket No. 86-117 may have been required under this standard; thus, it is not clear that any failure to follow the deferral procedures in that case was immaterial on the basis that deferral was not a necessary step. Even if deferral was required in Docket No. 86-117 and the Agency failed to follow the proper procedures /1,/, we are not persuaded that there was any prejudice to(5) the State as a result. The State has not shown in either case that supporting documentation is no longer available because of the alleged lack of notice of deferral. Moreover, assuming that the State could have established during the deferral process that the claim in Docket No. 86-117 was timely (which it apparently could not have done in Docket No. 86-146), the withholding of funds to which the State was entitled did not significantly harm the State. Under the deferral procedures, the Agency has more than seven months from receipt of the Quarterly Statement of Expenditures before payment of the claim is required (including the time -- without any extensions -- provided in the regulation for the State to make the requested documents and materials available to the Agency). Thus, the State's claim in Docket No. 86-117 would not have been paid before July 1986 had all the steps of the deferral process taken place. The fact that the States is temporarily obliged to finance Medicaid services for a few more months than if it had been able to demonstrate during the deferral process that the claim was allowable does not clearly have any substantial adverse impact on the State. Moreover, since the claim was a retroactive claim for services rendered more than two years earlier, the State most likely paid long ago for the services covered by the claim, so that the few extra months which the State must now wait for payment (assuming the State can demonstrate allowability) are relatively insignificant. Finally, we agree with the Agency that reversal of the disallowances is not appropriate regardless of any prejudice to the State since the effect would be to require the Agency to perform an illegal act -- payment of untimely claims contrary to section 1132 of the Act. /2/ Thus, we conclude that there is no basis here for the reversal of the disallowances. Conclusion For the foregoing reasons, we conclude that, even if the Agency failed to follow the procedures set out in 45 CFR 201.15 when it deferred the claims, the disallowances should not be reversed on this basis. Accordingly, briefing on the substantive issues in Docket No. 86-117 should proceed in accordance with the schedule established in the letter(6) forwarding this decision to the parties. The Board will issue a summary decision separately in Docket No. 86-146 as requested by the State.

##FN001 /1/ We need not decide whether the Agency failed to comply with the deferral procedures. We note, however, that it is not clear that the statement in the notice of grant award was tantamount to a notice of deferral, as the Agency asserted. The description of the deferred claims as "over two years old" fell short of fulfilling the requirement for a reason for deferral since there was no reference to any deadline for filing the claims. In addition, the notice of grant award was not signed by the Administrator (or his designee) as required by section 201.15(c) (2). Thus, there was at least a technical failure to comply with the regulation. ##FN002 /2/ We assume for purposes of this decision that the amount in dispute in Docket No. 86-117 represents untimely claims.

394

APRIL 25, 1987

00806

GAB Decision

10

November 13, 1986

Wayne State University; Docket No. 85-247

Settle, Norval D.; Ford, Cecilia S.

Ballard, Judith A.

(1) Wayne State University (the University) appealed the decision of the Regional Director, Region VII, /1/ upholding a unilateral determination by the Division of Cost Allocation (DCA, the Agency) of indirect cost rates for organized research for fiscal years (FY) 1983 through 1987. The Regional Director's review, conducted pursuant to 45 CFR Part 75, found the University's objection to the rate to be without merit. The unilateral determination was made when negotiations between the parties failed to produce any agreement on indirect cost rates. DCA established predetermined rates of 45% for FY 1983, 1984, and 1985, and 41.27% for FY 1986 and 1987. A predetermined rate is set based on the actual costs of a prior period and is not subject to adjustment. On appeal, the University stated that it was willing to accept the 45% rate for FY 1983 through 1985 since additional funds for indirect costs were no longer available under the grants for those years. /2/ The University contended, however, that a rate of 47% was justified for FY 1986 and 1987. (The University indicated that even if acceptance of all its arguments would result in a rate higher than 47%, no purpose would be served in establishing a higher rate in view of the limited availability of funds.) For the reasons set forth below, we find(2) that a rate of at least 47% for FY 1986 and 1987 was justified, and, accordingly, reverse the Regional Director's decision upholding a rate of 41.27% for those years.

How the Rate Was Established The rate established by DCA for FY 1986 and 1987 was based in part on an incomplete audit of the University's indirect cost proposal for FY 1982. DCA requested the audit based on concerns which it had regarding the proposal, but later requested that the audit be discontinued so that "a proper rate could be expeditiously negotiated and the parties' resources directed towards developing future proposals and improving the university's systems." (Agency Response to Board Questions, dated July 9, 1986, p. 1) The 1982 proposal requested an indirect cost rate of 80.38% (using a modified total direct cost (MTDC) base). When the audit was terminated, the auditors had questioned $3,862,302 of the $9,351,216 in indirect costs allocated to organized research by the University's proposal. The $5,488,914 in indirect costs not questioned at that point resulted in a rate of 47.18% of the reported (but unaudited) MTDC base. (Agency's brief dated April 10, 1986, p. 22) Taking the 47.18% rate recommended by the auditors (audited rate) as a starting point, DCA first added 1.07%. This adjustment represents library costs questioned by the auditors but later accepted by DCA. DCA also added 2.02%, representing one-half of the equipment use allowance questioned by the auditors. DCA then deducted 8%, representing dental fringe benefits and research support costs previously treated as indirect costs; both parties had agreed that these costs should be direct-charged beginning in FY 1986. /3/ (3) Finally, DCA deducted 1% in exchange for its waiver of the submission of indirect cost proposals for FY 1983 through 1985. This resulted in the 41.27% rate challenged by the University. On appeal, the University challenged the propriety of the audited rate on several grounds and also contested some of the adjustments made by DCA to the audited rate in determining the rate for FY 1986 and 1987. The parties agreed to point values for each of the disputed cost items, to be used to increase the 41.27% rate if we found for the University on any item. The disputed items totaled 24.89%, far more than the 5.73% needed to support the 47% rate the University sought. We consider here only six of the small point value items, which involve less complex issues, and conclude that an indirect cost rate of at least 47% was justified for FY 1986 and 1987. /4/ Upward Adjustment in Audited Rate Subsequent to the DCA's unilateral rate determination and the Regional Director's review of that determination, the auditors adjusted the audited rate upward by 1.37% to correct mathematical errors. The Agency acknowledged that this adjustment was correct, but took the position that the indirect cost rates for FY 1983 through 1987 should not be increased by this amount because the upward adjustment might be offset by findings adverse to the University if the incomplete audit were reopened. We find the Agency's position to be untenable. While it is true that if the audit were resumed, there might be adverse findings which would offset the 1.37% upward adjustment, the Agency has already chosen to discontinue the audit and to issue a unilateral rate determination. Since the Agency in(4) making that rate determination relied on the audited rate, the University is entitled to receive the benefit of changes in the audited rate which the Agency accepts as correct. Accordingly, the indirect cost rate for FY 1986 and 1987 should be increased by 1.37% corresponding to the auditors' upward adjustment in the audited rate. Proposal Waiver In exchange for waiving submission of indirect cost proposals for FY 1983 through 1985, the Agency deducted 2% from the indirect cost rate that would otherwise have been established for FY 1986 and 1987. The University contended that there was no authority in the applicable regulations or guidelines for reducing a grantee's indirect cost rate based on a proposal waiver. As noted previously, we need not consider the validity of the rate for FY 1983 through 1985. Even assuming, however, that DCA was authorized to reduce the indirect cost rate for FY 1983 through 1985 based on waiving proposals for those years, reducing the rate by 1% for FY 1986 and 1987 based on the waiver was improper. In the Agency's view, the 1% reduction in the rate for FY 1986 and 1987 was justified for the following reasons. Indirect cost rates are generally established for a set period, (usually the institution's fiscal year), based on actual costs for a prior period. In this case, DCA established rates for FY 1983 through 1987 based on actual costs shown in the University's FY 1982 indirect cost proposal (as audited). The rates were established as "predetermined" rates not subject to adjustment. /5/ The Agency asserted that, ordinarily, predetermined rates for FY 1986 and 1987 would have been established on the basis of proposals for FY 1983, 1984 and/or 1985. The Agency argued that the waiver of the proposals for FY 1983 through 1985 permitted the University to rely entirely on the(5) FY 1982 proposal as the basis for the FY 1986 and 1987 predetermined rate. The Agency did not explain why the FY 1986 and 1987 rate could not have been based on the FY 1982 proposal even if the proposals for FY 1983 through 1985 had not been waived. Thus, denial of a waiver would not necessarily have put the University in a worse position for FY 1986 and 1987. Moreover, we see no relationship between the waiver of these proposals and the rate for FY 1986 and 1987. The use of a predetermined rate made the submission of proposals for FY 1986 and 1987 unnecessary since the rate required no adjustment based on actual costs. However, only the submission of proposals for FY 1983 through 1985 was waived. If DCA had not issued a unilateral determination encompassing FY 1986 and 1987, the University could have still submitted timely indirect cost proposals for those years. /6/ Accordingly, we find that DCA improperly reduced the indirect cost rate for FY 1986 and 1987 by 1% on the basis of proposal waivers. Equipment Use Allowance The auditors questioned the 4.05% equipment use allowance claimed by the University on the ground that the University had not performed a physical inventory of the equipment within the last two years, as required by OMB Circular A-21, J.9.e. /7/ At the time of the audit, the most recent inventory had been performed in 1976. DCA did not include any use allowance in the rate for FY 1983 through 1985 (which is not before the Board here), but added to the audited rate for FY 1986 and 1987 approximately one-half of the equipment use(6) allowance, or 2.02%. The Agency stated that partial recognition of the use allowance was merely a negotiating concession and did not indicate the Agency's agreement that the costs were allowable. The University contended on appeal that it was entitled to the full equipment use allowance for FY 1986 and 1987 since it had completed the required inventory of its equipment in May 1985. The Agency asserted, however, that the 1985 inventory, which it had not reviewed, was not relevant because the rates in question were based on FY 1982 costs and the equipment included in the 1985 inventory might not be the same as the equipment held in FY 1982. The Agency further asserted that even if the equipment was the same, the 1985 inventory could not establish that the equipment was "unsable, used and needed" in FY 1982, in accordance with the Circular provision. We agree with the University that the 1985 inventory satisfied the requirements of OMB Circular A-21 for purposes of determining whether a use allowance was properly included in the FY 1986 and 1987 rate. Section J.9.e. states in pertinent part that:

physical inventories must be taken at least once every two years to ensure that the assets (for which a use allowance is claimed) exist and are usable, used, and needed.

While the use allowance was claimed as part of the University's FY 1982 indirect cost proposal, that proposal was used as the basis of the rate established for FY 1986 and 1987. The inventory performed in May 1985 was performed within two years of the period to which the rate applied, i.e., within two years of the period October 1, 1985 through September 30, 1987. Moreover, the Agency's objection that the 1985 inventory may not have covered equipment which was covered by the use allowance claimed in the FY 1982 proposal ignores the fact that use of a predetermined rate is based on the assumption that there will be no significant change that would affect the indirect costs between the period on which the rate is based and the period to which the rate is applied. If the Agency believed that there would be a significant change in the equipment owned by the University between FY 1982 and FY 1986 and 1987, then it should not have established a predetermined rate. The Agency also objected to reliance on the 1985 inventory on the ground that DCA had not reviewed it. However, the (7) Circular provision quoted above does not require that an inventory be reviewed and approved by the cognizant agency, but merely that one be performed by the grantee. While this would presumably not preclude a determination by the Agency based on review of an inventory that a use allowance was improperly claimed, the Agency did not express any desire during the proceedings before this Board to review the inventory, contending only that such a review would be time-consuming and delay finalization of the indirect cost rate. Finally, we note that the Agency did not challenge the amount of the use allowance in the 1982 proposal, but denied the allowance based solely on the lack of a current inventory. For 1986 and 1987, however, a current inventory existed; therefore, it was unreasonable for the Agency to deny the full allowance for those years. Accordingly, we find that the full equipment use allowance should have been recognized in the FY 1986 and 1987 rate, resulting in an increase in that rate of 2.02%. Detroit Institute of Technology Operations and Maintenance Costs The auditors removed operations and maintenance (O & M) costs attributable to the Detroit Institute of Technology from the O & M cost pool allocated to organized research based on their determination that these costs did not benefit organized research. The University agreed that there was no benefit, but contended that these costs were not in fact included in its FY 1982 indirect cost proposal, so that the costs were removed twice. The Agency agreed that the costs were removed twice, but declined to increase the indirect cost rate for FY 1986 and 1987 by the .72% involved, contending that that amount "was more than offset by the allowance for 1986-1987 of library costs and equipment use . . ." as well as by the 1% restored to the rate after 2% was originally deducted for the proposal waiver. (Agency's brief dated April 10, 1986, p. 48) The Agency's position is based on the assumption that reducing the rate for FY 1986 and 1987 based on the proposal waiver was proper and that the University was not entitled to any equipment use allowance, so that allowance of a portion of such costs by the Agency was purely gratuitous. This assumption is contrary to our findings detailed above. Moreover, we see no basis for the Agency's position that the .72% upward adjustment involved here is offset by the 1.07% representing library costs included in the rate for FY 1986 and 1987. The auditors questioned the entire amount of library costs allocated to organized research in the University's FY 1982 proposal on the ground that the University did not comply with(8) OMB Circular A-21, F.6.b. This provision requires the allocation of library costs among major functions according to usage by students, faculty, and other users. The Agency, however, later recognized the entire amount based on the University's representation subsequent to the audit that it had redetermined the library allocation in accordance with the method required by the Circular (with no change in the amount allocated). The Agency maintained that it did not thereby agree that the library costs were allowable, and asserted that the costs were included in the later years' rate only as a part of negotiations. In our view, since the Agency chose not to verify the University's representation that it had properly reallocated the library costs, the Agency is not justified in now using the lack of verification as a basis for denying the University an unrelated upward adjustment to which it would otherwise clearly be entitled. Accordingly, we conclude that the indirect cost rate for FY 1986 and 1987 should be increased by .72% corresponding to the erroneous second deduction for the Detroit Institute of Technology O & M costs. Internal Billings -- Operations and Maintenance The auditors removed the overhead costs of services rendered by the University's Physical Plant Department from O & M costs allocated to organized research. Since the direct costs of those services were charged to users within the University through the University's internal billings system, the Agency maintained that the associated overhead costs should also be billed in this manner, rather than being separately distributed as indirect costs. The University took the position that, unless the Physical Plant Department constituted a specialized service facility under J.38 of OMB Circular A-21, the overhead costs of the Department need not be included in the direct billings to users. The Agency agreed with the University that the Physical Plant Department was not a specialized service facility. It was unable to cite any other authority for treating these costs as direct costs. Accordingly, we conclude that the indirect cost rate for FY 1986 and 1987 should be increased by .35% to reflect the inclusion of the overhead costs in question in the O & M costs allocated to organized research. Salary Reimbursements from Local Hospitals The auditors determined that the salary received by University deans and department heads for their work at local hospitals was not but should have been included in the distribution base(9) for departmental administrative costs (departmental administration). The auditors concluded that this resulted in an overallocation of departmental administration to organized research. The Agency asserted that since time and effort reports completed by these individuals included the time spent at the hospitals, their work at the hospitals was considered University-related, in which case departmental administration was properly allocated to such work as well as to other University activities. The University took the position that the work performed at the hospitals was not University-related. It stated that the hospitals determined the amount to be paid to the University personnel for their in-hospital work; the hospitals paid the University (rather than the University personnel directly) only so that the personnel and receive benefits accordingly. The University asserted that the fact that the time spent at the hospitals was included in time and effort reports was not significant since OMB Circular A-21, J.6.d. (3), required the individuals to account for 100% of their time on such reports. The University also contended that none of the services provided by departmental administration were required by the University personnel for their work at the hospitals. According to the University, these services included academic supervision, not required since the personnel were themselves deans and department heads; secretarial support, not required since the hospitals provided such support; and space costs for departmental offices and maintenance of such offices, not required since the University personnel also had offices at the hospitals. We agree with the University that its compliance with the time and effort reporting requirement of OMB Circular A-21 is not evidence that the activities were University-related. The Circular requires that an employee account for 100% of the time for which he or she is compensated, without regard to where or how that time is spent. The University admitted, however, that general and administrative costs were allocated to the hospital activities, although departmental administration was not. The Agency argued that this meant that the hospital activities were in fact University-related, because otherwise the allocation of general and administrative costs to these activities would be inappropriate. Even if the hospital activities were University-related, however, this would not be dispositive on the question of whether the services provided by departmental administration were required for these activities. The Agency did not rebut the University's specific assertion, referred to above, that(10) no such services were required here. Accordingly, we find that these activities did not benefit from departmental administration and were therefore properly excluded from the distribution base for allocation of departmental administration. Although the University originally indicated that the indirect cost rate should be increased by 2.44% if the Board ruled in its favor on this issue, the University later agreed with the Agency's assertion that the University had miscalculated this amount and that the appropriate point value was 1.72%. (Transcript of September 9, 1986 conference call, p. 76) Accordingly, we find that the indirect cost rate set by the Agency should be increased by 1.72% on this basis. Conclusion For the foregoing reasons, we reverse the Regional Director's decision upholding DCA's unilateral rate determination establishing a rate of 41.27% for FY 1986 and 1987. Specifically, we find that the 41.27% rate established by DCA could be increased by:

1.37% -- upward adjustment in audited rate

1.00% -- proposal waiver

2.02% -- equipment use allowance

.72% -- Detroit Institute of Technology O & M costs

.35% -- internal billings -- O & M

1.72% -- salary reimbursements from local hospitals,

which would bring the rate to 48.45%. Accordingly, we conclude that the University was entitled to an indirect cost rate of 47% for FY 1986 and 1987.

##FN001 /1/ Although the University is located in Region V, responsibility for this matter was transferred to Region VII in June 1984 because of workload problems in Region V. (Agency's brief dated April 10, 1986, p. 15) ##FN002 /2/ The University stated that its acceptance of the 45% rate was contingent upon the carry forward of any underrecovery of indirect costs in FY 1983 through 1985 in determining the applicable rates for FY 1986 and 1987. However, since we have determined that the 47% rate sought by the University for the latter years is justified on other grounds, we need not consider the University's carry forward argument. ##FN003 /3/ The University did not dispute the 8% deduction for dental fringe benefits and research support costs. The Agency at one point in the proceedings before the Board appeared to be saying that the MTDC base the auditors used to calculate the rate for FY 1986 and 1987 should be revised to include dental fringe benefits and research support costs. (Agency's letter dated October 8, 1986, pp. 3-4) However, the Agency later clarified that it was not contending that a lower rate should have been used as the starting point for calculating the rate or that the point value of any disputed items should be recalculated using a larger MTDC base. (Tape of telephone conference held October 28, 1986) ##FN004 /4/ A major point in dispute concerned the auditors' finding that certain space-related costs (i.e., depreciation use allowance and operations and maintenance costs allocated to organized research on the basis of square footage) were improperly allocated to organized research. This item has a point value of 16.7%, and involves a number of complicated issues regarding the University's space study and time and effort reporting system. In view of our conclusion that the 47% rate sought by the University can be justified on other grounds, we do not address this issue. ##FN005 /5/ Other types of rates that could have been established were (1) a provisional rate, which is later adjusted based on the actual costs for the year to which the rate applies or (2) a fixed with carry forward rate, which remains fixed although a subsequent year's rate is adjusted to reflect the actual costs for the year to which the fixed rate applies. ##FN006 /6/ Proposals are due within six months of the close of the fiscal year. The University asserted that it had not submitted proposals for FY 1983 through 1985 as required because a DCA official in Region V had waived the proposals. The University admitted that it could not document this assertion, and the DCA official denied it. We note, however, that the University asserted that it was justified in delaying its preparation of proposals for FY 1983 through 1985 until DCA completed its review of the FY 1982 proposal. ##FN007 /7/ The provisions of this Circular were made binding on the University by 45 CFR 74.172 (1980).

394

APRIL 25, 1987

00805

GAB Decision

01

November 7, 1986

Ohio Department of Human Services; Docket No. 86-188

Ford, Cecilia S.; Garrett, Donald F.

Ballard, Judith A.

The Ohio Department of Human Services appealed a decision by the Health Care Financing Administration disallowing $4,968,255, in federal financial participation claimed by the State under Title XIX of the Social Security Act for the quarters ended September 30, 1983 and September 30, 1985. The State's claims were for impatient psychiatric services provided by State institutions for mental diseases (IMDs) to Medicaid patients aged 22 to 64 during the months the patients were admitted to the institutions.

The issues are those addressed by the Board in Joint Consideration: IMD Admission/Discharge Issue, Decision No. 436, May 31, 1983; Ohio Department of Public Welfare, Decision No. 486, December 13, 1983; Ohio department of Public Welfare, Decision No. 659, June 18, 1985. The parties agreed that separate proceedings in this case were unnecessary and that the Board should proceed to decision based on the parties' presentations in the previous cases. Accordingly, for the reasons stated in Decision Nos. 436, 486 and 659, which are incorporated here by reference, we uphold this $4,968,255 disallowance, subject to reduction under the conditions stated in Decision No. 436.

394

APRIL 25, 1987

00804

GAB Decision

09

October 31, 1986

Louisiana Department of Health and Human Resources; Docket No. 86-110

Ballard, Judith A.; Settle, Norval D.

Ford Cecilia S.

(1) The Louisiana Department of Health and Human Resources (DHHR, State, Louisiana) appealed a disallowance by the Health Care Financing Administration (HCFA, Agency) of $3,562,830 in federal financial participation (FFP) claimed under Title XIX of the Social Security Act (Medicaid). The claims were for the federal share of the cost of medical care provided to Medicaid recipients during the quarters ended March 31, 1981 through December 31, 1983. /1/

During that period, Louisiana's State plan limited payments under Medicaid for hospital outpatient services to three visits per recipient per year and payments for physician services to 12 visits per recipient per year. The issue here is whether charges billed by DHHR charity hospitals for certain costs associated with physician services provided in hospital outpatient clinics are subject to the three-visit limit or the 12-visit limit. In Louisiana Department of Health and Human Resources, Decision No. 731, March 21, 1986, we determined that such charges were outpatient services costs subject to the three-visit limit and affirmed a disallowance of FFP in charity hospital charges for recipient visits in excess of that limit. The State here acknowledged our prior decision and adopted the factual record made and the arguments presented in that appeal, but asked the Board to address an issue which it contended had not been considered by the Board, and to weigh evidence which the State alleged the Board had overlooked. The issue as framed by the State is "whether the State should be held solely responsible for the Agency's misinterpretation(2) of the State plan amendment limiting outpatient services to three visits per year when the Agency had arbitrarily disapproved the State's original and more narrow amendment which would have limited only emergency room services." The evidence that Louisiana argued we overlooked related to the State's claim that the State consistently treated the costs in question as a component of physician services and thus subject to the limit of 12, not three, visits per recipient per year. Louisiana's August 6, 1986 letter. For the reasons stated below, we conclude that our earlier decision was correct and affirm the disallowance. 1. HCFA's disapproval of the initial proposed State plan amendment is not a basis on which to reverse the disallowance. Title XIX of the Social Security Act (Act) and implementing Medicaid regulations authorize FFP in expenditures for both physician services and outpatient hospital services furnished to Medicaid recipients. A state could provide in its state plan for limits on these services. Prior to 1979, Louisiana imposed a limit of 12 physician services visits and did not limit the number of outpatient hospital services visits. Because of DHHR's concern that Medicaid recipients were avoiding the 12-visit physician services limit by unwarranted use of emergency room services, on January 19, 1979, Louisiana proposed a State plan amendment limiting paid use of emergency room services to three visits per year. This amendment was disapproved by HCFA, on the grounds that Medicaid regulation 42 CFR 440.230(c) (1) prohibited denying or reducing the amount, duration, or scope of a required service because of diagnosis, type of illness, or condition. Shortly after HCFA's rejection of the amendment, the State proposed, and HCFA accepted, an amendment limiting payment to a hospital for three outpatient hospital visits per recipient per year, effective January 1, 1979. In a later amendment, approved by HCFA and effective September 1, 1983, the State set specific limits for four categories of outpatient hospital services. Under the category "Emergency room services" it set a limit of "three emergency room visits per calendar year per recipient." Under the category "Clinic services," it specified that "physician services provided in a clinic in an outpatient hospital setting" were to be "included in the limit(3) of twelve physician visits per year per recipient." /2/ Louisiana Ex. 8, submission of February 8, 1985; see, Decision 731, p. 12, n. 6. The State contended that the approval of the 1983 amendment, which contained virtually identical language limiting emergency room services to three paid visits per recipient per year, established that HCFA's rejection of the initial proposed amendment was arbitrary and erroneous. HCFA argued that its determination on the initial proposed amendment was not properly challenged in this proceeding since under section 1116(a) of the Act a State has 60 days to request reconsideration of the disapproval of a plan amendment with a further right to judicial review of the reconsideration decision. We agree with HCFA (and the State did not dispute) that the Board does not have jurisdiction in this proceeding, under 45 CFR Part 16, to review the disapproval of a proposed State plan amendment. Furthermore, it would be both inappropriate and speculative, since this issue has not been directly addressed on the record here, for us to decide whether the disapproval of the first proposed plan amendment was correct. The State did not avail itself of the opportunity to appeal HCFA's rejection in 1979 and is now precluded from challenging that determination. /3/ A comparison of the 1979 proposal and the 1983 amendment shows that the provision in the 1983 amendment on the emergency room category of outpatient hospital services places the same three-visit limit as in the 1979 proposal. However, the 1983 amendment, unlike the 1979 proposal, limited all outpatient hospital services. As noted previously, the 1983 amendment limited the hospital billing related to physician services provided in hospital clinics to 12 visits per year. It also(4) limited rehabilitation services visits to the number specified in an approved rehabilitation plan, and all other outpatient services visits to the number justified by the medical necessity for the service. The amendment rejected by HCFA in 1979 set a limit only on one kind of outpatient hospital services -- those rendered in an emergency room. /4/ Thus, contrary to the State's allegation, the 1979 proposal and the 1983 amendment are not identical. The State's conclusory inference does not support a finding that HCFA reached the wrong result or that it acted unreasonably when disapproving the first proposal. Furthermore, even if the 1983 amendment were deemed sufficiently identical to make HCFA's approval facially inconsistent with its rejection of the 1979 amendment, this would not provide a basis for reversing the disallowance. Having selected what was obviously a "quick fix" and having amended its State plan to provide for a three visit limit on all outpatient services, Louisiana bound itself to operate its Medicaid program in accordance with that provision. 2. HCFA properly interpreted the 1979 approved amendment to cover the hospital services at issue here. Louisiana argued both that it was not aware that HCFA considered these hospital billings to be for outpatient services and that HCFA misinterpreted the language of the approved 1979 plan amendment to apply to a category of services the State never intended to cover under the three-visit limit since they were in fact already covered by a different limit. /5/ As we explained in Decision No. 731, the disputed billings were covered by the plain language of the 1979 approved amendment because they were for services falling(5) within the regulatory definition of hospital outpatient services. Decision No. 731, pp. 13 and 14. There was no reason for HCFA to know that the State was not aware of the status of these billings under the express terms of the federal regulations. In fact, a DHHR official even testified that the State did not communicate to HCFA that Louisiana was counting hospital-based costs incident to a physician service visit against a 12-visit, not a three-visit, limit. Decision No. 731, p. 12. Moreover, the plan provision setting the 12-visit limit on outpatient physician visits provided only for payments to licensed doctors. There is no provision for payment to a hospital for outpatient physician services. The physician's services were billed for by LSU. Thus, there is no basis here for a finding that HCFA should have informed the State that it considered the approved amendment to encompass the disputed billings or that HCFA misinterpreted the approved plan amendment. 3. The Board's finding in Decision No. 731 on the lack of evidence to support the State's contention that these costs were consistently treated as physician services was not erroneous. The State challenged the Board's finding that the State did not provide any evidence of a contemporaneous, written interpretation or a consistent administrative practice to support its contention that the hospital billings at issue here were not outpatient services costs subject to the three visit limit. The State cited the testimony of a DHHR official and documents in the appeal record for Decision 731 which it alleged the Board had overlooked. Letter of August 6, 1986. The documents are a November 6, 1978 letter from the Director of the State's Medicaid Assistance Program (a part of DHHR) to the State's Medicaid fiscal intermediary, a November 6, 1978 memorandum from the Director of the State's Planning and Policy Formulation Section, a January 19, 1979 memorandum from the fiscal intermediary to the State's charity hospitals, and a September 10, 1979 letter from the fiscal intermediary to the Director of the State's Medical Assistance Program. Louisiana Exs. 10, 11, and 13 to submission of November 7, 1985, and Ex. C to submission of August 23, 1985. The DHHR official testified that the 12-visit limit on physician's services had been in the State plan for several years prior to 1979, possibly as early as 1975, but also indicated that the State did not begin to use a procedure code (90045) to associate the hospital outpatient clinic costs with a physician services visit until 1979. /6/ (6) Tr., pp. 434-436. She also testified that at the time the State proposed the three-visit limit for outpatient services, "it was intended that the facility costs that were associated with the clinic, where the physicians went to see their patients could be counted along (with) the physician visit, along with the facility usage fee at the same time." Tr., pp. 434-435. She cited the January 1979 memorandum in support. We think that the DHHR official may have confused the two 1979 amendments -- the rejected one and the approved one -- in her testimony. /7/ The correspondence which she cited -- the January 19, 1979 memorandum by the fiscal intermediary advising charity hospitals to use code 90045 "in order that you receive payment for the hospital component for the maximum number of physician clinic visits" -- was contemporaneous with the January 31, 1979 submission of the proposed amendment rejected by HCFA in September 1979. The approved amendment was not proposed until December 1979. (Both were proposed effective as of January 1, 1979.) The November 6, 1978 documents are also contemporaneous with the rejected amendment. The letter from the Director of the Medical Assistance Program (not the same DHHR official who testified at the hearing, although at another time the witness held the position of Director) stated that "it is our intent to allow the charity hospitals to bill for outpatient clinics which are really physician group settings. This includes the physical component of twelve physician visits per year in addition to three emergency room visits." The November 6, 1978 memorandum also referred to the three visit limit on emergency room services and stated that "(v)isits of a non-emergency nature will be counted as one of the tweleve (12) physician visits allowed per calender year for outpatient services. Patient visits to outpatient physicians' clinics or offices fall in this category." The September 10, 1979 letter from the fiscal intermediary listed cost savings during August of 1979 from a number of computer edits, including one for a 12-visit payment limit for "Non-emergency outpatient visits." To whatever extent these documents and the DHHR official's testimony reflect the State's intent when it proposed the rejected amendment, the State did not show that it had the same intent almost 12 months later when it proposed an(7) amendment which on its face limited all outpatient services. More importantly, these documents are not evidence of an official State interpretation of the approved amendment which would exclude these hospital billings from the general limit on outpatient services costs. As we discussed in Decision No. 731, there was other evidence in the record that the State treated these costs as outpatient services costs. Decision No. 731, p. 5. Moreover, to the extent the State actually applied a 12-visit limit to the hospital billings, it made no effort to conform the State plan provisions to this practice or to review with HCFA the propriety under federal regulations of equating the hospital costs with the physician services. Also, a June 1980 DHHR interoffice communication reported that services billed as 90045 and other services reimbursed to hospitals on an outpatient basis were not being subjected to any limits and indicated that there was general confusion about how to implement any limits at all for outpatient services. Louisiana Ex. 16 to submission of November 7, 1985. That confusion, or lack of clear direction by DHHR, is also reflected in the annual assessment reports, in 1980, 1981, and 1982, discussed in Decision No. 731 at pages 8-11. These documents show that the State had not put into effect computer edits which would have limited outpatient services other than emergency room services to the three-visit limit. When HCFA was made aware of the State's practice, it promptly sent the State a recommendation that the State should count all services performed in an outpatient setting toward the three-visit limit. Decision No. 731, p. 10. /8/ Prior to this time, the State had repeatedly assured HCFA that all claims showing the place of service as an outpatient hospital were subject to a three-visit limit even though the type of service was not viewed as an outpatient service. Decision No. 731, pp. 9 and 10. (8) The State also argued that the costs at issue here were "the equivalent of the overhead costs incurred and charged by private physicians when they provide care out of their own offices." Louisiana Brief of August 6, 1986, p. 3. The record does not bear out such an analogy, however. The implication the State would have us draw from this argument is that these hospital costs are properly regarded as a component of the physician services cost and that, unless they are covered by the 12-visit limit, the State would be deprived of recovering the same costs that private physician would recover. As we pointed out in Decision No. 731, (1) hospitals use cost-based reimbursement methods whereas a physician is reimbursed on a fee basis, which only in a very general sense would reflect the physician's underlying costs, and (2) the hospital costs here cover hospital employees, hospital facilities, and a range of hospital supportive services. Decision No. 731, p. 6. n. 3 and p. 14. n. 8. Also, the record shows that the combination of the hospital billing and the LSU physician billing resulted in reimbursement "at a considerably higher level than is allowed for services (office visits) in private physicians' offices." Louisiana Ex. 16 to submission of November 7, 1985. Thus, it would be reasonable to cover the physician's fee under one limit and the hospital's costs under a lower limit. As we pointed out in Decision No. 731 at page 14, it was important that the State communicate to HCFA what limits applied to enable HCFA to determine whether federal requirements had been met and to permit HCFA to properly monitor the reasonableness of payment levels for the services in question. Even if the State had shown that it consistently applied the 12-visit physician services limit to the hospital billings, it would not be entitled to FFP where the wording of the approved State plan amendment, using terms defined by the Medicaid regulations, precluded the State's practice. As the drafter of the amendment, the State bears the burden of the risk of ambiguity, lack of clarity, and the absence of proper warning to HCFA as the party which could have "forestalled the controversy." See Arkansas v. United States, U.S. Cl. Ct. No. 150-85C, February 20, 1986, p. 14. In the Arkansas case, the Court upheld a Board decision (No. 357) that a State plan provision requiring a prospective rate determination for services to Medicaid recipients in certain State-owned facilities was binding even though the State presented testimony that all along it intended under its plan to assure full reimbursement of the actual costs to operate these facilities. The Court held that it was not unreasonable for HCFA to require that a state plan set forth clearly the method of cost determination used, even though "at(9) first blush, this might appear to be an elevation of form over substance . . . (the State) drafted the Plan in question and must now live with it." Id. at 16. As in Arkansas, this is a dispute which need not have occurred had the State taken greater care in the preparation and implementation of its State plan. Having failed to do this, the State must bear the consequences. Conclusion For the reasons stated above, we affirm the disallowance.

##FN001 /1/ The State originally appealed a total of $5,473,537 in FFP which HCFA disallowed, but subsequently the State withdrew its appeal of $1,910,707 in FFP, which represented the federal share of the cost of miscellaneous outpatient hospital services. ##FN002 /2/ DHHR contracts with the Louisiana State University School of Medicine (LSU) to have LSU provide physician services to Medicaid recipients in outpatient clinics located in State-owned charity hospitals. LSU bills separately for the physician services to Medicaid patients. A HCFA official testified that many states have similar arrangements. Decision No. 731, pp. 2, 3, and 13. ##FN003 /3/ However, the State insisted in its reply brief that it was not asking the Board to rule on the validity of HCFA's determination since the State's position is that simply the approval of the 1983 amendment established that the rejection of the first 1979 proposed amendment was wrong. As we explain below, we do not agree with the State's position on the effect of the approval of the 1983 amendment. ##FN004 /4/ A DHHR official testified at the hearing that HCFA rejected the proposed amendment in 1979 because "we could not limit the outpatient emergency room visits without limiting the other outpatient hospital services" and indicated that she proposed the amendment with "varying limits in the outpatient hospital services" which was approved in 1983. Transcript of Hearing (Tr.), pp. 436 and 438A. ##FN005 /5/ The State also contended that HCFA's disapproval of the 1979 initial proposed amendment misled the State into adopting the "unnecessarily broad language" of the amendment approved in December 1979. Louisiana Reply Brief of October 1, 1986, p. 3. However, Louisiana did not argue that HCFA had been instrumental in the development of the language it chose for the approved amendment. ##FN006 /6/ We cited this testimony as authority for the State plan provision on physician services visits, as the State acknowledged here. Decision No. 731, p. 2, n. 1. ##FN007 /7/ This same official submitted an affidavit identifying the rejected amendment as the approved version. Decision No. 731, p. 6, n.3. ##FN008 /8/ The State argued here that the fact that HCFA's August 1982 recommendation was given 20 months into the January 1981 -- December 1983 period of this disallowance amounted in effect to a lack of notice for at least part of the disallowance. The State had sufficient notice, however, that FFP was available only in payments made according to the State plan. Where a state makes payments contrary to its own plan, specific notice from HCFA that the payments are unallowable is not a prerequisite for a disallowance. We also note that, during the time period involved in Decision No. 731, the State had this notice for the entire period and yet did not discontinue its erroneous practice.

394

APRIL 25, 1987

00803

GAB Decision

05

November 4, 1986

Washington State Department of Health and Social Services; Docket No. 86-87

Settle, Norval D.; Teitz, Alexander G.

Ballard, Judith A.

(1) The Washington State Department of Health and Social Services (Washington/State) appealed a determination by the Health Care Financing Administration (HCFA/Agency) disallowing $226,807.79 in federal funding claimed by the State under Title XIX (Medicaid) of the Social Security Act (Act) for the quarters ending June 30, September 30 and December 31, 1985. Based on a validation survey, HCFA concluded that the State did not have an effective program of utilization control of long term stay services as required by section 1903(g)(1) of the Act. Specifically, HCFA found that Washington failed to conduct valid annual medical reviews in intermediate care and skilled nursing facilities within the state during those three quarters.

Based on documentation submitted by Washington during the course of this appeal, HCFA reduced the scope of the disallowance so that this decision concerns violations at one skilled nursing facility for the quarter ending September 30, 1985. The amount of federal funding disallowed has been reduced to $20,524.65. See HCFA Letter, October 8, 1986. Washington conceded that the annual review in this one facility was not completed in a timely manner, but argued that no penalty should be assessed as this was a de minimis violation of the annual review requirement. For the reasons discussed below, we uphold this disallowance in the revised amount of $20,524.65. Facts The remaining facility for which HCFA alleged a deficiency is the Ocean View Convalescent Center. HCFA found that Washington had failed to conduct annual medical reviews for two patients at this facility by the close of the quarter ending September 30, 1985. Washington conceded that it had not reviewed one Ocean View(2) patient in a timely fashion. /1/ However, Washington argued that "imposition of a penalty for an entire facility based on . . . the failure to review even one patient is unreasonable. Failure to review a single patient cannot mean the State failed to have an effective program for utilization control." Washington Reply Brief, p. 3, n.1. Washington recognized that the Board has taken a contrary position on this issue, but nevertheless asked the Board to address the issue in its decision. Applicable Law The statutory authority for the Medicaid program is found at Title XIX of the Act. It provides that for each quarter in which a state claims federal funds under Medicaid, that state must make a "showing satisfactory to the Secretary" that it is operating an effective utilization control program for long-stay patients in certain facilities. See section 1903(g)(1). Specifically, section 1903(g)(1) of the Act requires the state agency responsibile for the administration of a state's Medicaid plan to submit a written, quarterly showing demonstrating that it --

has an effective program of medical review of the care of patients in . . . skilled nursing facilities pursuant to paragraphs . . . (31) of section 1902(a) whereby the professional management of each case is reviewed and evaluated at least annually by independent professional review teams. (Emphasis added)

A state's showing for each quarter must be "satisfactory" or FFP paid to the state for expenditures for long-stay services will be decreased according to the formula set out in section 1903(g)(5).(3) Regulations implementing the statutory utilization control requirements are found at 42 CFR Part 456 (1978). In particular, section 456.652 provides that --

(a) . . . (in) order to avoid a reduction in FFP, he Medicaid Agency must make a satisfactory showing to the Administrator, in each quarter, that it has met the following requirements for each recipient:

* * * *

(4) A regular program of reviews, including medical evaluations, and annual on-site reviews of the care of each recipient. . . .

(b) Annual on-site review requirements. (1) An agency meets the quarterly on-site review requirements of paragraph (a)(4) of this section for a quarter if it completes on-site reviews of each recipient in every facility in the State . . . by the end of the quarter in which a review is required under paragraph (b)(2) of this section. /2/

Analysis The Board has recently addressed the issue of de minimis violations of the annual medical review requirement in Delaware Department of Health and Social Services, Decision No. 732, March 21, 1986, and Pennsylvania Department of Public Welfare, Decision No. 746, April 28, 1986. In both Delaware and Pennsylvania, HCFA asserted that the language in section 1903(g)(1) and 42 CFR 456.652(b), which calls for a review of each patient in every facility in the state, clearly demonstrated that HCFA had no discretion to waive the imposition of a penalty for even a single violation of the annual review requirement. Therefore, HCFA contended, a state is required to review every recipient in every facility due for(4) review. Further, HCFA reasoned that since Congress had not written a de minimis exception into the statute, the Agency could not be expected to apply one. Consequently, HCFA concluded, it was obliged to hold that failure to review any patient is tantamount to failure to review the facility. In Delaware and Pennsylvania, the Board concluded that the Agency's interpretation is supportable under the terms of the statute and consistent with the implementing regulations, which the Board is bound to apply. Although section 1903(g)(1) requires a showing that "there is in operation in the State an effective program of control over utilization of" long-stay services, the statute specifies that such a program must include conducting annual medical reviews of the care of each Medicaid patient. See sections 1903(g)(1) and 1902(a)(26) and (31). The statute provides certain limited exceptions to the requirement for the annual review of each patient, but contains no indication that the Secretary has discretion, where those exceptions do not apply, to find that the State has made a valid showing if the State did not review patients who reasonably should have been identified as Medicaid eligibles in the facility. Here, Washington did not even argue that it was not reasonably able to identify and review the omitted patients. The regulation at 42 CFR 456.652(b) states a general requirement for an on-site medical review in every facility for each Medicaid recipient. Here, there is no dispute that a review did not include one or more Medicaid recipients who were in the facility and who ought to have been included in the on-site review. We agree with HCFA's general premise that where such recipients are omitted from the medical review performed at the facility, such a facility is legally on a par with a facility which was entirely unreviewed. See generally Delaware, supra at 6-9; Pennsylvania, supra at 6-9. Washington has presented no arguments which would cause us to reconsider our previous decisions on this issue. Consequently, we uphold this disallowance. (5) Conclusion Based on the analysis above, we uphold the disallowance in the revised amount of $20,524.65.

##FN001 /1/ Throughout these proceedings HCFA has cited two patients at this facility as not having been timely reviewed. See Washington's Notice of Appeal, Enclosure 1, and HCFA's Letter, October 8, 1986. However, Washington made its argument in terms of only one patient and did not discuss the second patient cited by HCFA. See Washington's Reply Brief, p. 3. Washington's documentation, however, has shown untimely review for two patients at Ocean View. See Washington's Notice of Appeal, Enclosure 2, and Washington's Reply Brief, Ex. A. Given our finding herein rejecting Washington's contention that a single violation is an insufficient basis for a disallowance, this inconsistency does not affect our holding. ##FN002 /2/ Section 1903(g)( 4)(B) of the Act (implemented by 42 CFR 456.653) provides two exceptions to the annual review requirements where a state meets certain threshold criteria and can show that it exercised good faith and due diligence in its effort to complete the reviews or that failings of a technical nature prevented timely completion of the reviews. Washington did not argue that either exception applied to these facts.

394

APRIL 25, 1987

00802

GAB Decision

01

November 4, 1986

New Jersey Department of Human Services; Docket No. 86-195

Garrett, Donald F.; Settle, Norval D.

Teitz, Alexander G.

(1) The New Jersey Department of Human Services (State) appealed the disallowance of $55,029 in federal financial participation by the Health Care Financing Administration (HCFA) under Title XIX (Medicaid) of the Social Security Act. The disallowance was based on the State's Quarterly Statement of Expenditures for the quarter ended December 31, 1985. The basis for the disallowance was that the State had not credited the federal government for any part of the "penalty interest" the State received when it recovered overpayments from providers of Medicaid services. HCFA contended that such interest constituted an applicable credit within the meaning of Office of Management and Budget Circular A-87 and that, accordingly, the federal government was entitled to its share of the interest.

The State acknowledged that this identical issue was addressed in Board Docket No. 83-115, decided in New Jersey Department of Human Services, Decision No. 480, November 30, 1983. The State is currently appealing Decision No. 480 in United States District Court, and appealed this case to preserve its rights in the event Decision No. 480 should be reversed. The State therefore requested that the Board issue a summary decision in this appeal. HCFA stated that it had no objection to the issuance of a summary decision. We therefore sustain the disallowance of $55,029, based on Decision No. 480, which we incorporate herein.

394

APRIL 25, 1987

00801

GAB Decision

09

November 3, 1986

Missouri Department of Social Services; Docket No. 86-84

Ford, Cecilia S.; Garrett, Donald F.

Ballard, Judith A.

(1) The Missouri Department of Social Services (State) appealed a determination by the Health Care Financing Administration (HCFA or Agency) disallowing $115,572.73 claimed for intermediate care facility (ICF) services under Title XIX of the Social Security Act (Act) for the quarters ending June 30, 1985 and September 30, 1985. The disallowance was taken pursuant to section 1903(g)(1) of the Act, which provides for the reduction of a state's federal medical assistance percentage of amounts claimed for a calendar quarter unless the state shows that during the quarter it had "an effective program of medical review of the care of patients . . . whereby the professional management of each case is reviewed and evaluated at least annually by independent professional review teams." /1/ Based on a validation survey, the Agency found that the State failed to include in its annual medical reviews two Medicaid patients in one ICF facility for the two quarters in question, and one patient receiving ICF services in a dually certified facility for the quarter ending September 30, 1985.

Our decision below is based on the parties' written submissions. We conclude that none of the three patients was required to be reviewed and, accordingly, we reverse the disallowance. (2) Statutory and regulatory framework Section 1903(g)(1) of the Act requires the state agency responsible for the administration of a state's Medicaid plan to submit a written quarterly showing demonstrating that--

(it) has an effective program of medical review of the care of patients in . . . intermediate care facilities (ICFs) pursuant to paragraphs . . . (31) of section 1902(a) whereby the professional management of each case is reviewed and evaluated at least annually by independent professional review teams. (Emphasis added)

A state's showing for each quarter must be "satisfactory" or FFP paid to the state for expenditures for long-stay services will be decreased according to the formula set out in section 1903(g)(5). Section 1902(a)(31)(B) requires in pertinent part that a state plan provide:

with respect to each . . . intermediate care facility within the State, for periodic on-site inspections of the care being provided to each person receiving medical assistance, by one or more independent professional review teams . . . including with respect to each such person (i) the adequacy of the services available. . . .

Regulations implementing the statutory utilization control requirements are found at 42 CFR Part 456 (1984). In particular, section 456.652 provides that:

(a) . . . (in) order to avoid a reduction in FFP, the Medicaid Agency must make a satisfactory showing to the Administrator, in each quarter, that it has met the following requirements for each recipient:

* * * *

(4) A regular program of reviews, including medical evaluations, and annual on-site reviews of the care of each recipient. . . . (Emphasis added)

As used in the Medicaid regulations, the term "recipient" means an individual "who has been determined eligible for Medicaid," but this definition is qualified by the phrase "unless the context indicates otherwise." 42 CFR 400.203 (1984). In a series of previous decisions, this Board has upheld HCFA's position that, if a state has failed to include in a facility review one or more patients who should have been(3) reviewed, the state's review cannot be considered to meet the statutory and regulatory standard for a medical review and the provisions of section 1903(g) apply as though the state had performed no review at all. See, e.g., Delaware Department of Health and Social Services, Decision No. 732, March 21, 1986. The Board has also upheld HCFA's interpretation that the mere fact that a facility has not yet actually received a Medicaid payment for services rendered to a patient does not mean that that patient is not a "person receiving medical assistance" within the meaning of section 1902(a)(31)(B). West Virginia Department of Human Services, Decision No. 686, August 21, 1985, p. 5. (Missouri disputed this conclusion, but we do not need to reach this issue here since we find for the State on other grounds.) As we discuss more fully below, however, the Board has not adopted the view advanced by HCFA here that a violation must be found if a state did not review every patient who had been determined eligible for Medicaid prior to the review. The Board has upheld HCFA's finding of a violation where a state has failed to review patients who reasonably should have been identified as Medicaid eligibles present in the facility. The Board has not upheld a finding of a violation, even if the review team missed one or more patients who had been determined eligible, if the evidence showed that the state followed a system reasonably designed to ensure that all Medicaid eligibles in the facility would be reviewed in a timely manner. This result is consistent with the statutory purposes, HCFA's guidance on the medical review requirement, and a recognition of the practical difficulties of administering a medical review program. We next discuss the facts of this case and why we find that there was no violation of the medical review requirement here. What the record shows here The Agency assessed a disallowance for two quarters for the Kendallwood Trails ICF on the ground that the State did not include in the review conducted from June 13 through June 18, 1985 patients B.G. and W.D. /2/ These patients had been determined eligible for Medicaid prior to the review and were present in the facility throughout the review. Similarly, the Agency assessed a disallowance for the Hamilton Hillcrest facility for one quarter because the review team failed to review patient P.M. during the review conducted July 15 and(4) 16, 1985. Patient P.M. had been determined eligible prior to the review and was present in the facility throughout the review. During Board proceedings, the State presented affidavits from individuals involved at various stages of the State's eligibility determination, data processing, and medical review processes, each detailing specific information concerning how that aspect of the system worked and what the limitations in its capabilities were. The affidavits were supported by documentary evidence substantiating the statements made in the affidavits about the particular patients at issue here. State's Exhibits (Exs.) A-D. HCFA did not dispute the State's evidence regarding the particular patients or the State's system, but argued that the facts were not distinguishable from previous cases where the Board has upheld disallowances and also contested the State's position that the review teams did not have a readily accessible means of identifying these patients at the time of the reviews. The undisputed facts are as follows. Patient B.G. was determined eligible to receive Medicaid benefits for ICF care on May 23, 1985 and patient W.D. was determined eligible to received Medicaid benefits for ICF care on May 28, 1985. These patients were not reviewed during the June review at Kendallwood Trails because the information used by the review team to determine which patients to review did not identify them. The State's Medical Review Unit conducted the inspections of care using a particular computer report, generated monthly, which indicated Medicaid recipients in each facility who had been entered into the Income Maintenance data base. The review team supplemented this report by using a list of recent eligibility determinations and pending Medicaid applications for facility residents. This list was obtained from the facility at the time the team members began their inspection. For the June 13 through 18, 1985 review at Kendallwood Trails, the review team used the monthly report dated May 25, 1985. The closing date for including new information in the Income Maintenance data base prior to running this monthly report was May 23, 1985. The eligibility information regarding patients B.G. and W.D. was not entered into the data base until June 5, 1985, and June 7, 1985, respectively. As a result, this information did not appear on the May 25, 1985 report used by the review team but on the next report run on June 23, 1985. The delay between the date the patients were determined eligible and the date when this information was included in the data base was due to the fact that the county caseworkers had to complete by hand the forms approving the patients as eligible and transmit the forms by mail to the Division of(5) Data Processing in Jefferson City, Missouri, where the information was entered by data processors into the computer data base. The inspection of Hamilton Hillcrest was conducted July 15 and 16, 1985. Patient P.M. was approved as eligible on June 28, 1985. This information was entered into the data base on July 5, 1985. The closing date for including new information in the data base for the monthly report dated June 23, 1985 used by the review team was June 20, 1985. Consequently, patient P.M. was not included on the monthly report used by the review team. This patient was also not named by the facility as a pending application or a new eligible. At the time the caseworkers determined these patients were eligible, a letter of notification was sent to each patient, to the patient's relative, and to the facility. While the facilities should have therefore had information regarding these patients' eligibility, the facilities failed to include the names of these patients on the lists the review team used to supplement the monthly computer reports. Our evaluation of the State's system As the Board explained in Idaho Department of Health and Welfare, Decision No. 747, April 28, 1986, there is very little Agency guidance to assist a state in knowing how to formulate a list of patients to be included in a medical review. While Agency guidance suggests that a state should obtain a "current" list, that guidance also implies that a state is entitled to reasonable lead time to prepare its list of eligibles and to make other preparations for the review based on that list. In Idaho, the Board concluded that that State could reasonably rely on its computer-generated list under the circumstances there, where nothing indicated that the State's system was not current or was operated inefficiently. The Board stated:

The ultimate purpose of the medical review requirement in this context is to insure that the State reviews all patients that the State could reasonably have determined to be eligible at the time of the review, not to penalize the State for unavoidable delays in inputting patient names in a computer system that was current and efficient.

Idaho, p. 8.

Here, the uncontroverted evidence shows that there was no lack of effort on Missouri's part to keep its system current. The review team used a report which was generated monthly. New information which had to be entered into the data base for (6) that report was "inputted" in a timely manner. As the State has shown, the largest gap of time between when a recipient was determined eligible by the county caseworker and when that information was entered into the data base was about a week. The reason for this delay was that the caseworker had to send the notice by hard copy through the mail to the State's data processing office, where it had to be processed manually by the data processing division and then entered into the computer data base. State's Ex. A. Moreover, the State here did not rely solely on the monthly reports. The review team also sought information from each facility at the beginning of the review. It requested a list of any patients who had recently been determined eligible for Medicaid benefits as well as any patients for whom an application for benefits was pending. The State's evidence shows that even patients with pending Medicaid applications were reviewed when the facility was inspected. While the State was not required by regulation or statute to inspect a patient for whom an application was pending, the State indicated it did so to avoid the possibility of any eligible recipient "slipping through the cracks." State's Brief, p. 13. Under the circumstances here, we think it was reasonable for the State to expect the facilities to give the review team accurate information of those patients who had been recently determined eligible. The State's practice was to send not only a copy of the eligibility letter to each recipient but to the facility as well. Unlike in previous cases before the Board, we do not have a situation where the State was relying solely on the facility's information or on its own out-of-date information. See, e.g., New Hampshire Department of Health and Welfare, Decision No. 756, May 30, 1986; North Carolina Department of Human Resources, Decision No. 728, March 18, 1986; and West Virginia Department of Human Services, Decision No. 686, August 21, 1985. The Agency argued that this case is similar to the circumstances presented in Arkansas Department of Human Services, Decision No. 735, March 28, 1986. We disagree. In that case, Arkansas admitted that it could take up to two months after an eligibility determination for a patient's name to show up on the report used for the reviews. /3/ Moreover, Arkansas failed to give any reason why its system was not updated. Missouri,(7) however, explained why it would not be feasible to generate and distribute its computer report more often than once a month. The report is lengthy, encompassing 300 ICFs as well as other facilities in the State, and the printout had to be sent to the central office of the Medical Review Unit where it was broken down into separate lists by facility; then the lists had to be sent to the appropriate one of the seven regional offices of the Medical Review Unit. State's Exs. B and C. No procedure existed in the State whereby a review team member could access on a computer an updated recipient list. State's Ex. B. The State also effectively rebutted the Agency's suggestions contained in an affidavit made by a HCFA official involved in surveying states' compliance with the medical review requirements. HCFA's Ex. H. She stated that, based on her experience, her opinion was that material was available to the review team other than the computer report. She stated that the review team could contact the county welfare offices before reviewing a facility and request names of any recently approved recipients; that the review team could request copies of the facility's daily census; and that the review team could request the turnaround document (TAD) from the prior and current month. The State's affidavits, made by officials, with working knowledge of the State's program, state the following:

-- that it was too onerous and unmanageable to have the county caseworkers keep a log of newly determined eligibles (State's Ex. H); /4/

-- that the practice in the State was to discourage indicating on the daily census of a facility that a patient was Medicaid eligible, in order to prevent discrimination against such patients by the staff (State's Ex. I); and

-- that neither the prior nor current TAD would be helpful to the review team because they would be available at or around the same time the monthly report currently used by the review team was issued (State's Ex. G).

(8) In response, HCFA submitted another affidavit from the same HCFA official, but emphasized that her previous statements had been "merely suggestions." HCFA response to reply brief, p. 1. The second affidavit does not dispute the facts attested to in the State's affidavits, but expresses the opinion that the State review team could use a facility's daily census as a basis for revieew with the facility administrator or bookkeeper or request information from the person designated by the facility to generate an updated TAD or to inform the facility's biller of newly certified persons. HCFA. Ex. I. This is substantially different from saying that the State itself could have easily obtained the information directly from the census or TAD documents. Moreover, we have no basis for finding here that the State did not ask an appropriate person within the facility for updated information. Indeed, we have no reason to believe that the affiant's suggestions are any different or better than what the State actually did. Consequently, this case is distinguishable from Arkansas where no evidence was presented to show that updated information was not readily accessible to the review teams. The Board has cautioned in previous decisions that, in upholding some of the disallowances, the Board was not implying that the retrospective identification by the Agency of one or more patients omitted from a medical review is necessarily always a proper basis for a finding that a state violated the on-site medical review requirement. See Arkansas, note 8, at p. 9. The requirement is for annual reviews of a patient's care. In recognition of the practical administrative difficulties of tracking individual patients, however, HCFA implemented this requirement through an approach tracking reviews of facilities, making a facility review due by the end of the quarter in which the previous year's review was performed. Thus, not including a patient determined eligible shortly before the facility review means at most that the patient will not be reviewed until the next facility review, which will be about a year after the eligibility determination. The states still must aim to identify all such patients. But, where a state could not have guaranteed identification of such a patient without disproportionate effort and cost, a section 1903(g) disallowance is not warranted. Accordingly, we find the State was not required to review the two patients in the Kendallwood Trails facility and the one patient in the Hamilton Hillcrest facility. /5/ (9) Conclusion Based on our analysis, we reverse the disallowance of $115,572.73 taken for Kendallwood Trails and Hamilton Hillcrest.

##FN001 /1/ Amendments to section 1903(g) as contained in section 2363 of the Deficit Reduction Act (DEFRA) of 1984, enacted July 18, 1984, Pub. L. 98-369, eliminated all utilization control requirements other than the medical review requirement as a basis for reductions in federal financial participation. Although section 2368 of DEFRA revised the medical review requirement, those changes are not relevant to our decision here. ##FN002 /2/ The patients are identified by their initials to protect their privacy. ##FN003 /3/ In that case, the State of Arkansas indicated that the patient's name would not appear on the monthly report used by the review team nor on the subsequent month's report. Here, the State showed that the patients' names would appear on the next report. ##FN004 /4/ A State official who supervised Income Maintenance staff making eligibility determinations stated her opinion that it was not feasible for the 114 county offices plus the City of St. Louis to maintain some sort of manual record solely for the purpose of providing accurate information to review teams about recent Medicaid eligibility determinations for nursing home residents. ##FN005 /5/ Given our findings here, it is unnecessary to address the other arguments advanced by the State.

394

APRIL 25, 1987

00800

GAB Decision

02

October 29, 1986

New York State Department of Social Services; Docket No. 86-181

Ballard, Judith A.; Garrett, Donald F.

Teitz, Alexander G.

(1) The New York State Department of Social Services (State) appealed a decision of the Office of Family Assistance, Family Support Administration (Agency), disallowing $95,238 claimed under Title IV-A of the Social Security Act (Act). *

The Agency relied for the disallowance on section 1132 of the Act, and 45 CFR 95.7, which require that claims for expenditures made after September 30, 1979 be filed within two years after the quarter in which the expenditures were made. The disallowance letter also referred to 45 CFR 95.13, setting the time when an expenditure is considered to have been made both for assistance payments and administration or training. The expenditures claimed by the State were all made after September 30, 1979, and the claims were all filed more than two years after the quarter in which the expenditures were made. The State in its appeal repeated the arguments pertaining to the applicability of the relevant filing requirements and exceptions which it had put forward in Board Docket Nos. 83-170 and 83-180, decided in New York State Department of Social Services, Decision No. 521, March 6, 1984. The State requested the Board to issue a summary decision based upon our holding in Decision No. 521. The State submitted no new argument why Decision No. 521 was wrong. The Agency stated that it had no objection to the issuance of a summary decision. (2) In its acknowledgment of the notice of appeal the Board asked the State to advise the Board whether the holding in Decision No. 521, which involved claims for Title XIX expenditures, would apply equally here, where the expenditures claimed were under Title IV-A. In its letter dated October 15, 1986, the State replied that the holding in Decision No. 521 was equally applicable to Title IV-A claims. The State also stated that there were no material issues of fact or law in this case which distinguish it from Decision No. 521, and repeated its request for a summary decision based upon Decision No. 521. We conclude that the claims here are barred by statutory and regulatory requirements, and we sustain the disallowance of $95,238, based on Decision No 521, which we incorporate herein. See also New York Department of Social Services, Decision No. 795, September 30, 1986.

* This amount was part of a larger disallowance totalling $1,936,982. The State chose not to appeal $1,837,954. The State requested argument on $3,790 of the original disallowance. The appeal of this amount was severed and given a separate Board docket number of 86-184.

394

APRIL 25, 1987

00799

GAB Decision

09

October 22, 1986

Oklahoma Department of Human Services; Docket No. 86-40

Ballard, Judith A.; Teitz, Alexander G.

Garrett, Donald F.

(1) The Oklahoma Department of Human Services (DHS, State) appealed a decision by the Health Care Financing Administration (HCFA, Agency) disallowing $4,446,311 in federal financial participation (FFP) claimed under Title XIX of the Social Security Act (Medicaid) for payments made to the Oklahoma Teaching Hospitals (OTH). The disallowed payments were for inpatient hospital services provided at the Central Oklahoma Juvenile Treatment Center (COJTC) during the period July 1, 1982 through August 31, 1985. According to the Agency, COJTC was ineligible for FFP because it was never properly certified to HCFA as a component of OTH under the requirements of Title XVIII (Medicare).

In light of our review of the arguments and materials presented by the parties, we have concluded that, based on existing regulations and policies, COJTC need not be certified by HCFA as a qualified Medicare provider to be eligible to participate in Medicaid, i.e., state certification is sufficient for Medicaid participation. In addition, we have determined that, even assuming that the Agency has authority to review a State's Medicaid certification, the Agency did not establish that COJTC did not provide inpatient hospital services as a component of OTH. Accordingly, we reverse this disallowance as being unsupported by the record. /1/ (2) Regulatory Background The Medicaid program under Title XIX of the Social Security Act (Act) is administered by the states and partially funded by the federal government. A facility must be inspected by the proper state survey agency in order to qualify for reimbursement for "inpatient hospital services" provided to a patient who is eligible for Medicaid. /2/ In the case of hospitals, the state survey agency must be the agency responsible for licensing such institutions under state law. (3) Section 1902(a)(33)(B) of the Act. Generally, the same survey agency performs the surveys for both Medicare and Medicaid. Section 1902(a)(9)(A) of the Act; 42 CFR 431.610(e). If the facility is found to meet the requisite state and federal standards for its clas of providers, the survey agency certifies this to the single state agency (responsible for administering the Medicaid program), which may then enter into a Medicaid provider agreement with the certified facility without seeking approval from HCFA. In contrast, if a facility is seeking certification for Medicare purposes, the surveying agency's certification is forwarded to HCFA as a recommendation which the Agency must review and approve before the facility can be reimbursed under Medicare. Background The record demonstrates that during 1982 the State changed the population at COJTC from children and adolescents who had been placed into State custody as adjudicated juvenile delinquents to minors who had been adjudicated as "in need of treatment." /3/ State's Exhibit (Ex.) 7, paragraph 13. Concurrent with this change in population, DHS took steps to make COJTC a component of the OTH with a view towards qualifying the facility for Medicaid participation. State's Ex. 12. COJTC's policies, staffing and physical plant were allegedly revamped to comply with OTH practices. State's Ex. 7. In addition, final authority for staffing and making medical program policy decisions for COJTC were all placed in a newly created position at DHS, Director for Institutional Programs. Id. In November 1982 the State survey agency, the Oklahoma Department of Health, inspected COJTC as a component of OTH for compliance with state and federal regulations for hospitals. The Department of Health surveyed COJTC (State's Ex. 27) and provided DHS its certification findings, with a list of deficiencies. State's Ex. 51. On December 30, 1982, COJTC submitted a plan for correction of certain deficiencies. State's Ex. 29. The Department of Health licensed COJTC as a component of OTH from February 15, 1983 through April 30, 1985. State's Exs. 51, 53. On April 28, 1984, the Joint Committee on Accreditation of Hospitals (JCAH) awarded(4) accreditation to COJTC. State's Ex. 30. On April 9, 1985, DHS forwarded to HCFA for the first time a separate certification and transmittal form (HCFA form 1539) for COJTC as a component of OTH. State's Ex. 54. The Disallowance In its January 29, 1986 notice of disallowance, HCFA stated that pursuant to its look-behind authority under section 1902(a)(33)(B) of the Act, it had reviewed COJTC's status as a Medicaid provider and had determined that COJTC was not primarily engaged in providing medical services and, furthermore, was not a component of OTH. In its briefing before the Board, the Agency substantially modified its position. Instead of relying on section 1902(a) (33) (B), the Agency contended that COJTC was required to be certified by HCFA as a Medicare-qualified facility in order to be eligible for reimbursement in the Medicaid program. The Agency also argued that review authority over Medicaid-certified facilities was inherent in the Act, citing Smith v. Heckler, 747 F.2d 83 (10th Cir. 1984). /4/ The Agency maintained that COJTC was a juvenile detention center rather than a component of OTH which provided inpatient hospital services. The State argued in its briefs that a facility that sought only Medicaid certification needed only State certification and that, once the State had certified a hospital as a qualified Medicaid provider, the Agency had no authority to review the State certification. The State also contended that COJTC was providing inpatient hospital services to patients during the relevant time period as a state-certified component of OTH. Medicare Certification as a Prerequisite to Medicaid Participation As an independent basis for the disallowance -- and as one basis for its authority to question COJTC's qualifications as a Medicaid provide -- HCFA maintained that the definition of Medicaid-reimbursable inpatient hospital services at 42 CFR 440.10(a) (3) (iii) requires that a Medicaid provider must actually be certified by HCFA as a Medicare provider. That provision states that the services must be provided at a hospital that "meets the requirements for participation in Medicare." As previously noted, a State's survey and(5) certification of a Medicare provider, unlike that of a Medicaid provider, must be formally apporved by HCFA for the facility to be accepted as an eligible provider. The State admitted that it never sought Medicare certification for COJTC because all patients treated there were under 21 years old and therefore ineligible for Medicare. The State contended that the regulation required only that an institution meet the requirements for participation in Medicare, not that it actually participate in Medicare. The State therefore maintained that when a facility seeks only Medicaid certification, the State, not HCFA, is responsible for determining certifiability. The literal language of the provision under discussion does not support the limitation being urged upon us by the Agency as the correct interpretation. This provision does not on its face require that a hospital be certified as a Medicare provider, only that the facility meet the requirements for participation in Medicare. HCFA did not point to any policy issuance as support for its claim here that this provision mandates that not only must the Medicare conditions for participation be met, but that HCFA approval is required as well. The determination of a facility's qualifications is one that the State survey agency is eminently well-qualified to make, as the regulations require not only that the same agency perform Medicaid surveys as performs Medicare inspections, but that the same agency staff perform both determinations. See 42 CFR 431.610(e)(2). Moreover, for SNFs, which, like hospitals, may participate in Medicare, Medicaid regulations indicate that certification for Medicaid may be made by either HCFA or a state survey agency. 42 CFR 442.200. Finally, in one instance where HCFA approval under the Medicare program is required for Medicaid participation, the Agency has so specified. See 42 CFR 440.40(a) (1) (ii) (B) ("'Skilled nursing facility services for individuals age 21 or older, other than services in an institution for tuberculosis or mental diseases,' means services that are -- . . . Provided by . . . if specified in the State plan, a swing-bed hospital that has an approval from HCFA to furnish nursing facility services in the Medicare program; . . .") (Emphasis added). Consequently, we conclude that the regulations read as a whole do not make reimbursement under Medicaid for a unit of a hospital not providing Medicare services contingent upon HCFA approval under Medicare. The Agency's "Inherent Authority" Contention In addition to its contention that the Agency must approve a hospital under Medicare for it to be reimbursed for inpatient hospital services under Medicaid, the Agency argued that COJTC (6) was improperly certified as a component of OTH, stating: "This disallowance is the exercise of (the Secretary's) . . . duty to determine the eligibility and compliance of institutions to receive federal Medicaid monies." Agency's Response, p. 20. Rather than relying on any specific statutory provision, the Agency contended that its authority to review COJTC's status as a component of a hospital was inherent in the Act, citing Smith v. Heckler. In Smith, the court stated:

The Secretary has a duty to ensure more than paper compliance . . . The "look-behind" provision and its legislative history intended the Secretary to be responsible for assuring that federal Medicaid money is given only to those institutions that actually comply with Medicaid requirements.

Smith, 747 F. 2d at 589, 590. In essence, the Agency contended that it was not only authorized but duty-bound to recover FFP erroneously paid to what it maintained was a state juvenile detention center, not a hospital. Although Smith can be cited for the proposition that the Secretary has a duty to ensure that patients in facilities receiving federal Medicare and Medicaid funds receive proper care, that case involved a plaintiff's claim that this duty compelled the Secretary to promulgate regulations furthering that objective, not a claim that the Secretary was obliged or authorized to review state Medicaid determinations. Moreover, since the look-behind authority discussed in Smith was section 1902(a)(33)(B), which the Agency originally cited but has now evidently abandoned as the basis for this disallowance, this case is not persuasive support for the Agency's claim that there is implicit in the Act a general look-behind authority. We are not obliged, however, to consider whether the statutory scheme requires that the Agency permit FFP even where, as is alleged here, the expenditures were for a non-medical facility, because, as we discuss below, the Agency's contentions concerning the nature of this facility are unsupported in the record. The Agency's Characterization of COJTC Even if the Agency had identified a specific statutory or regulatory basis for its review of COJTC's status, the record before us does not support the Agency's claim that despite COJTC's licensure by the appropriate State agency as a component of OTH, COJTC was really a detention facility for juvenile delinquents during the disallowance period and did not meet applicable federal program requirements to be a component of OTH. The Agency contended that the threshold(7) test for deciding whether this facility is a component of OTH is the requirement that it be located in the same metropolitan area. /5/ According to the Agency, COJTC, located in Tecumseh, Oklahoma, some 50 miles from Oklahoma City, where OTH is located, fails to meet the geographical proximity test. Finally, the Agency argued that COJTC was not a component of OTH because it was not "administratively responsible" to OTH. Agency's Response, p. 17. We first lay to rest the Agency's insistence that COJTC is a juvenile detention facility rather than a treatment center where mentally ill children were provided medical services under the supervision of physicians. As of October 1, 1982, Oklahoma law restricted placement of juveniles at COJTC to those who were adjudged "in need of treatment"; by definition, such a child could not be placed into DHS care unless a court found that the child had a demonstrable mental illness. Oklahoma Stat. Annot., tit. 10 section 1116(A)(5)(b). Although, as the Agency indicated, this definition is included in a section of the Oklahoma statutes that also deals with adjudicating children as juvenile delinquents, that classification is clearly a separate one from "in need of treatment" and, as well, from "abused or neglected child," which is also included in that section. The affidavit of the facility's first director (State's Ex. 7) and a state survey agency report (State's Ex. 31) confirm that by 1983 COJTC was in compliance with the statute; all children who did not meet the definition of "in need of treatment" were removed from the facility. In addition, COJTC's Program Manual shows that a patient was to be examined by a psychiatrist upon arrival who would establish a diagnosis and initial treatment plan for the child on its first day at the facility. State's Ex. 9, Chapter IV. During the succeeding ten days several other health professionals would provide their assessments so that a more thorough treatment plan could be established. COJTC's 1984 accreditation by the JCAH (State's Ex. 30) /6/ and sample(8) medical records from patients (State's Exs. 47, 48) provide further unrefuted support for the conclusion that the facility was treating mentally ill juveniles. As for the Agency's argument that COJTC is not a component of OTH, we conclude that the requirement of geographical proximity is not a threshold test, as claimed by the Agency, but merely one of several considerations cited by the SOM for determining whether a facility was so integrated with another that it should be considered a component of the other facility. /7/ Even if geographical proximity were an absolute requirement, we find this condition to be met. In its briefs, the State pointed out that the metropolitan statistical area of Oklahoma City includes Tecumseh and that the JCAH considers a 100-mile radius as being a reasonable geographic area for accredited multi-facility providers. State's Exs. 44, 45, 46. HCFA did not contest these statements. The Agency also has not seriously contested the extensive documentation provided by the State showing that COJTC's policies and procedures were revised in 1982 to comply with and become subordinate to those of OTH and that COJTC was certified as a component of OTH by the State survey agency. In finding that COJTC was not a component of OTH the Agency failed to define anywhere "administratively responsible," the criterion upon which it relied, nor did it indicate which of the four components listed in the SOM -- common ownership, single Chief Medical Officer, single Chief Executive Officer, and totally integrated medical staff -- this criterion falls under. The Agency did argue that some of the various organizational charts extant during the disallowance period show COJTC as subordinate to the Division of Children and Youth Services (DCYS) rather than OTH. Agency's Ex. N2, N3, and N4. /8/ We find, however, that COJTC was under common "ownership" with OTH, in that both were subject to the control and direction of the same governing body, the Oklahoma Human Services Commission, which was ultimately responsible for the operational decisions of the entire hospital enterprise. COJTC's Chief of Staff of the Institutional Medical Programs reported to the Executive Chief of Staff for OTH (later known as the Medical Director), who reported directly to the(9) governing body and was ultimately responsible for all medical staff activities, including, e.g., approval of applications for staff privileges. In addition, both COJTC and OTH were ultimately responsible to the same Chief Executive Officer, the Director of Human Services. Even if, as the State conceded, management of COJTC administrative matters was shared by DCYS, with OTH exercising medical and professional supervision over the facility, both DCYS and OTH were ultimately responsible to the Director of Human Services. In addition, COJTC was consistently certified by the state survey agency as a component of OTH. /9/ The Agency did not contest any of the materials furnished by the State in support of its claim that during 1982 COJTC was systematically brought under OTH policies and authority. We therefore conclude that the Agency's characterization of COJTC is not supported by the record. Conclusion Based on the foregoing, we conclude that the disallowance cannot be sustained on the basis relied on by the Agency in this proceeding.

##FN001 /1/ The State conceded that a disallowance for the period from July 1, 1982 until State Medicaid certification was completed might be appropriate. Appeal, n.3. The State maintained that COJTC's certification was complete with the submission of an acceptable plan of correction on December 30, 1982. Reply, p. 17. The record is unclear, however, as to when certification was actually completed, since the certification form proffered by the State (State's Ex. 51) indicates on its face that the Life Safety Code inspection results had not been received by the date that the form was signed. Our reversal of the disallowance on the grounds presented by the Agency in this case does not preclude a further disallowance if the Agency determines that FFP was claimed for a period when the State did not have in place a valid provider agreement with COJTC. ##FN002 /2/ "Inpatient hospital services" are defined as services that -- (1) are ordinarily furnished in a hospital for the care and treatment of inpatients; (2) Except in the case of nurse-midwife services, as specified in Sec. 440.165, are furnished under the direction of a physician or dentist; and (3) are furnished in an institution that -- (i) Is maintained primarily for the care and treatment of patients with disorders other than tuberculosis or mental diseases; (ii) Is licensed or formally approved as a hospital by an officially designated authority for State standard-setting; (iii) Except in the case of medical supervision of nurse-midwife services, as specified in Sec. 440.165, meets the requirements for participation in Medicare; and (iv) Has in effect a utilization review plan, applicable to all Medicaid patients, that meets the requirements of Sec. 405.1035 of this chapter, unless a waiver has been granted by the Secretary. 42 CFR 440.10(a). (1985) (effective throughout the period of disallowance). ##FN003 /3/ The Oklahoma statutes defined a "child in need of treatment" as any child who is afflicted with a substantial disorder of the emotional processes, thought, or cognition which grossly impairs judgment, behavior, capacity to recognize reality, or ability to meet the ordinary demands of life appropriate to the age of the child. Okla. Stat. Annot., tit. 10, section 1101. ##FN004 /4/ Since the Agency did not pursue its reliance on section 1902(a) (33) (B) of the Act, we need not discuss the State's contentions concerning the proper construction of that section. ##FN005 /5/ A "component" of a hospital is defined in the HCFA State Operations Manual (SOM) as an additional facility, geographically separated but in the same metropolitan area, united under common ownership, with a single Chief Medical Officer, single Chief Executive Officer and a totally integrated medical staff. SOM section 2024. ##FN006 /6/ The Agency claimed that the JCAH accreditation pertained only to a program at COJTC, not the entire facility. This is not accurate, since the actual certificate of accreditation is not so limited. See State's Ex. 30. Moreover, the State is not claiming that the facility should receive deemed status under section 1865 of the Act. ##FN007 /7/ Although the SOM cautions that a facility may be so distant as to make it impossible to operate as a component of a single hospital, there is not as explicit a requirement of geographical proximity as there is, for example, for a single Chief Medical Officer. ##FN008 /8/ An additional organizational chart cited by the Agency was not pertinent to the disallowance period. ##FN009 /9/ The Agency made much of the fact that one of the state certification forms indicates that the COJTC's beds were not included in the count of Medicare-certified beds. There is no indication, however, that the certifying agency was excluding COJTC's beds from Medicaid certification and, as we held above, Medicare certification was not necessary for COJTC to qualify as a Medicaid provider.

394

APRIL 25, 1987

00798

GAB Decision

12

October 22, 1986

Georgia Department of Medical Assistance; Docket No. 86-81; Audit Control No. 04-50211

Ford, Cecilia S.; Garrett, Donald F.

Ballard, Judith A.

(1) The Georgia Department of Medical Assistance (DMA or State) appealed a decision by the Health Care Financing Administration (HCFA or Agency) to disallow $678,634 in federal financial participation (FFP), claimed under Title XIX (Medicaid) of the Social Security Act (Act). HCFA based the disallowance on an audit of State records identifying amounts of Medicaid payments made for recipients later determined to have been ineligible (recipient overpayments). The auditors found that the State did not pay back the FFP claimed in the original payments until the State collected the amounts from the recipients. HCFA disallowed $604,567 as the federal share of uncollected recipient overpayments made prior to April 1, 1979, and $74,067 as the federal share of uncollected recipient overpayments made from October 1, 1982 through March 31, 1983. (During the intervening period, erroneous payments for ineligible individuals were subject to special disallowance provisions related to the Medicaid quality control system.)

The State argued that section 1903(d)(3) of the Act precluded HCFA from disallowing the federal share of recipient overpayments prior to the State's recovery of the overpayment from the recipient. The State also raised a number of arguments based on the age of some of the identified overpayments, including arguments based on a federal statute of limitations, the equitable doctrine of laches, and general considerations related to the fairness of the disallowance. The State alleged, for example, that because some of its records had been destroyed or were not readily accessible, it would have difficulty in collecting the payments at this late date or in documenting that the amounts were not in fact overpayments or had already been collected. For the reasons stated below, we conclude that HCFA is not precluded from taking the disallowance here based on any of the arguments advanced by the State. Section 1903(d)(3)(2) does not apply to payments for ineligible recipients, and neither the statute of limitations nor laches apply here. The State's other arguments concerning fairness do not provide a basis for reversing the disallowance. HCFA's disallowance was based on State records and the evidence presented by the State is insufficient to show specifically to what extent those records were inaccurate or incomplete so that HCFA could not reasonably rely on them. For the reasons explained at pages 10-11, however, we have determined that the State should have an opportunity to provide evidence for the limited purposes outlined below. Accordingly, we uphold the disallowance, subject to reduction if the State can make the requisite showing. Discussion 1. HCFA is not required to wait until the State recovers overpayments from the recipient. Title XIX of the Act provides for the payment of federal funds to states for aid in financing state medical assistance programs for eligible individuals. Section 1903(d)(2) authorizes the Secretary of the Department of Health and Human Services to pay grant funds to each participating state for the federal share of quarterly expenditures in amounts:

reduced or increased to the extent of any overpayment or underpayment which the Secretary determines was made under this section to such state for any prior quarter and with respect to which adjustment had not already been made under this subsection. . . .

In numerous cases involving overpayments by states to medical assistance providers, such as hospitals or nursing homes, the Board has held that, under this section, the Agency may require adjustment of the grant award for the federal share of improper or excess payments to providers, even if a state has not yet recovered the amounts from providers. See, e.g., Arkansas Department of Human Services, Decision No. 717, January 8, 1986; New York State Department of Social Services, Decision No. 311, June 16, 1982. The State argued that section 1903(d)(2) is limited by section 1903(d)( 3), which states:

The pro rata share to which the United States is equitably entitled . . . of the net amount recovered during any quarter by the State . . . with respect to medical assistance furnished under the State(3) plan shall be considered an overpayment to be adjusted under this subsection.

The State asserted that, under section 1903(d)(3), an amount must have been recovered from the recipient before it is an overpayment for purposes of section 1903(d)(2). In prior decisions, the Board rejected similar arguments that section 1903(d)(3) limits federal recoupment of the federal share of provider overpayments until the state has recovered the funds. Section 1903(d)( 3) applies only to those amounts which would be allowable as "medical assistance furnished under the state plan." The Board concluded that section 1903(d)(3) does not preclude treatment as overpayments of amounts which would be unallowable as "medical assistance," under section 1905(a) of the Act, or are otherwise not in accordance with a state plan. See Arkansas, supra. The Board's analysis has been upheld in two United States Court of Appeals decisions: Massachusetts v. Secretary, 749 F.2d 89 (1st Cir. 1984), cert. denied, 105 S. Ct. 3478 (1985), and Perales v. Heckler, 762 F.2d 226 (2d Cir. 1985). /1/ The State argued that the Board's analysis leaves section 1903(d)(3) without any effect. This is incorrect; section 1903(d)(3) applies when the State properly incurs costs of medical assistance, claims FFP in those costs and, subsequently, recovers some of those costs. For example, the State may receive a payment by a recipient's relative or from an insurance company. Section 1903(d)(3) simply makes it clear that in these situations the Agency can recoup the appropriate federal share by means of an offset to the next grant award. The State attempted to distinguish this case from prior Board decisions on the basis that those cases involved provider overpayments and this case involves recipient(4) overpayments. While the Board has not previously directly considered whether adjustments due to recipient overpayments should be treated differently, the State did not present any justification for doing so. /2/ Indeed, since 1905(a) defines "medical assistance" as payments for eligible individuals, payments for ineligible recipients would fall outside the scope of section 1903(d)( 3) more clearly than some of the provider overpayments which the Board has addressed in prior cases. Although the State alleged that it had no notice that such an interpretation of the statute would apply, 45 CFR 201.5(a)(3) clearly requires states to report on quarterly statements of expenditures not only amounts which have been recovered but also all acknowledged or identified "expenditures not properly subject to federal financial participation." /3/ The State presented no reason why this regulatory requirement would not apply to expenditures acknowledged by the State to be payments for ineligible recipients. In sum, we do not find merit in the State's arguments that the Agency can require adjustment of claims due to recipient overpayments only after the State has recovered the funds. (5) II. The Board will not reverse a part of the disallowance merely because of the age of the alleged overpayments. The State argued that the Agency is precluded from requiring adjustment for the part of the disallowance relating to alleged overpayments made prior to April 1, 1979 because the disallowance was untimely. The State asserted that the statute of limitations set forth at 28 U.S.C. 2415 acts as a bar to the disallowance with respect to overpayments made prior to six years before the Agency requested adjustment (e.g., overpayments made prior to March 19, 1980). The State also advanced the defense of laches, based upon the failure of the federal government to pursue the federal share of the overpayments earlier. Traditionally, statutes of limitations and laches did not apply against the United States because of the historical privileges of the sovereign. See, e.g., S.E.R., Jobs for Progress, Inc. v. United States, 759 F.2d 1, 6-8 (Fed. Cir. 1985). Since 1966, however, the statutory provision at 28 U.S.C. 2415 has placed limitations on certain actions by the United States for money damages. The State alleged that this provision barred the proceeding here because it is an action which was not filed within six years after the right of action accrued. The Board has previously rejected arguments that this statute of limitations is applicable in administrative proceedings. See Community Action Commission of Belmont County, Ohio, Decision No. 565, August 28, 1984. Although the statute does not specify that it applies only to judicial actions, the Board found that the context of the statute, the separate treatment of administrative proceedings within the statute, and the legislative history indicate that the statute refers to actions in federal court. Id., pp. 6-8; S. Rep. No. 1328, 89th Cong., 1st Sess., (1966) reprinted in 1966 U.S. Code Cong. & Ad. News, 2502-2514. /4/ (6) Since the State has not presented any authority for the application of the statute of limitations in an administrative forum, we again conclude that this limitation does not apply in cases before the Board. Similarly, laches is unavailable against the federal government in cases before the Board. Laches is an equitable doctrine under common law which traditionally does not apply to the federal government, and that immunity has not been waived here by statute. United States v. Summerlin, 310 U.S. 414, 416 (1940); Chevron U.S.A. v. United States, 705 F.2d 1487 (9th Cir. 1983). We note that our decision here does not imply agreement with the State that, if applicable, either the statute of limitations at 28 U.S.C. 2415 or the doctrine of laches would bar the action here. The State's view appears to be premised on the notion that HCFA was obliged to act within six years of the time the payments were made for ineligible recipients. Yet, the State was responsible for determining eligibility for Medicaid and for recovering overpayments it identified. While HCFA may adjust the federal share of anoverpayment prior to recovery, HCFA also has discretion to permit the State an opportunity to first recover the overpayment. Even if HCFA could have discovered earlier that the State was not timely adjusting the federal share of overpayments it was unable to collect, there is a question of whether this delay prejudiced the State. As discussed below, the State has not yet established such prejudice. Moreover, any delay by HCFA in requiring the State to adjust the federal share gave the State additional time to recover the amounts from the recipients, as well as use of funds which otherwise would have had to be paid back. III. The State has not shown any other reason why the disallowance was unfair. The State presented several general arguments alleging that it would be unfair to uphold a disallowance at this time for such old overpayments because the State may be unable to(7) respond by recouping money from recipients at this time, because the supporting documentation may be unreliable or unavailable, or because the cost of verifying the accuracy of the disallowance is very high. As we discuss below, we find little merit to the State's arguments regarding its ability to collect from the recipients or regarding the cost to the State to obtain documentation which may be relatively inaccessible. Further, we find that the State's arguments that the disallowance was based on unreliable or unavailable documentation were unsupported by the type of evidence necessary to overcome the audit findings. Nevertheless, we have determined that there are reasons why the State should be given an opportunity to present more specific evidence relating to particular parts of the disallowance. /5/

a. The disallowance does not affect the State's ability to recoup identified overpayments from recipients in a timely manner.

The State alleged it was unfair to impose a disallowance when "the lapse of years makes it unlikely that any of the recipients that HHS asserts were ineligible can be located so that DMA can recoup any overpayments." State's Brief, p. 3. The Agency's right to adjust the federal share of payments to ineligibles is not contingent on the ability of the State to recover the payments from the recipients. Moreover, the State should have been seeking to recoup any recipient overpayments as an ongoing matter, as soon as the overpayments were discovered. In fact, the State did collect some of the overpayments from at least 20 percent of the ineligible recipients; the State must have understood that there was no need to wait for a disallowance from the Agency to recoup. Agency's Brief, p. 4; State's Ex. 4.

(8) b. The State has not shown that the disallowance was based on unreliable or unavailable documentation.

The disallowance was based upon an audit examining central State records and data, as well as information obtained through on-site visits to some county offices, and telephone and mail inquiries to other county offices. The auditors calculated net overpayments to 412 recipients identified by a computerized recipient overpayment data base obtained from the State. The auditors validated from State and county records the reason for the overpayment determination, the amount, and the status of any collection efforts. Audit Report, State's Ex. 5, p. 3. The auditors did not make independent determinations of overpayments, but relied on the State's own determinations that overpayments had been made. Id. The State argued that the Board should reverse the part of the disallowance relating to alleged overpayments made prior to April 1, 1979 because of the unavailability or unreliability of the supporting documentation. The State alleged generally that "records on overpayments refunded to the State are retained for four years only." State's Brief, p. 2. The State also indicated that the disallowance was based on information in the State's automated client tracking system which the State alleged was unreliable because the automated system as revised in 1983 did not reflect closed cases. The State contended that the lack of documentation affected the merits of the disallowance and prejudiced the State by diminishing its ability to respond to the disallowance. The mere existence of a record retention period in the State does not necessarily indicate that documentation retained beyond that period is unreliable or unavailable. Nor is the Agency precluded from requiring documentation beyond that time period, if such documentation exists. Community Health and Counseling Services, Decision No. 557, August 2, 1984. Although the Board has recognized that a state need not keep documentation for claims indefinitely, the Board has consistently found that record retention requirements are not equivalent to limitation periods on challenges to state claims. See California Department of Health Services, Decision No. 666, June 28, 1985. We recognize, however, that when records are destroyed pursuant to an overall records management plan, the State cannot be held to documentation requirements otherwise applicable. We have found that the general requirement to provide documentation to support a claim does not apply when a state can show that the relevant records had been maintained but were, in fact, destroyed, after a reasonable (9) retention period not shorter than the period required by regulation, as part of a regular program of record destruction unrelated to the disallowance. California, pp. 2-3. We specifically stated that the expiration of a record retention period could not enable a state to "retain program funds which were not authorized by statute and which were received solely by virtue of its erroneous claiming practices." Id., pp. 2-3. The State presented no evidence that adequate documentation had actually been maintained, no evidence of any regular program of record destruction, and no evidence that any records in question here were, in fact, destroyed. The affidavit the State cited in support of the statement that relevant records had been destroyed merely indicates that the State record retention schedule allows recipient refund records to be destroyed after four years. State's Ex. 10, p. 2. The affidavit states that the records "had either been destroyed or were not readily accessible." Id., pp. 1-2. /6/ Even if DMA has destroyed some records, the relevant information may be available from the local county offices or other State offices. The auditors sought validation of DMA overpayment records at county offices. If the relevant information is available, then the State would not be harmed even if DMA did destroy some records. The State failed to indicate any specific parts of the disallowance which may have been inaccurate because of unreliable or partial documentation. Although the State alleged that recipient refunds may not have been entered into the automated client tracking system, the State did not provide a single example of a recipient refund which had not been so recorded, or provide evidence that the State had accounted to HCFA for a greater amount of refunds than those recorded on the automated system. Certainly, the automated printout submitted by the State has some recipient refunds entered on it. We think it was reasonable for the Agency to assume, without any evidence to the contrary, that all such records were included. Furthermore, the audit report indicates that the auditors did not rely exclusively upon the automated system, but validated data with county offices. Audit Report, State's Ex. 5, p. 2. (10) The State did not even provide any evidence which would indicate that the State itself did not rely on the documentation and the underlying State overpayment determinations used to calculate the disallowance. See Pennsylvania Department of Public Welfare, Decision No. 765, July 10, 1986, pp. 11-13. The State apparently used these records itself as a basis for seeking recoveries; the State obtained partial recoveries from some of the ineligible recipients. /7/ See State's Ex. 4. Although some of the "sample" documentation submitted by the Agency appears not to be the final action in the case, but merely a report of a suspected overpayment, the State presented no evidence that any alleged overpayments had not been considered to be final determinations. Agency's Supplement to Appeal File, Att. A. /8/ As we discuss below, the fact that some of the records in question are not "readily accessible" does not excuse the State from the burden of establishing how the State records relied on by HCFA are inaccurate or incomplete. Here the State did not contest that it failed to credit the federal government by adjusting claims for FFP received in prior quarters for payments it identified as overpayments for individuals ineligible under the Medicaid program. Had the State been properly adjusting its claims at an earlier stage, it would not now face a difficult task in proving its case. (11) Although we find that the State has not presented sufficient evidence to show that specific records were destroyed or were unreliable, in such a way as to establish that HCFA could not reasonably rely on the existing state records, we have determined that the State should have 30 days from receipt of this decision (or such longer period as the Agency determines to be appropriate) to present evidence to the Agency of specific instances of destroyed or unreliable records, or of refunds already made. The reasons why we have determined that the State should have this opportunity are as follows: * The State based its presentation here primarily on the broad legal issues on which it hoped to prevail, and encountered difficulties in making its factual presentation in part because of the need for one State agency (DMA), to obtain information from another State agency (the Department of Human Resources). * Issues concerning the effect of prior Board decisions on record retention were not developed until late in the proceedings. * The State's presentation raises some questions about whether all of its overpayment determinations were sufficiently final and whether the State may have already adjusted the federal share of some amounts included in the disallowance. HCFA has generally been willing in overpayment cases to examine state documentation in these areas. Any evidence the State presents, however, should not be the generalized evidence the State has already presented, but should relate to specific parts of the disallowance. If the State can identify particular records which have been destroyed and not entered in the automated client system, or overpayments which had not been finally determined or had already been credited to the federal government, then we agree that the disallowance should be reduced to the extent that this shows that the State records used by HCFA were inaccurate or incomplete. We note, however, that the destruction of records is not a sufficient defense if the records were destroyed after the State had notice of the audit inquiry, or if the information that was on those records is available from other sources.

c. The high cost to the State of verifying the accuracy of the disallowance is not a ground for reversal.

The State alleged that it was shouldering an unfair burden in being required to use "the limited resources of the Georgia Department of Human Resources" to verify findings on(12) overpayments going back to 1968, at the same time as those resources were needed to keep current error rates at a level low enough to avoid further disallowances. State's Initial Reply Brief, pp. 2-3. The State alleged that because the documentation was not readily accessible and because the research required labor-intensive reviews of the documentation, verification would be difficult if not impossible. Under the Medicaid program, the State bears the burden of documenting its claim for FFP. See California, supra. The State is responsible to keep accurate records, and to file claims consistent with those records. Had the State been properly adjusting its claims in a timely fashion, the State would not have to review its earlier records. Had the State kept those records in a careful manner, and updated the status of all cases as it should, it would not have to examine each case to defend against this disallowance. The State's staffing or administrative difficulties in managing the quality control program are not a basis for reversing the disallowance. If the State has chosen to use all its resources for current program needs and not to devote any resources to defending against this disallowance, the State must accept the consequences of that management judgment. Conclusion We uphold the disallowance of $678,634, subject to reduction if the State chooses to present evidence to the Agency consistent with this decision (see pp. 10-11 above). If the parties cannot agree on the extent, if any, to which the disallowance should be reduced, the State may return to the Board for a further determination.

##FN001 /1/ See also Florida v. Heckler, Civ. No. 82-0935 (N.D. Fla. 1984). The Eighth Circuit is currently considering the issue in an appeal of Missouri Department of Social Services v. Heckler, No. 84-4106-CV-C-5 (W.D. Mo. Sept. 27, 1984). The district court in Missouri reversed a Board decision, but based its holding on the Massachusetts district court opinion at 576 F. Supp. 1565 (D. Mass 1984), which was reversed on appeal in Massachusetts v. Secretary, supra. In any event, the rationale used by the district court would not apply to payments for ineligible recipients. ##FN002 /2/ In one of the State's initial responses to the audit findings, the State suggested that some of the recipient overpayments may have been uncollectible, and that federal participation in such losses would be consistent with the federal-state partnership concept implicit in the Medicaid program. The State did not point to any provision in the applicable statute or regulations which would indicate that the federal government agreed to fund such recipient overpayments as part of the Medicaid program. We incorporate here the discussion of this argument contained in Arkansas, supra., pp. 15-16 and New York, supra., p. 7. We note that the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), Pub. L. 99-272, contains a provision which would permit states to retain FFP for overpayments to bankrupt providers or which are otherwise uncollectible. This provision is effective, however, only for overpayments identified for quarters after October 1, 1985. ##FN003 /3/ This regulation, published in 1970, was a codification of provisions which previously appeared in the Handbook of Public Assistance Administration. 35 Fed. Reg. 12180 (July 29, 1970). ##FN004 /4/ The State argued that the applicable provision is in 28 U.S.C. 2415(b). We note that 28 U.S.C. 2415(a) may be more apposite. See Community Action Commission. We do not find it necessary to determine which provision is pertinent, since we conclude that neither applies. We note that section 2415 contains an exception where "otherwise provided by Congress," which might be a further basis for determining that section 2415 does not apply here. Section 1903(d)(2) of the Act provides for adjustments of the federal share of an overpayment "for any prior quarter." In addition, Congress has now imposed limits on the time period for states to submit claims for prior quarters (i.e., proposed adjustments for underpayments to the states), but did not indicate any corresponding time limit for adjustments for overpayments made to the states. See section 1132 of the Act. ##FN005 /5/ The disallowance was based on State or local records identifying amounts as overpayments for ineligible recipients and the auditors' general finding that the State was not crediting the federal share of these overpayments prior to recovering from the recipients. The Board has previously held that when HCFA is relying on a determination made by a state, that must be given an adequate opportunity to show that that reliance is not reasonable. See, e.g., Ohio Department of Public Welfare, Decision No. 637, April 2, 1985, p. 11-14. Our analysis below takes into account the fact that HCFA was relying here on State determinations. ##FN006 /6/ In California, the Board found an added reason to reverse the disallowance because the Agency had been aware of problems with the claiming practices and had not given any notice that the records might be questioned. ##FN007 /7/ We note that the State alleged, in a letter responding to the audit, that one of the difficulties was in verifying whether recipients had met "spenddown" requirements by using sufficient funds for medical expenses to become eligible for Medicaid. The State should have considered these requirements in making the initial determinations regarding overpayment amounts. Since the State presented no evidence to suggest that these State determinations were incorrect, we have no reason to think that documentation relating to "spenddown" amounts would make a difference here. ##FN008 /8/ The State alleged that the determinations were not final because the recipients had not been afforded any administrative appeal procedures. State's Ex. 6. However, it is clear that the State used at least some of the determinations as the basis for collection and considered them final. Whether the State offered appeal rights to recipients could affect the State's right to enforce collection, but does not affect the validity of the determination.

394

APRIL 25, 1987

00797

GAB Decision

01

October 21, 1986

New York State Department of Social Services; Docket No1 86-185

Garrett, Donald F.; Settle, Norval D.

Ballard, Judith A.

The New York State Department of Social Services (State) appealed a decision by the Social Security Administration (Agency) disallowing $1,079,174 in federal financial participation claimed by the State under section 403(a) of the Social Security Act (Act) for the calendar quarter ending March 31, 1986. The Agency found that the costs at issue were provided in connection with "social services" as defined at section 2002(a)(1) of the Act. The Agency based the disallowance on section 403(a)(3) of the Act, which prohibits federal reimbursement under Title IV-A for costs associated with the provision of such social services.

New York asserted that the disallowed costs were properly charged to Title IV-A based on an approved cost allocation plan. New York also maintained that these claims were allowable under statutory exceptions in section 403(a)(3)(C). Finally, New York argued that at least part of these claims were attributable to income maintenance functions and therefore were allowable under section 403(a)(3). The State acknowledged that these identical issues were addressed and decided in New York State Department of Social Services, Decision No. 759, June 13, 1986 (although, as the Agency pointed out, the State did not accurately describe the holding in that case). The State requested that the Board issue a summary decision consistent with the findings and determinations we made in Decision No. 759. The Agency did not object to this course of action. We therefore sustain the disallowance of $1,079,174, based on Decision No. 759, which we incorporate by reference here.

394

APRIL 25, 1987

00796

GAB Decision

07

October 6, 1986

Massachusetts Department of Public Welfare; Docket No. 86-88

Ballard, Judith A.; Teitz, Alexander G.

Ford, Cecilia S.

(1) The Massachusetts Department of Public Welfare (State) appealed a disallowance by the Health Care Financing Administration (HCFA) of $1,040,744 in federal financial participation (FFP) claimed under Title XIX (Medicaid) of the Social Security Act (Act). HCFA disallowed State claims filed on August 27, 1985 for the costs of services in State-owned intermediate care facilities for the mentally retarded (ICFs/MR) for the quarters ending September 30 and December 31, 1982. HCFA determined that the State had failed to comply with the requirements for timely claims submission.

The issue presented is whether the disallowed claims were either adjustments to prior year costs or resulted from an audit exception and thus were excepted from the two-year filing limitation in 45 CFR 95.7. For the reasons discussed below, we find that these claims were not within the exceptions. Accordingly, we sustain the disallowance. Applicable regulations Section 95.7 of 45 CFR implements section 1132 of the Act and provides that: /1/

. . . we will pay a State for a State agency expenditure made after September 30, 1979, only if the State files a claim with us for that expenditure within 2 years after the calendar quarter in which the State agency made the expenditure. . . .

(2) Section 95.19 of 45 CFR provides exceptions to the time limitation in section 95.7. The exceptions relevant here are:

(a) Any claim for an adjustment to prior year costs.

(b) Any claim resulting from an audit exception.

Factual Background The State filed Quarterly Statement of Expenditure Reports (QERs) for the quarters ending September 30, 1982 and December 31, 1982 claiming FFP for services provided by State-owned ICFs/MR operated by the Massachusetts Department of Mental Health (DMH). (The QERs were timely filed on October 29, 1982 and January 31, 1983, respectively.) On April 26, 1985 DMH submitted to the State reprocessed claims for these two quarters. DMH had reconciled the earlier claims with the State's Master Eligibility File by reprocessing the claims through the State's computerized vendor payment system. DMH learned that the State had previously claimed for some ineligible patients as well as not claimed for some eligible patients. On August 27, 1985, in the QER for the quarter ending June 30, 1985, the State submitted these reprocessed claims to HCFA. For the quarter ending September 30, 1982, the reprocessed claim increased FFP by $826,379 and decreased it by $1,235,004. For the quarter ended December 31, 1982, the reprocessed claim increased FFP by $214,365 and decreased it by $1,646,162. HCFA initially deferred action on the State's claims, noting that DMH's reconciliation of its ICF/MR claims identified 9,801 patient days not previously reported with total charges of $1,040,744 FFP. The deferral notice requested the State to make available all related documents and material necessary to determine the allowability of the State's claims. On April 10, 1986 HCFA disallowed the State's claim of $1,040,744 FFP based on the two-year time limitation in 45 CFR 95.7. HCFA rejected the State's assertion that the claim resulted from an audit exception and concluded that claims for these expenditures should have been filed by September 30, 1984 and December 31, 1984, respectively. Analysis Section 95.7 of 45 CFR provides that HCFA will pay FFP for an expenditure only if the State files a claim for that expenditure within two years after the quarter in which the(3) expenditure was made. /2/ Here the State did not file a claim for 9801 patient days from the quarters ending September 30, 1982 and December 31, 1982 until August 27, 1985. The State did not argue that its billing system for ICFs/MR caused it to make the expenditures in question at some point after the quarters ending September 30 and December 31, 1982. The State submitted no rebuttal to the conclusion reached by HCFA in its disallowance that, under the two-year limitation, the State was required to file a claim for these patient days by September 30 and December 31 of 1984, respectively. In fact, HCFA's deferral letter cited correspondence from DMH to an official of the State Medicaid Agency acknowledging that the State had exceeded the two year limitation but stating that "the Department (DMH) feels justified in filing this claim based on an audit by HEW. . . ." /3/ HCFA Ex. A. In effect, the State has conceded that these claims are barred by section 95.7 unless the State can show that one of the exceptions set forth in 45 CFR 95.19 applies. HCFA determined in its disallowance letter that the claims did not result from an audit exception. In the Board proceedings, the State relied on the exception for adjustments to prior year costs and argued that its claim should be determined by netting the overstated and understated costs. We will therefore examine whether either of the two exceptions relied on by the State applies. I. Is the State's claim an adjustment to prior year costs? The State argued that the claims at issue constitute an adjustment to previously filed claims, and are, therefore, not barred by the time limitation in 45 CFR 95.7. The State explained that the claims at issue arose when DMH, in April 1985, reprocessed the previously filed claims through the(4) State's computerized vendor payment system in conformity with recommendations from federal auditors. /4/ Rather than being new claims, the State maintained, the claims were merely the result of matching the patients from the original claim with the Master Eligibility File, as was recommended by the federal auditors. The State cited Maryland Department of Human Resources, Decision No. 483, November 30, 1983, both for the general proposition that an adjustment to a previous claim is not barred by timely claims limitations and as support for its argument that FFP should be calculated by netting its overstated and understated costs. HCFA responded that the claims at issue were not an adjustment, but were new claims for ICF/MR patient days not previously reported. HCFA argued that the newly added eligible patients days discovered through use of the State's computerized vendor payment system did not constitute part of the State's original claim and there fore were not timely filed. For purposes of the 45 CFR 95.19(a) exception, "adjustment to prior year costs" is defined as "an adjustment in the amount of a particular cost item that was previously claimed under an interim rate concept and for which it is later determined that the cost is greater or less than that originally claimed." 45 CFR 95.4. The State's claim was not based on a change to an interim rate for ICF/MR services. (5) What we are dealing with here, additional patient days, does not fall within this definition. The State did not increase the amount reimbursed for each patient day of service provided and previously claimed. The State's claims at issue here are related to its earlier claims for the same quarters only in that all the claims are for ICF/MR patient days. This alone will not qualify the latter claims as adjustments to prior year costs. The State has simply claimed costs for patient days not previously reflected on the State's QERs. As such, these claims are not adjustments to prior year costs, but are wholly independent of previous claims. Additionally, we find the Maryland case cited by the State not relevant to the facts of this appeal. The issues before the Board in Maryland did not involve the two-year limitation at 45 CFR 95.7 and the exceptions at 45 CFR 95.19. Maryland involved a claim for a $2,344 net credit resulting from an audit finding that claims for co-operative agreement costs under Title IV-D of the Act contained clerical errors both understating and overstating costs. (Title IV-D is entitled Child Support and Establishment of Paternity.) The Agency found that Maryland's claim resulted from an audit exception under 45 CFR 95.19(b) but was nevertheless barred by congressional funding restrictions in certain fiscal year appropriations statutes. The Board reversed the disallowance on grounds that the funding restrictions were not a bar to payment of the credit since it "was merely an adjustment to the total amount of FFP allowable for specific cost items for which the State had previously (timely) claimed FFP." Maryland, p. 3 (emphasis in original). Here, the State's reprocessed claims decreased its FFP for the two quarters at issue by $2,881,166, while increasing it by $1,040,744. The State argued that HCFA should have reconciled these claims by subtracting the understated costs from the overstated costs, resulting in a net decrease of $1,840,422 in the FFP previously claimed. The State relied on Maryland as support for this. We agree with HCFA that the previously unclaimed patient days do not represent previously understated cost items but rather are separate cost items. We regard it as merely fortuitous that the State's earlier, timely claims for the quarters in question included unallowable costs which exceeded the amount of the claims at issue here. There is no basis in the regulation excepting "adjustments to prior year costs" or in Maryland to require HCFA to calculate FFP as the State has proposed. To find that this is proper would in essence require HCFA to pay for unallowable claims which were timely submitted simply because the State later discovered, after the time for filing had run, that it had not claimed for at least as many eligible patient days. (6) We therefore find that the exception for adjustments to prior year costs does not apply to the State's claims for patient days not previously reported. II. Is the State's claim the result of an audit exception? Although the State did not restate this argument in its briefing, the DMH/State Medicaid Agency correspondence cited in the notice of deferral took the position that the claim was justified based on a federal audit and the State's subsequent actions to follow the auditor's recommendations and reprocess its ICF/MR claims. The disallowance decision addressed the State's assertion and concluded that these claims did not result from an audit exception under 45 CFR 95.19(b). Since the State initially relied on the audit exception, we will briefly discuss that exception. We also find no support for applying this exception here. Section 95.4 of 45 CFR defines audit exception as "a proposed adjustment by the responsible Federal agency to any expenditure claimed by a State by virtue of an audit." The only audit mentioned in the record is the audit covering the State's ICF/MR claims for the period July 1, 1978 to December 31, 1980, years before the claims at issue arose. The only relationship that audit has to the claims at issue was its recommendation that the State's ICF/MR billings be incorporated into its computerized vendor payment system in order to identify prior payments to ineligible patients. The auditors also recommended in the alternative that the State "manually screen" its ICF/MR billings to avoid claims for ineligibles. While the State could presumably have avoided the late claim submission here had it followed the auditors' recommendations, we find it unreasonable for the State to try to stretch those recommendations into an "audit exception" covering the claims at issue here. III. Availability of the exceptions in general. In New York State Department of Social Services, Decision No. 521, March 6, 1984, the Board considered the exceptions discussed here. The Board stated:

. . . The purpose of this legislation (section 1132 of the Act) was not on its face to save federal money by depriving the states of FFP in valid claims for expenditures. The purpose was to prevent the states from coming in many years after expenditures were made and claiming FFP, or transferring claims for FFP from one program to another, without any time limit. Such delayed claiming made it difficult for the Department of Health and Human Services to plan its budget; claims( 7) for millions of dollars for expenditures in years long gone by could turn up at any time.

* * *

The exceptions . . . to the time limitations were intended to cover only extreme situations. They were not intended to cover a routine situation where a state simply did not get around to getting its data together in time to file a claim within the statutory requirements. The exceptions are to take care of those cases where it would be patently unfair to a state to outlaw its claim merely because of the passage of time.

New York, p. 8.

The points made by the Board concerning the design of the exceptions "to prevent manifest injustice" are equally germane here. New York, p. 9. This record shows that the systems necessary to accurately and timely file claims for ICF/MR services were within the sole control of the State. There is no apparent reason for delaying until August of 1985 to file the claims at issue. It is this type of casual approach to the submission of claims for FFP that section 1132 and the implementing regulations were designed to prevent. Conclusion For the reasons stated above, we sustain the disallowance of $1,040,744.

##FN001 /1/ 45 CFR Part 95, Subpart A, Time Limits for States to File Claims, was published in 46 Fed. Reg. 3529 (January 15, 1981). ##FN002 /2/ "Claim means a request for Federal financial participation in the manner and format required by our program regulations and instructions or directives issued thereunder." 45 CFR 95.4. ##FN003 /3/ The notice of deferral also stated that the reconciliation data for the claims were available in December 1983, but noted that DMH had not submitted the reprocessed claims to the State until April 1985. The State has not provided any information to rebut this finding. Consequently, the record shows that the State had more than ample time to submit the claims in a timely fashion. ##FN004 /4/ Between November 1980 and April 1981, the Office of Inspector General, DHHS, conducted a filed audit to review Medicaid payments to State-owned ICFs/MR for the period July 1, 1978 to December 21, 1980. Audit Control No. 01-20201, issued March 5, 1982, State Ex. C. The audit report found that DMH had claimed reimbursement for services rendered to patients ineligible for Medicaid because DHM's ICF/MR billings were not processed through the State's computerized vendor payment system, which would automatically test to the State's current Master Eligibility File. Among the audit report recommendations were that the State integrate ICF/MR billings into the computerized vendor payment system in order to prevent future Medicaid payments for ineligible patients and that the State reprocess its billings for ICF/MR services from June 1, 1980 through June 30, 1981 to identify ineligible patients. The State had advised the auditors that it expected to add ICF/MR payments to the computerized system during the first quarter of the 1982 federal fiscal year. Audit Report, pp. 22-26.

394

APRIL 25, 1987

00795

GAB Decision

01

September 30, 1986

New York State Department of Social Services; Docket No. 86-169

Ballard, Judith A.; Garrett, Donald F.

Teitz, Alexander G.

(1) The New York State Department of Social Services (State) appealed a decision of the Office of Family Assistance, Family Support Administration, disallowing $293,941 claimed under Title IV-A of the Social Security Act (Act). *

The authority given for the disallowance was section 1132 of the Social Security Act as added by Public Law 96-272, and 45 CFR 95.7, which require that claims for expenditures made after September 30, 1979 be filed within two years after the quarter in which the expenditures were made. The expenditures were all made after September 30, 1979, and the claims were all filed more than two years after the quarter in which the expenditures were made. The State in its appeal repeated the arguments pertaining to the applicability of the relevant filing requirements and exceptions which it had put forward in Board Docket Nos. 83-170 and 83-180, decided in New York State Department of Social Services, Decision No. 521, March 6, 1984. The State requested the Board to issue a summary decision based upon our holding in Decision No. 521. The State submitted no new argument why Decision No. 521 was wrong. The Agency stated that it had no objection to the issuance of a summary decision. In its acknowledgment of the notice of appeal the Board asked the State to advise the Board whether the holding in Decision No. 521, which involved claims for Title XIX expenditures, would apply equally here, where the expenditure claimed were under Title IV-A. In its letter dated September 12, 1986, the State(2) replied that the two year limit provided by statute and regulations governs claims under Title IV-A of the Act as well as Title XIX, and specifically admitted:

The Board's holding as to the interpretation of both the statute and regulations is equally applicable to programs under Title IV-A and XIX of the Act.

We conclude that the claims here are barred by statutory and regulatory requirements and sustain the disallowance of $293,941, based on Decision No. 521, which we incorporate herein. See also New York State Department of Social Services, Decision No. 784, September 2, 1986.

* This was part of a larger disallowance totalling $443,184. The State chose not to appeal $188, identified by it as "Uncontested Claims" in its notice of appeal. The amount of $149,055 was identified "for argument before the Board," and the appeal of this amount was severed and given a separate Board Docket Number of 86-172.

394

APRIL 25, 1987

00794

GAB Decision

14

September 30, 1986

New York State Department of Social Services; Docket No. 85-198; Audit Control No. NY-82-AC

Ballard, Judith A.; Ford, Cecilia S.

Settle, Norval D.

(1) The New York State Department of Social Services (State) appealed a decision of the Office of Child Support Enforcement (Agency) disallowing $1,507,312 in claims for federal financial participation (FFP) under Title IV-D (Child Support and Establishment of Paternity) of the Social Security Act (Act) filed by the State for the period of October 1981 through September 1982. During the course of these proceedings, the Agency reduced its disallowance to $1,039,363. The claims now at issue are $77,756 in training costs and $961,607 in costs allegedly offset by interest earned on collected child support payments.

Summary We uphold the Agency's determination on training costs because the State did not show that the disputed training costs were allowable as the "direct costs of short term training provided to IV-D agency staff." 45 CFR 304.23(d). The training at issue was provided to state employees with some alleged IV-D program responsibilities. The State did not present evidence sufficient to establish that the training was provided to the employees in a capacity as "IV-D agency staff" allowable under 45 CFR 304.23(d). We uphold in principle the Agency's determination on interest earned but not properly accounted for by the State. Under section 455(a) of the Act, the State must deduct from its claims for IV-D program expenditures an amount equal to "fees or income resulting from services provided" under the IV-D program. We have previously found that the Agency reasonably interpreted this to include interest income on IV-D collections. Utah Department of Social Services, Decision No. 750, April 30, 1986. But, for the reasons(2) explained below, we permit the State a further opportunity to submit evidence concerning the calculation of the amount of interest earned. Background The Child Support Enforcement Program was established, under Title IV-D of the Act, to enforce child and spousal support obligations. Basic program functions include locating absent parents, determining paternity, establishing the amount of the child support obligation, and collecting support payments. See, generally, section 451 of the Act. Title IV-D of the Act authorizes grant funding for the costs of operating the State's program. In order to obtain FFP, the State must operate the program in accordance with a federally approved state plan for operating the program, an approved cost allocation plan for identifying and allocating costs, and all applicable federal regulations. Some of the funds collected under Title IV-D are collected on behalf of families which received assistance under the Title IV-A program, Aid to Families with Dependent Children (AFDC). Under section 457 of the Act, child support collections on behalf of these families (AFDC child support) are not distributed in full to the recipient families; funds are withheld to reimburse the governmental entities which contributed to the AFDC payments under a complex formula. The federal share of the IV-D funds withheld must be credited to the federal government by the IV-A agency. 42 CFR 302.51(b)(2). I. Training costs The Agency initially disallowed $88,457 in claims for FFP for training costs which were found to be "not directly identifiable with the IV-D program." Ex. 7. As a result of documentation submitted by the State during the course of this appeal, the Agency agreed to reduce the disallowance by $10,701. Agency Letter dated April 28, 1986. The Agency based the disallowance on 45 CFR 304.23(d), which states that FFP under Title IV-D is not available for educational and training costs other than the "direct costs of short term training provided to IV-D agency staff. . . ." /1/ The Agency found that the State had not been specific enough(3) in documenting the number of IV-D agency staff members participating in the training activities involved. The State argued that the training costs were allowable because the claim was based on a proposed cost allocation plan under which the kind of costs involved were properly allocated as direct costs to the IV-D program. /2/ The State cited 45 CFR 302.16 (1981), /3/ which authorized the State, under its State plan, to claim allocable costs if the State had a cost allocation plan for properly charging the costs of administration, services, and training activities. We find that the State misinterpreted the regulations. Whether or not the costs were properly allocated, the issue is whether the costs were allowable under a specific regulatory requirement. The regulation at 45 CFR 302.16 was a general procedural rule, which merely required that a State operate in conformity with an approved cost allocation plan. That regulation was not a definitive rule on cost allowability. In contrast, the regulation at 45 CFR 304.23(d) is a specific prohibition on federal participation in certain costs. This specific regulatory directive must be read to control the more general procedural guideline. The mere fact that the State may have a cost allocation plan which allocates certain costs does not make those costs allowable per se. /4/ (4) To show that the costs are allowable under 45 CFR 304.23(d), the State must show that the costs are within the narrow exception to the prohibition on federal participation for training costs. The State submitted attendance records for courses under four of the six training contracts at issue. State's Reply Brief, Ex. 10. Some of these attendance records summarily identify attendees by program. The Agency accepted the categorization of all attendees designated as IV-D employees, and contested only costs for those employees who were not specifically identified as IV-D employees, or were identified as employees under other federal-state programs who allegedly exercised certain responsibilities under the IV-D program. The State apparently allocated the training costs for these "IV-D related employees" to each of the programs to which the employees were somehow related, including the IV-D program, but provided no further explanation of the connection between the employees and the IV-D program. Without evidence of specific IV-D responsibilities of the disputed employees, there is not sufficient evidence to determine whether the IV-D related employees are "IV-D agency staff" under 45 CFR 304.23(d), or are other State or county employees who may perform an overhead function, but are not IV-D agency staff. /5/ While, generally, overhead costs may be properly allocated to and allowable under the IV-D program, training costs for overhead personnel must be tested against the prohibition and limited exceptions of 45 CFR 304.23(d). The fact that the State's proposed cost allocation plan might allocate some of the salaries of the personnel at issue to the IV-D program is simply not evidence that these personnel were "IV-D agency staff." The State had adequate notice and several opportunities to submit evidence into the record concerning whether the disputed employees were IV-D agency staff. The State merely provided the job titles of some employees (such as county commissioner and staff development supervisor). The State failed to provide even a description of the employees'(5) responsibilities to the IV-D program. Because of the general bar to federal participation in training costs for non-IV-D agency staff under the IV-D program, such proof is necessary. We conclude that the State did not meet its burden of demonstrating that the disputed costs were allowable under 45 CFR 304.23(d). With respect to those contracts for which no attendance records were submitted, the State clearly did not justify the claims under the IV-D program. For the other contracts involving employees who were not specifically identified as IV-D agency staff, the State failed to provide sufficient proof that the costs fall within the exception to the bar on federal participation on training costs at 45 CFR 304.23(d), by providing evidence that these employees were IV-D agency staff. Therefore, we uphold the Agency's disallowance, in the reduced amount of $77,756. II. Interest Income The Agency disallowed $1,418,855 which it stated was the federal share of interest earned on child support payments collected by the State and local districts. During the course of this proceeding, the Agency reduced its disallowance to $961,607. Agency submission of June 20, 1986. The disallowance was based on Audit Report Number NY-82-AC (Audit Report, Ex. 3), which examined State accounts and the accounts of seven counties administering Title IV-D programs for the State. The Agency alleged generally that this interest income should have been applied to reduce program expenditures because it constituted "income resulting from services provided under the (State) plan." Section 455( a) of the Act (42 U.S.C. 655(a)), as amended by the Omnibus Reconciliation Act of 1981 (OBRA), Pub.L. 97-35, requires that the amount of any program income be deducted from the amount of program expenditures for which the State would otherwise claim FFP.

a. Is interest "income" for purposes of section 455(a)?

In a recent case, the Board upheld the Agency's determination that interest on child support collections is "income" for purposes of section 455(a) of the Act, and we incorporate that reasoning here. Utah Department of Social Services, Decision No. 750, April 30, 1986, pp. 1-7. Below, we discuss some new arguments raised by the State in this case. (6) The State argued that since the interest income resulted from "investment activity," the interest income was not within the bounds of section 455(a) of the Act because it did not result from services provided under Title IV-D. The State noted that interest income is not specifically mentioned in section 455(a), and that neither the Act nor the State plan requires that states invest dormant funds. The State cited Perales v. United States, 598 F. Supp. 19 (S.D.N.Y. 1984), aff'd, 751 F.2d 15 (2d, Cir. 1984), for the proposition that the federal government cannot impose upon states, as a grant condition, a requirement to pay interest upon funds if there is no statutory mandate for that grant condition. We reject the State's argument that interest income earned on child support collections is not required, in general, to be deducted from program expenditures claimed under section 455(a) of the Act. We agree that investment of dormant funds is not required by the Act, and is not directly addressed as a program activity, but that is not dispositive. /6/ It is undisputed that some Title IV-D collections in New York were deposited in interest-bearing accounts. The interest income here resulted directly from the accumulation of principal balances from program activities. The interest in dispute would not have been earned if the State had not been collecting child support payments pursuant to the IV-D program. Thus, all interest income resulted directly from the IV-D collection services provided, whether or not the statute or regulations required interest to be earned. We know of no reasonable basis to find that income from interest should be treated, under the statute, differently from other income. The point of section 455(a) is that federal funding needs should be offset by the federal share of funds produced through program activities. Interest earned on collected funds meets this basic policy requirement. Therefore, we conclude that the federal share of interest earned must be deducted from program expenditures in claiming FFP, in accordance with section 455(a). /7/ (7) We find the case before us to be distinguishable from the facts in Perales. In Perales, the court reversed a penalty assessment which was based on interest income imputed to funds incorrectly claimed under the Food Stamp Program, when there was no statutory authorization for such a penalty. In this case, the Agency is not assessing a penalty based on imputed interest, but rather is merely requiring the State to properly report program expenditures under applicable cost principles requiring the State to account for the interest actually earned. See New York State Department of Social Services, Decision No. 721, February 6, 1986. The offset of the federal share of interest earned against the federal grant can reasonably be required under section 455( a). /8/ The purpose of the disallowance is not punitive; the disallowance is to fairly distribute the benefit received by the State in the form of interest on funds held for the IV-D program, as required by law. As discussed in the Board's decision in Utah, the State had notice of other reasonable and explicit bases in HHS' general grant requirements (45 CFR Part 74) for treating the interest here as both program income and as an applicable credit against the federal grant. These requirements are such that the result we reach here would be supportable even(8) in the absence of section 455(a) of the Act. We incorporate those determinations here. See Utah, Decision No. 750, pp. 2-4.

b. Does the Intergovernmental Cooperation Act apply?

The Intergovernmental Cooperation Act (ICA), at 31 U.S.C. 6503 (previously codified at 42 U.S.C. 4213), states that a State is not accountable for interest earned on grant money pending its disbursement. This provision operates as a statutory exception to the general rule set out at 45 CFR 74.47(a), which requires grantees to remit to the federal government any "interest or investment income earned on advances of HHS grant funds. This includes any interest or investment income earned by subgrantees." /9/ In this case, some of the child support collections, for families who received assistance payments under the Title IV-A AFDC program, were used to reimburse the State and federal governments for those assistance payments. Under section 457 of the Act and 45 CFR 302.51, the State is required to distribute a portion of the child support collected for families who received IV-A AFDC assistance payments to reimburse the the IV-A AFDC program. The regulations at 45 CFR 302.51 provide that states must credit the federal government for the federal share of these IV-D collections through the IV-A agency. This situation is like that in North Carolina Department of Human Resources, Decision No. 361, November 30, 1982, aff'd, North Carolina v. Heckler, 584 F. Supp 179 (E.D.N.C. 1984). In North Carolina, the funds involved had been collected from providers as overpayments. Instead of refunding the money to the various participating government entities, the State deducted the amount from current funding claims. Thus, North Carolina claimed that the funds acquired the character of advances on grant funding. The Board rejected North Carolina's contention because there was no evidence that the funds were being held pending disbursement; rather, the Board found that the funds were held pending repayment(9) of the federal share. See also New York Department of Social Services, Decision No. 588, October 31, 1984, p. 9. The AFDC child support collections in this case reimburse the federal, state, and local governments for AFDC payments already made; the funds are held by the IV-D program only pending distribution to the AFDC program. Only after distribution and crediting of the federal share could the funds be considered grant funds, because then they replace federal funds. As we discuss below, after distribution to the AFDC program and crediting of the federal share, no interest earned would be attributable to the IV-D program. We conclude that the ICA exception for interest earned on advances of grant funds does not apply to the funds while they are held by the IV-D program because they are not grant funds at that time. C. At what point was interest on AFDC child support collections no longer attributable to the IV-D program? The State argued that the Agency improperly included in the disallowance interest on funds from child support collections which reimbursed the Title IV-A (AFDC) program for assistance payments made to recipient families after the federal government had already been credited with those funds. /10/ The State and the Agency disagreed as to when the federal government was credited with its share of the AFDC child support collections and when, therefore, interest for which the State was accountable to the IV-D program ceased to accure. In the specific circumstances of Utah, the Board found that the federal government could be credited with child support collections in two ways: either by an accounting rendered on the quarterly report of both AFDC expenditures and AFDC child support collections, or by an earlier distribution, pursuant to section 457 of the Act and 45 CFR 302.51, crediting the federal share of AFDC child support collections to the federal account in the AFDC program and using the funds to redeem AFDC program liabilities. Utah, Decision No. 750, pp. 10-11. In this case, the State asserted that it credited the federal share of AFDC (10) collections by submitting a lower quarterly estimated claim for federal financial participation in the AFDC program, at the beginning of the quarter when it deducted estimated AFDC collections from estimated AFDC expenditures. /11/ The State argued that, as a result, the State advanced funds to pay AFDC expenditures and that subsequent AFDC child support payments reimbursed the State for the funds so advanced. The State argued that all aspects of distribution of the AFDC child support collections were complete at the end of the month following the month the funds were collected, when the State received monthly reports from the local counties administering the two programs. At that time, the State reasoned, the counties credited the State with the non-local share of the child support collections and no further distribution of proceeds took place. /12/ The State alleged that it had already credited the federal government with its share through the reduction of the estimated claim at the beginning of the quarter. Tr., pp. 7-13. The Agency did not contest that the monthly county report distributed the collected funds between the State and the local districts, but pointed out that this was irrelevant, since the important question was when the funds were distributed to the federal government. The Agency denied that the counties' monthly reports credited the federal government with any share of the AFDC child support collections. The Agency argued that, under the quarterly reporting system, the only act which actually credited the federal government with the AFDC collections was the submission of the quarterly report. The Agency contended that, although no(11) cash changed hands, the quarterly report was the only time during the quarter when the State settled accounts with the federal government, offsetting IV-D funds against claims for funds for the cost of the AFDC program. /13/ As the Board stated in Utah, "the State clearly bears a burden generally of accounting for liabilities such as program income (see, e. g., 31 U.S.C. 6503(b)), and under section 455(a) clearly shares the responsibility of accounting for income under title IV-D." pp. 11-12. We agree in principle with the Agency that the important question is not when the State settled its accounts with localities, but when the State reasonably can be said to have credited the federal government with its share of the IV-D collections. The question arises in the context of a complex, intrastate accounting process which is overseen by New York. Since no funds actually changed hands or were physically distributed in any manner, we find that the Agency would ordinarily be justified in assuming that the IV-D collections had not been credited to the federal account until the State formally settled its accounts with the federal government at the end of the quarter, unless the State can affirmatively establish an earlier point when the funds were credited. Cf. Utah, pp. 11-13. Certainly, the reduction of the State's estimated claim did not credit the federal government with its share of the IV-D collections. The purpose of the estimated claims and advance payments is to ensure that the State has sufficient cash flow to meet joint federal-state obligations. Estimated child support collections are deducted from estimated AFDC payments because they reduce overall needs for cash advances during the quarter, but this reduced estimate does not "credit" the federal government with its share of actual AFDC child support collections. As we stated in Utah, the State's funding mechanism for the AFDC program is not dispositive of our inquiry. The IV-D program is a separate program and "(nothing) in the law or otherwise(12) authorizes OCSE to ignore the requirements in IV-D because of a cash flow problem in Title IV-A or, for that matter, in any other federal program." Utah, Decision No. 750, p. 5. We recognize, however, as we did in Utah, that a state may credit the federal government in ways other than by settlement at the end of the quarter. As we explained in Utah, OCSE is correctly concerned with accountability, but arguably arbitrary in imposing the date of the quarterly report as a measure of that accountability, if there is evidence that interest actually ceased to be earned as of an earlier point. What the State appears to be alleging is that it effectively, if not formally, credited the federal government with the federal share of IV-D collections by requiring local counties to offset AFDC support collections against AFDC expenditures. The State implied that this system resulted in the county either using the AFDC support collections directly to replace federal and state funding, or substituting an equivalent amount of county funds. However, New York provided only a general conceptual allegation that this occurred, not actual documentary evidence of any such disposition. The point when the State effectively credited the federal government with the federal share of IV-D collections must be established by evidence of an act which changes the character of the funds, such as the issuance of IV-A program warrants against the funds as in Utah, or by documentation of an act which similarly substitutes IV-D collections for federal funds. Settlement with the local counties is relevant only if the State used information obtained from the counties, for example, to specifically reduce the amount of federal funds drawn under the State's letter of credit, as shown by documentation of actual amounts and the relationship of those amounts to IV-D collections. Settlement with the federal government would occur when the IV-D funds actually (not theoretically) are substituted for federal grant funds or otherwise used to reduce the drawdown of federal funds. After that date, we agree that the State should not be held liable for the interest at issue here, since the underlying principal would have been effectively distributed. In this case, the State has not provided any hard evidence of any act changing the character of the IV-D funds, such as the issuance of IV-A program warrants against the IV-D account in Utah or as discussed above. Nor has the State met its burden of establishing that IV-D funds were credited to the federal government by substitution for federal grant funds which would otherwise be drawn under the State's letter of credit. The State is free to commingle program funds and use any accounting system which will meet the (13) reporting requirements established in the Act and regulations. The State, however, must accept the burden of ensuring that its accounting system provides adequate information and accounts for liabilities such as program income. Here, the State simply provided no substantial documentary evidence to support its arguments. However, we conclude that New York ought to have one last, limited opportunity to make the showing required above. It is not easy to apply section 455(a) of the Act in the accounting context here. New York's accounting system is complex, involving considerable financial activity related to the intricacies and interactions of the IV-A and the IV-D programs at both state and county levels. The issue of when interest ceases to be earned has only been developed recently by the Agency. New York fairly may not have understood its burden or the need for more detail to justify its position. Within 15 days from receipt of this decision, the State must submit a statement of whether it has additional information to submit, and a description of that information. Thereafter, the State will have 30 days to submit this information to the Agency (or such longer period as the Agency determines appropriate). If the State cannot produce satisfactory information to justify an earlier date, we find that the Agency properly used the end of the quarter as the date when the federal government was credited with the principal sums at issue, and properly calculated the amount of interest. In sum, we uphold the Agency's calculation with respect to the disputed interest income, subject to reduction if the State can submit evidence that the principal sums were actually credited to the federal government before the end of the quarter and that, therefore, no interest attributable to the IV-D program was earned thereafter. d. Interest questioned on other grounds. In its reply brief, New York argued briefly that part of the disallowance should be overturned because it was attributable to counties in which interest allegedly was not actually earned. Reply Brief, p. 11. The State did not develop any issue concerning the Agency's methodology in calculating these amounts; rather, the State merely presented a telephone survey conducted of certain county IV-D coordinators which the State said showed no interest was earned. We find this evidence questionable. The survey would have been more credible if it had involved treasury or finance officials, since interest deposited in a general fund likely would earn interest even if none was credited to the IV-D program per se. In any event, since the State now(14) has an opportunity to present evidence concerning the actual amounts of interest earned, the State will have a chance to make a more definitive showing on this matter, if it can. Conclusion We conclude by upholding the disallowance for training costs in the amount of $77,756. We also uphold the disallowance for interest income in the amount of $961,607, subject to reduction if the State provides evidence, consistent with the principles outlined in this decision, that a lesser amount of interest was actually earned. This evidence must be provided to the Agency in accordance with the schedule set out above.

##FN001 /1/ Another exception to the prohibition on IV-D training costs applies to cooperative agreements under 45 CFR 304.21. That is not at issue in this case. ##FN002 /2/ There was no dispute that the proposed cost allocation plan was a valid method to use in calculating the allocation of costs. See 45 CFR 95.517. The precise provisions of the proposed cost allocation plan were not submitted for the record. ##FN003 /3/ 45 CFR 302.16 was revised and redesignated as 45 CFR 304.15 at 47 Fed. Reg. 17586 (April 23, 1982), effective May 24, 1982. Neither party has argued that this action substantively changed the regulation with regard to this case, and we do not see any change material to the issue here. ##FN004 /4/ Theoretically, a cost allocation plan might contain language which specified the allowability of a particular cost item. We offered New York the opportunity to make such a showing here, but the State was unable to produce any such evidence. Nor did the State show that its plan methodology was developed for the specific purpose of identifying the extent to which the contested employees functioned as IV-D agency staff. ##FN005 /5/ Under general cost principles applicable to state and local governments administering federal grants, state-wide or countywide central service functions (such as central personnel and administrative services) may be allocated or billed to programs receiving the services. See, generally, Office of Management and Budget Circular A-87 Att. A, C.2.a (made applicable by 45 CFR 74.171 and 301.15(e)). But the fact that state or county personnel provide these kinds of services to a IV-D agency does not make them IV-D agency staff. ##FN006 /6/ Whether HHS could order states to invest funds is not an issue before us. ##FN007 /7/ Although arising in a different program, this holding is consistent with our decision in North Carolina Department of Human Resources, Decision No. 361, November 30, 1981, aff'd, North Carolina v. Heckler, 584 F. Supp. 179 (E.D.N.C. 1984) in which we found that a state must credit to the Medicaid program an amount equal to the federal share of interest earned on Medicaid overpayment recoveries. See also New York Department of Social Services, Decision No. 588, October 31, 1984. ##FN008 /8/ The Agency also relied upon a September 3, 1982 Action Transmittal, OCSE-AT-82-8, which required that states reduce claimed expenditures by the "total interest earned on collections made under the IV-D state plan." The Agency subsequently codified this Action Transmittal at 45 CFR 304.50(b), 49 Federal Register 36764, 36772 (September 19, 1984). The State argued that the Action Transmittal should not be applied in this case, but did not argue specifically that it had relied on a different interpretation of section 455(a), nor that it would be adversely affected by retroactive application of the Agency's interpretation. Indeed, what we are addressing here is primarily a question of whether the State can retain the full amount of what is essentially a windfall to the program, or must share a fair part of it with the federal government. Thus, we do not think that the Agency is precluded from applying its interpretation here. ##FN009 /9/ Some of the collections at issue in this case were distributed, in full, directly to recipient families. These collections are funds which the State recovered from, and distributed to, private parties. The State did not contend that the ICA or 45 CFR 74.47 applies to these child support collections. Since these are not grant-in-aid funds, the ICA simply does not apply. ##FN010 /10/ The State's argument here concerns only child support collections for families which received IV-A AFDC assistance payments. An undefined proportion of the interest income at issue was earned from non-AFDC collections. The State did not contest the Agency's calculation of interest on non-AFDC collections that were actually deposited in interest bearing accounts. ##FN011 /11/ The State was required to reduce its quarterly estimated claim for expenditures under the AFDC program by the quarterly estimated AFDC collections pursuant to section 403(b)(2) of the Act. ##FN012 /12/ Throughout this whole so-called distribution process, the State acknowledged, no cash actually changed hands. The cash was collected by local counties administering the IV-D program and placed in the county's general fund. The counties reported these funds in a monthly report to the State, offsetting IV-D funds from expenditures claimed for IV-A AFDC funding from the State. The actual cash remained with the local county after the monthly report was submitted because the county had settled its accounts. After the report was received by the State, the State ceased to hold the counties accountable for these funds and the State would reduce the next grant to the county by an equivalent amount. Tr., p. 12. ##FN013 /13/ The Agency originally argued during this proceeding that the federal government was only credited with the funds on the date that the quarterly expenditure report for the IV-A program was received. After the Board's Utah decision, the Agency issued PIQ 86-1, which stated that the Agency would calculate interest on IV-D collections only until the end of the quarter, regardless of when the quarterly report was actually received. While this, apparently, was the reason for the substantial reduction in the disallowance, it does not affect the basic reasoning of the Agency's position.

394

APRIL 25, 1987

00793

GAB Decision

11

September 30, 1986

Indiana Department of Public Welfare; Docket No. 86-76

Settle, Norval D.; Teitz, Alexander G.

Ballard, Judith A.(1)$200:

(1) The Indiana Department of Public Welfare (State) appealed a determination by the designee for the Regional Director for Region V (Agency), disallowing $6,008,395.38 claimed under titles I, IV-A, X, XIV, and XIX of the Social Security Act and under the U.S. Department of Agriculture (USDA) Food Stamp program. The costs represented court-ordered back wages for the period 1960 through 1976 paid to county welfare department employees administering the Social Security Act programs and the Food Stamp program. The costs, which were required to be allocated among the various programs pursuant to the State's cost allocation plan, were originally allocated by the State based on time records for the county welfare department employees for the quarter ended June 30, 1982. An earlier determination by the Director, Division of Cost Allocation (DCA), which the State appealed to the Regional Director under the provisions of 45 CFR Part 75, held that the costs were improperly allocated since the time records used to allocate the costs did not relate to the period covered by the costs. DCA therefore re-allocated the costs for the period April 1, 1973 through December 31, 1976 based on time records for that period and disallowed the costs attributable to the period prior to April 1, 1973 on the ground that no time records for that earlier period were available. DCA also held that all costs but the recalculated Food Stamp costs were unallowable because the State's claims for the costs were not timely filed under section 1132 of the Social Security Act. In its appeal to the Regional Director, the State indicated that it had recalculated its claim based on a new allocation methodology. /1/ The Regional Director's designee, however, affirmed DCA's(2) finding that all costs but the Food Stamp costs were unallowable under section 1132 of the Social Security Act. He also found that all costs including the Food Stamp costs were unallowable because of deficiencies in the State's new cost allocation methodology. /2/

The State appealed the determination of the Regional Director's designee to this Board pursuant to 45 CFR Part 16. The State alleged, however, that the Board had no jurisdiction over the Food Stamp costs. It was subsequently agreed that the Board would decide this threshold issue before reaching the substantive issues relating to the allocation methodology. (Board's letter to parties dated May 16, 1986, p. 1) For the reasons explained below, we find that this Board has jurisdiction to review the issue of whether costs were properly allocated to the Food Stamp Program (although USDA has sole authority to allow or disallow the State's claims under that program). With respect to the State's claims under the various titles of the Social Security Act, it was agreed that the parties would address only the threshold issue whether the claims were timely filed under section 1132 of the Act. It was further agreed that if the Board held for the State on this issue, the Agency could issue a new disallowance on other grounds which the State could appeal to the Board. (Board's letter to parties dated May 16, 1986, p. 1) For the reasons explained below, we find that the claims in question were timely filed. Since it appears that the same issues of allocation methodology are raised with respect to the Food Stamp costs and those costs claimed under the Social Security Act, we have determined that it is appropriate to remand the case to the Agency to make a new determination pertaining to both the Social Security Act costs and the Food Stamp costs. In(3) addition to addressing issues of allocation methodology, the Agency's disallowance may address the limitations imposed by Public Law 95-291, noted in footnote 2 of this decision, to the extent that that matter has not been resolved by the parties. I. Board's Jurisdiction Over Food Stamp Costs The Agency took the position that the Board has jurisdiction over the determination regarding Food Stamp costs. We agree. /3/ The costs in question constituted administrative expenses of county welfare departments which must be allocated to the various federal programs that benefit from the costs in accordance with the methodology set out in the State's approved cost allocation plan. The Board's jurisdiction in this case stems from that fact. Specifically, under OMB Circular A-87 (made applicable to the State by 45 CFR 74.171), a single cognizant federal agency is responsible for negotiation, approval and audit of cost allocation plans of state agencies operating federal grant programs. (OMB Circular A-87, J.4.b.) The Department of Health and Human Services (DHHS) has been designated as the cognizant federal agency for the State. (45 Fed. Reg. 13396, 13399 (February 28, 1980)) Implementing OMB Circular A-87, DHHS regulations at 45 CFR 95.501 et seq. provide for the review and approval of cost allocation plans by DCA. These regulations further provide that if costs claimed under certain programs, including the Social Security Act titles in question here, "are not claimed in accordance with the approved cost allocation plan" and "the issue affects the programs of more than one Operating Division or Federal department," then:

the Director, DCA, after consulting with the Operating Divisions, shall determine the amount inappropriately claimed under each program. The Director, DCA, will notify the State of this determination, of the dollar affect (sic) of the claims made under each program, and will inform the State of its opportunity for reconsideration of the determination under 45 CFR Part 75. The State will subsequently be notified by the appropriate Operating Division as to the disposition of the funds in question.

(4) (45 CFR 95.519(b)(1)) This regulation indicates that DCA is responsible for determining whether costs charged to more than one program, including programs administered by other federal departments, are claimed in accordance with a cost allocation plan, although the actual disallowance of costs determined not to be properly claimed rests with the affected program office. This is consistent with guidelines issued by DHHS for implementing OMB Circular A-87, which provide that:

costs approved by the cognizant agency will be recognized by all Federal departments and agencies. Likewise, costs not approved by the cognizant agency will not be recognized.

(A Guide for State and Local Government Agencies, OASC-10, December 1976, p. 3) Furthermore, the role of DCA with respect to the costs in question here was expressly acknowledged by USDA. In a letter dated December 3, 1984 concerning the State's Food Stamp claim, USDA wrote:

Pending a determination by DCA-DHHS, the cost in question may be subject to deferral or disallowance by the Food and Nutrition Service (part of USDA).

(State's Ex. K) This procedure was also consistent with USDA regulations at 7 CFR Part 277. Section 277.9(d) provides in part:

All State agency Cost Allocation Plans for determining the costs of administering the program must be approved by the cognizant Federal agency.

Appendix A, Paragraph (I)(6), of Part 277 further provides:

The cognizant Federal agency, in collaboration with Federal agencies concerned, will be responsible for negotiation, approval, and audit of cost allocation plans.

In view of DCA's authority to make a determination regarding whether the costs in question were properly allocated to the Food Stamp program, it is clear that the Board has jurisdiction. This is so because DCA's determination is made under 45 CFR Part 75, which provides for reconsideration of DCA's determination by the Regional Director or his designee. (45 CFR 75.5, 75-6(d)) Section 75.6(c) in turn requires that the Regional Director's decision inform the grantee of its right to appeal the decision to the Department Grant Appeals Board under 45 CFR Part 16. (5) Moreover, the Board's regulations themselves recognize such disputes as subject to the Board's jurisdiction. Appendix A, Paragraph D, of 45 CFR Part 16 provides:

The Board reviews final written decisions in disputes which may affect a number of HHS programs because they involve cost allocation plans or rate determinations. These include decisions related to cost allocation plans negotiated with State or local governments. . . . The "final written decision" for purposes of Board review of these disputes is the decision issued as a result of the preliminary appeal process at Part 75 of this title.

The State argued that this provision gives the Board jurisdiction over cost allocation disputes only to the extent that they affect DHHS programs, citing the reference to "disputes which may affect a number of HHS programs." The Agency maintained, however, and we agree, that this language means merely that some HHS funds must be involved in order for the Board to have jurisdiction (or indeed, in order for HHS to be the cognizant agency in the first instance). This latter reading is consistent with the intent expressed in 45 CFR Part 75 that the Board have jurisdiction to review the Regional Director's decision in all cost allocation disputes. The State also asserted that USDA has its own mechanism for dealing with disputes concerning the types of costs in question here. USDA regulations provide for the disallowance by the Administrator of the Food and Nutrition Service (FNS) of adminstrative cost of the Food Stamp program based on state agency failures to comply with the Food Stamp Act, regulations, or the FNS-approved State Plan of Operations. (7 CFR 276.4) The regulations further provide that a state agency may appeal such a disallowance to the State Food Stamp Appeals Board. Id., section 276.7) However, these procedures do not clearly preclude the determination by a single cognizant federal agency of costs allocable to the Food Stamp program pursuant to a cost allocation plan. In light of the recognition in Appendix A, Paragraph (I)(6), of 7 CFR Part 277 of the authority of the cognizant federal agency to audit cost allocation plans, the more reasonable view is that the appeals process of the cognizant federal agency takes precedence over the Food Stamp appeals process for this limited purpose. (It appears, however, that where the cognizant federal agency determines that costs are not properly allocated to the Food Stamp program, the Administrator of FNS would remain responsible for making a disallowance determination.) The State argued, however, that Appendix A, Paragraph (1), of 7 CFR Part 277 (concerning cost allocation plans) applied only to indirect costs, and that the wages in question here were direct costs. Appendix A, Paragraph (I)(1), states: "A cost (6) allocation plan will be required to support the distribution of any indirect costs." The term "indirect costs," however, appears to be used here in a broad sense to encompass any costs not on their face clearly chargeable to a particular program, regardless of whether the costs once allocated to various programs are charged as direct or indirect costs. Since the State did not deny that the back wages were subject to a cost allocation plan, it follows that Paragraph (I) is applicable. The State also argued that the reconsideration decision by the Regional Director's designee was illegal because DCA's initial determination allowed the Food Stamp costs. The State asserted that it did not request reconsideration of this aspect of DCA's determination and that this matter was therefore not properly before the Board. The State's request for reconsideration stated:

Pursuant to 45 CFR 95.519(b)(1) and (2) . . ., we are requesting reconsideration of your disallowance determination of claims submitted by this agency for court-ordered back wages to County Welfare Department workers.

(Letter dated December 12, 1985. from Blinzinger to Stanton, p. 1) Since DCA in fact allowed only $398,525 of the $1,460,321 originally allocated by the State to the Food Stamp program, it is not clear that the State's reconsideration request was not challenging DCA's determination with respect to the Food Stamp costs. In any event, the State did not simply request reconsideration of the earlier determination but presented to the Regional Director a recalculation of its claim, based on a new allocation methodology. This recalculation necessarily re-opened the issue of whether costs were properly allocated to the Food Stamp program. This is so because the costs incurred by a state agency in administering various federal programs must be allocated to those programs on a uniform basis. Thus, the State cannot rely on one methodology -- the methodology used by DCA -- to determine the costs allocable to the Food Stamp program and on another methodology -- its new methodology -- to determine the costs allocable to the Social Security Act programs. To do so might result in the State's being reimbursed for either more or less than the total amount of costs actually incurred. In fact, the State's new allocation methodology resulted in the reduction of its Food Stamp claim below the amount allowed by DCA and an increase in the total claimed for all programs. Thus, the State clearly intended that the allocability of the costs charged to all programs, including the Food Stamp program, be reconsidered based on its new allocation methodology. For the foregoing reasons, we conclude that the Board has jurisdiction to review this dispute. (7) II. Timeless of State's Claims The expenditures in question here were required by the decision in King v. State of Indiana, No. S175-1143 (Marion County Superior court), aff'd, State v. King, 413 N.E.2d 1016 (Ind. App. 1980), which held that the State illegally established separate salary schedules for county welfare department merit employees that were unequal to those for other State employees performing comparable work. The trial court appointed a Commissioner to determine the amount of back wages owed to each member of the affected class. The State paid $14,401,799 into court on May 4, 1982, and another $545,194 into court on May 11, 1982 pursuant to court orders approving the Commissioner's initial and supplemental reports. /4/ The State filed claims for federal financial participation in these expenditures in July 1984 and August 1984. DCA and subsequently the Regional Director, by his designee, determined that all costs but those claimed under the USDA Food Stamp program were unallowable because they were not filed within two years of the date the expenditures were made, as required by section 1132 of the Social Security Act. Both decisions noted that section 1132 contains an exception for "court-ordered retroactive payments," concluded that the claims should have been filed within two years after the State made payments to the court. We find, however, that this interpretation of the exception for "court-ordered retroactive payments" is clearly inconsistent with regulations promulgated by DHHS to implement section 1132. Accordingly, we conclude that the State's claims were timely filed. Section 1132(a) /5/ of the Social Security Act provides as follows:

Notwithstanding any other provision of this Act (but subject to subsection (b)), any claim by a State for payment with respect to an expenditure made during any calendar quarter by the State --

(1) in carrying out a State plan approved under title I, IV, X, XIV, XIX, or XX of this Act, or

(8) (2) under any other provision of this Act which provides (on an entitlement basis) for Federal financial participation in expenditures made under State plans or programs, shall be filed (in such form and manner as the Secretary shall by regulations prescribe) within the two-year period which begins on the first day of the calendar quarter immediately following such calendar quarter; and payment shall not be made under this Act on account of any such expenditure if claim therefor is not made within such two-year period; except that this section shall not be applied so as to deny payment with respect to any expenditure involving court-ordered retroactive payments or audit exceptions, or adjustments to prior year costs.

The implementing regulations at 45 CFR 95.7 (1981) articulate the general rule as follows:

(We) will pay a State for State agency expenditure made after September 30, 1979, only if the State files a claim with us for that expenditure within 2 years after the calendar quarter in which the State agency made the expenditure. Section 95.19 lists the exceptions to this rule.

Section 95.19 provides:

The time limits in Secs. 95.7 and 95.10 do not apply to any of the following --

(a) Any claim for an adjustment to prior year costs.

(b) Any claim resulting from an audit exception.

(c) Any claim resulting from a court-ordered retroactive payment.

(d) Any claim for which the Secretary decides there was good cause for the State's not filing it within the time limit.

The State argued that those regulations impose no restriction on the time for filing a claim resulting from a court-ordered retroactive payment. The Agency also acknowledged that this was the literal meaning of the regulations. There is nothing in the preamble accompanying the publication of these provisions in the Federal Register which indicates a contrary intent. However, the Agency asserted that the literal meaning of a regulation should not be accepted where that meaning would conflict with the statute, and argued that the statute requires a state to file a claim within two years of the quarter in which it makes a court-ordered retroactive payment. We find the reading proposed by the Agency here to be a strained one, which is neither mandated by the plain language of the statute nor required in order to fulfill the statutory(9) purposes. Moreover, even if the Agency's reading of the statute is a reasonable one, it is clear from the regulations that DHHS has adopted a different interpretation. Accordingly, the interpretation that should apply is the one articulated in the published regulations, on which the State was entitled to rely. The Agency's argument regarding the meaning of the statute relies on the fact that section 1132 states that the two-year filing limit "shall not be applied so as to deny payment" of certain types of expenditures, including court-ordered retroactive payments. The Agency argued that this language:

does not eliminate the two-year filing limit with respect to such expenditures, but only precludes an application of the limit which would bar reimbursement based on the expenditures themselves, without regard to the state's actions in filing its claims.

(Agency's brief dated August 18, 1986, p. 19) This argument, however, is based on the mistaken premise that, in the absence of the exception for court-ordered retroactive payments, even if the State had filed its claims immediately after making the payments into court, payment of federal financial participation would have been precluded on the ground that the back wages related to a period more than two years before the State's claims were filed. In fact, however, section 1132 requires that a claim be made within two years after the date of the expenditure, without consideration of the period to which the expenditure relates. The regulations issued by DHHS defining when an expenditure is made state in pertinent part:

We consider a State Agency's expenditure for administration or training under title I, IV-A, IV-D, IV-E, X, XIV, XVI (AABD), or XIX to have been made in the quarter payment was made by a State agency to a private agency or individual. . . .

45 CFR 95.13(d). Thus, the expenditures in this case were clearly made no earlier than the time that the State made the payments into court, /6/ so that the two-year limitation would(10) not have barred payment had the State's claims been filed immediately thereafter. Accordingly, the rationale advanced by the Agency to support its view that the exception for court-ordered payments merely tolls the two-year filing deadline until the State makes a court-ordered retroactive payment is defective. We do not here decide that the Agency's reading of the statute proposed here is an unreasonable one, and we note that the Agency could implement such a reading in its regulations. We do not agree with the Agency, however, that the State's interpretation, which is the one plainly articulated by the regulation, defeats the general purpose of the two-year limit to permit DHHS to plan its budget based on predictable claims by the states. Since, as the Agency itself noted, the court-ordered retroactive payments here related to a period of years beginning in 1960, it would appear to make little difference to DHHS for budget planning purposes whether the State filed its claims immediately after it made the payments into court or years thereafter, since the expenditures were not made on a current basis and could not have been predicted. The Agency also noted that, in decisions construing the exceptions for audit exceptions and adjustments to prior year costs, this Board has consistently indicated that the exceptions were to be construed narrowly. However, those decisions addressed the scope of the individual exceptions and not the question presented here whether the two-year limit applies to expenditures within the scope of the exceptions. It is arguable, moreover, that a narrow construction of the individual exceptions is necessary precisely because the two-year filing limit does not apply at all to the types of expenditures covered by the exceptions, in which case a broad construction of the indvidual exceptions would render the general rule almost meaningless. Accordingly, since DHHS in duly promulgated regulations has clearly interpreted section 1132 of the Social Security Act as not imposing any time limit on the filing of claims for court-ordered retroactive payments, we reverse the Agency's determination based on a contrary interpretation. Conclusion For the foregoing reasons, we conclude that the Board has jurisdiction to review the Agency's determination that expenditures claimed by the State as costs of the Food Stamp program were not allocable to that program. We further conclude that the Agency erroneously disallowed the State's claims for expenditures under the Social Security Act programs as untimely filed. We therefore remand the case to the Agency, which may proceed to issue a new determination with(11) respect to both the Food Stamp costs and the Social Security Act costs based on the State's allocation methodology and on the limitations imposed by Public Law 95-291 to the extent that the latter matter has not been resolved by the parties.

##FN001 /1/ The Social Security Act portion of the State's claim was originally made under titles IV-A, IV-D and XIX. The title IV-A costs were identified as income maintenance costs. The State's new allocation methodology indicated that the income maintenance costs were properly claimed under titles I, X, XIV and XVI as well as title IV-A. ##FN002 /2/ The Regional's Director's designee also stated that to the extent that the State's claims under titles I, IV-A, X and XIV of the Social Security Act pertained to the administration of social services prior to October 1, 1975, such claims were unallowable under Public Law 95-291, which required that the claims had to be submitted no later than September 11, 1977. He further stated that any claims under titles I, X, and XIV would be contingent upon the availability of funds under those titles. In light of the State's apparent agreement with the Agency regarding this basis for the disallowance, the Board directed the parties to discuss their respective positions concurrently with the proceedings before the Board on other issues. (Board's letter to parties dated May 16, 1986) ##FN003 /3/ Under 45 CFR 16.7, the Board Chair determines whether an appeal meets the requirements of Appendix A of Part 16, which defines the Board's jurisdiction. For purposes of convenience, the Board Chair's jurisdictional ruling in this case is incorporated in the decision of a three-member Panel, of which the Board Chair is one member. ##FN004 /4/ These amounts exclude interest paid by the State. The State did not claim federal financial participation in the interest payments. ##FN005 /5/ Subsection (b) of section 1132 provides that the Secretary shall waive the time limit if he determines that there was good cause for late filing. ##FN006 /6/ The State argued that the expenditures were not made until the distribution of the back wages to individual class members was completed in 1984, so that its claims would be timely even absent the exception for court-ordered retroactive payments. In view of our interpretation of that exception, however, we need not address this contention.

394

APRIL 25, 1987

00792

GAB Decision

02

September 29, 1986

New York State Department of Social Services; Docket No. 36-107

Ballard, Judith A.; Teitz, Alexander G.

Settle, Norval D.

(1) The New York State Department of Social Services (State) appealed the disallowance of $1,958,901 in federal financial participation by the Health Care Financing Administration (HCFA) under Title XIX (Medicaid) of the Social Security Act (Act). The disallowance represented claims submitted by the State for 15 percent incentive payments for medical support enforcement activity for the period April 1985 through September 1985. HCFA determined that the documentation submitted by the State in support of its claims did not demonstrate that the gross collections against which the 15 percent had been calculated were in fact the results of enforcement and collection activity undertaken by a political subdivision of New York State or by another state pursuant to cooperative agreements in accordance with sections 1903(p)(1) and 1912(a)(1) of the Act.

The Board dealt with essentially the same issues concerning incentive payments for enforcement and collection efforts in New York State Department of Social Services, Decision No. 628, March 19, 1985. The State requested the opportunity to verify whether political subdivisions reporting expenditures duly distinguished between allowable Child Support Enforcement and other collections in calculating the 15 percent payment for medical support enforcement activity. The State asserted that, once the figures used by HCFA in reaching the disallowance were verified, the State would stipulate to the disallowance being sustained based upon Decision No. 628, without the necessity of further proceedings. See, Appellant's letter to the Board dated June 16, 1986. The Board gave the State the opportunity to examine HCFA's calculations. The State then submitted documentation showing that the disallowance should be reduced by $32,536. HCFA reviewed the State's submission and agreed that the disallowance should be so reduced. See Respondent's letter to the Board dated September 24, 1986. (2) We therefore sustain the disallowance in the reduced amount of $1,926,365, based on Decision No. 628, which we incorporate by reference here.

394

APRIL 25, 1987

00791

GAB Decision

02

September 22, 1986

Wisconsin Department of Health and Social Services; Docket No. 85-11

Settle, Norval D.; Teitz, Alexander G.

Ford, Cecilia S.

(1) The Wisconsin Department of Health and Social Services (State) appealed a decision by the Health Care Financing Administration (Agency) disallowing $724,628.69 in federal funds claimed by the State under Title XIX of the Social Security Act (Act) for the quarters ending March 31, June 30, and September 30, 1984. The disallowance was based on the Agency's finding that the State failed to maintain an effective program for controlling the utilization of long-term care services provided at 15 intermediate care facilities (ICFs) in accordance with section 1903(g) of the Act. The Agency determined that, for the quarters in question, patients certified as needing skilled nursing care were retained in these ICFs. During the course of this appeal we issued Decision No. 655, Effect of DEFRA Amendments on Utilization Control Disallowances, June 7, 1985. Based on that decision, the Agency deleted the quarter ending September 30, 1984 from the disallowance. See Agency Letter, July 25, 1986. For the reasons discussed below, we uphold the disallowance for the quarters ending March 31 and June 30, 1984, and direct the Agency to recalculate the disallowance accordingly.

In three earlier cases from Wisconsin, the Board addressed whether it is a violation of the utilization control requirements to retain Medicaid patients certified as requireing skilled nursing care in ICFs or Medicaid patients certified as requiring intermediate nursing care in skilled nursing facilities (SNFs). See Wisconsin Department of Health and Social Services, Decision No. 482, November 30, 1983; Wisconsin Department of Health and Social Services, Decision No. 525, March 30, 1984; and Wisconsin Department of Health and Social Services, Decision No. 547, June 27, 1984. In those decisions, we sustained the Agency's position that ICF patients could not properly be retained in SNFs, nor could SNF patients properly be retained in ICFs. Our findings in those decisions have been upheld by the United States Court of Appeals for the Seventh Circuit in State of Wisconsin v. Bowen, No. 85-1207 (7th Cir. July 21, 1986. (2) This case was appealed to the Board while the three Wisconsin decisions cited above were on appeal to the Seventh Circuit from a District Court ruling which reversed and remanded the Board's decisions. The parties and the Board agreed that it would be appropriate to stay the proceedings in this case pending the Seventh Circuit's decision. See Stay of Appeal, February 19, 1985. Upon receipt of the Seventh Circuit's decision, the Board ordered the State to show cause why, based on that decision, a summary decision should not be issued in this appeal. The Order also indicated that the State could choose to withdraw this appeal in light of the Seventh Circuit's decision. See Order to Show Cause, July 30, 1986. The State's undated reply to our Order (received September 12, 1986) indicated that it did not wish to withdraw this appeal and requested a continuation of the stay in view of the fact that the State "will most likely petition the U.S. Supreme Court for a writ of certiorari." The State did not specifically comment on the Board's issuance of a summary decision. We find that a further stay of these proceedings is not warranted. The State has not alleged the existence of any new facts or issues requiring further development or given any reason for distinguishing this appeal from those decided earlier. From our review of the Notice of Disallowance and the State's Notice of Appeal, we conclude that the issues here are resolved by the prior decisions. Accordingly, we are issuing this summary decision, which will end the administrative review process, rather than continuing to keep this appeal on the Board's docket. Therefore, for the reasons stated in Decision Nos. 482, 525, and 547, which are incorporated here by reference, we uphold this disallowance. The Agency should recalculate the amount of the disallowance consistent with its decision to delete the quarter ending September 30, 1984 from the disallowance.

394

APRIL 25, 1987

00790

GAB Decision

09

September 22, 1986

New Mexico State Agency on Aging; Docket No. 86-55

Ford, Cecilia S.; Settle, Norval D.

Ballard, Judith A.

(1) The New Mexico State Agency on Aging (State) appealed a determination by the Office of Human Development Services (OHDS) to disallow $133,970 in funds awarded to the State for fiscal year (FY) 1984 under Title III of the Older Americans Act of 1965 as amended, 42 U.S.C. 3001 et seq. The basis for the disallowance was the State's failure to obligate these funds by the end of FY 1984 on September 30, 1984. For the reasons discussed below, we uphold the disallowance.

I. The Obligation Requirement Regulations applying to the Older Americans Program provide:

Except as provided in paragraph (b) of this section (concerning the "reallotment" of funding), the State agency must obligate any funds received under this part during the fiscal year in which they are allotted.

45 CFR 1321.197(a). Obligation has been characterized as "a definite commitment which creates a legal liability of the Government for the payment of appropriated funds for goods and services ordered or received." Decision of the U.S. Comptroller General, B-116795, June 18, 1954. The Comptroller General "has generally avoided a universally applicable legal definition of the term 'obligation,' and has instead analyzed the nature of the particular transaction at issue to determine whether an obligation has been incurred." Decision of the U.S. Comptroller General, B-192282, April 18, 1979. The State referred to a general definition of "obligations" found in 45 CFR 74.71, which pertains to financial reporting requirements for Department grantees. As such, the regulation does not specifically implement the program requirement in 45 CFR 1321.197 that funds be obligated by the end of the fiscal year. However, the definition is consistent with the(2) Comptroller General decisions cited above and may provide some general guidance to determining whether there has been an obligation:

"Obligations" are the amounts of orders placed, contracts and subgrants awarded, services received, and similar transactions during a given period, which will require payment during the same or a future period.

45 CFR 74.71. The Board has previously concluded that the key issue in determining whether a state timely obligated funds as required by 45 CFR 1321.197 is whether there was, during the fiscal year, a definite commitment requiring payment. See Texas Department on Aging, Decision No. 571, September 12, 1984, pp. 4-5. II. The Facts of this Case The State entered into a contract with the New Mexico District II Area on Aging, Inc. (District II) to provide services under the Older Americans Act. The contract was signed by the State on July 3, 1984 and by District II on June 29, 1984. State's Ex. 5a. The contract incorporated by reference a Notification of Grant Award (NGA), which had several sections, including an "approved budget" and a "computation of grant." State's Ex. 5b. /1/ The parties agreed that the NGA's "approved budget" of $2,428,983 ($1,205,332 federal share) included $133,970 in costs to which the funds in dispute were ultimately applied. The "computation of grant" on this NGA, however, listed under "(new) obligational authority herein awarded" only $368,353 in federal funds; the parties agreed that this amount did not include the $133,970 in dispute here. The State issued amendments to the original contract to "release additional federal funds as the funds (became) available." State's Brief, p. 4. Amendment No. 2 to the contract, OHDS' Exhibit 2, was signed by the State on September 28, 1986, only two days prior to the end of FY 1984. Amendment No. 3 to the contract "released" the $133,970 in federal funds which are in dispute, according to the State. State's Ex. 5c. Amendment No. 3 was signed by representatives of the State and of District II on October 30 and October 31,(3) 1984, respectively, after the end of FY 1984. Amendment Nos. 2 and 3 also were each accompanied by a Notification of Grant Award, the same basic NGA form as that incorporated into the original contract. /2/ The NGA for Amendment Nos. 2 and 3 repeated the same entries under the category "approved budget" as that for the NGA to the original contract. Under the "computation of grant" category, the NGA to Amendment No. 3 listed the $133,970 that is in dispute as the federal share on the line for "(new) obligational authority herein awarded." State's Ex. 5c. Although Amendment No. 3 was signed on October 30 and 31, the State maintained that it should be considered effective before the end of the fiscal year. State's Exhibit 6, an October 29, 1984 memorandum from the State Agency on Aging to the State Division of Finance and Administration (DFA), was signed by the Secretary of DFA next to the notation "Waiver Approved." The four-sentence memorandum requested a "waiver on the effective date" of the contract because "(allocation) of these funds in this manner had been planned for several months but no contract was executed." The memorandum further explained: "The effective date of the contract must be September 30, 1984 in order to avoid the loss of federal funds in the amount of $134,000." III. Analysis In maintaining that the $133,970 was obligated by the State before the close of FY 1984, the State presented the following arguments. First, the State maintained that the State had "waived" the October date and retroactively established the amendment date to be September 30, 1984. Second, the State argued that the NGA incorporated into the original contract, executed before the close of the fiscal year, obligated the funds. The State also argued generally that the disallowance was inequitable. We discuss these arguments in turn below. (4) A. The State could not retroactively change the date of obligation. In its notice of appeal, the State argued that the Contract Amendment No. 3, which released the $133,970 in dispute to District II, should be considered as "effective" on September 30, 1984 because of a "waiver" by the State Department of Finance and Administration. Although the State did not continue to argue this point in its brief, we respond briefly to the argument below. /3/ To accept a state's argument that it may "waive" the effective date of a contract in order to claim that funds were obligated by a certain date would render meaningless the regulatory requirement that funds be obligated by the end of the fiscal year in which they were awarded. The State's "waiver" does not alter the uncontroverted fact that Amendment No. 3 to the contract was signed by both parties at the end of October 1984, after the end of the fiscal year. We therefore conclude that we cannot accept the "waiver" of the contract's signature date as evidence that the funds were obligated in a timely manner. B. The Notification of Grant Award here did not constitute an obligation of funds. The State alternatively argued that the NGA incorporated into the original contract obligated the $133,970 in dispute. The State noted that the Board has previously recognized that a notification of grant award may constitute an obligation of (5) funds, citing Montana Department of Social and Rehabilitation Services, Decision No. 549, July 3, 1984. The State is correct that an NGA may constitute an obligation of funds. In any particular case, however, the Board would clearly need to analyze how the NGA in question is worded and the context in which it operates in evaluating whether the NGA was a definite commitment that constituted an obligation of funds. In the present appeal, the State would have a stronger case if the "approved budget" section of the NGA to the original contract, which included the $133,970, stood alone as the sole component of the NGA. Even in such a case, however, the State would need to demonstrate how approval of a budget constituted a definite commitment of the State to pay the full budgeted amount out of a specific year's funds. The State presented only a conclusory argument, and no evidence, to support a conclusion that budget approval constituted such a commitment. In any event, the "approved budget" section of the NGA here obviously must be considered in conjunction with the remainder of that form, including the "computation of grant" section which appears directly below it. The name and wording of the section itself indicates that this was the part of the NGA form intended to describe the amount of funding which was granted to District II. Line 8 of the "computation of grant" section reads: "Federal/State Shares will be Comprised of:" and then lists possible sources of federal and state shares. Line 8(b) describes the "carry over" from the previous period and line 8(c) describes the "new obligational authority herein awarded," listing both the federal and state shares of the award. The $133,970 in dispute is clearly listed as the federal share on line 8(c) of the NGA appended to Contract Amendment No. 3, which we have concluded was not executed prior to the end of FY 1984. /4/ This NGA is identified as a(6) "Revision of Earlier Grant." Since the only change is on line 8(c), the logical conclusion is that the $133,970 was not part of the funds granted by the original NGA. Our conclusion that line 8 of the NGA's "computation of grant" section obligated funds, rather than the "approved budget" section, is further reinforced by the contract into which the NGA was incorporated by reference. OHDS argued that the NGA was by nature "ambiguous" and "could not control the more specific language of the contract." OHDS' Brief, p. 6. We do not specifically decide whether the language of the contract and its amendments superseded the NGA's which they incorporated, but nonetheless find it highly significant that the amount of funding authorized by the contract and each of the amendments corresponded precisely with the sum of money described on line 8(c) in the "computation of grant" section for each of the NGA's and was only some part of the funds listed as the "approved budget." The original contract is a 16-page formal document which includes an extensive description of the duties of District II, as well as the specific amounts of funding released by the State under each relevant statutory provision. State's Ex. 5a. Each of the contract amendments also described the monies released under each statutory provision. Read in conjunction with the NGA's, the contracts clearly support the conclusion that the amount of federal funds obligated was not the total federal share of the approved budget but was only the amount of federal funds "awarded" on line 8 of the "computation of grant" section of the NGA. The State interpreted the relationship between the contract and the NGA differently, arguing that the NGA to the original contract was itself a "contract and subgrant awarded," one of the examples of an "obligation" as defined in 45 CFR 74.71. The State further argued that by the NGA the State was "contractually bound to fulfill the entire amount of grant awarded thereunder," referring to the total sum specified in the "approved budget" portion of the NGA. State's Brief, pp. 5-6. However, the State did not seek to demonstrate how either the contract or the NGA contractually bound the State to eventually spend the disputed sum because of its inclusion in the "approved budget" amount. The contract itself was not silent on the question of what money had to be spent to satisfy the contract, but instead listed under each statutory provision the dollar amount which the State "shall pay the Contractor . . . for the provision of services. . ." Those dollar amounts did not reflect the full amount of federal funds described by the "approved budget" part of the NGA, as we have explained above, but rather corresponded precisely(7) with the smaller amount described by line 8(c) of the "computation of grant" part of the NGA. In sum, we conclude that line 8 of the "computation of grant" section of the NGA described the funding which represented a definite commitment of the State and thus an obligation, as also reflected in the contracts. The State was not legally bound to pay all amounts listed on the approved budget part of the NGA. The State relied upon two Board decisions in arguing that the NGA incorporated into the original contract constituted an obligation of the $133,970. We find the circumstances of both of those decisions to be distinguishable from the present appeal. The State first argued that this case was analogous to that decided in Montana Department of Social and Rehabilitation Services, Decision No. 549, July 3, 1984. The Board found in that decision that the language of the NGA's at issue there "unquestionably binds the State agency to turn over funds" to the local agency and "the award language does not appear to be susceptible to any other interpretation." Montana, p. 4 (footnote omitted). As we have discussed above, the language of the NGA here is susceptible of another interpretation, i.e., that the State's commitment extended only to funds listed under line 8 of the "computation of grant" section, not to the full budgeted amount. /5/ The State also cited Texas Department on Aging, Decision No. 571, September 12, 1984, for the proposition that a "clear intent" to obligate funds may exist even in the absence of a signed document to obligate the funds. The State argued that such a clear intent existed in the present case. State's Brief, pp. 7-8. The situation considered in Texas was very different from the present case, however. In Texas, a State agency official, authorized to grant funds, had sent a letter to the subgrantee during the fiscal year approving the use of the funds in question as a carryover. The Board found that this constituted an obligation because preceding events, including approval of a method of allocating funds and written(8) communications between the State and the subgrantee, eliminated any ambiguity about whether the approval meant that Texas was legally bound to pay the funds in question. While the Board noted that the events made it clear what that State's intent was with regard to the funds, the Board also noted that mere intent is insufficient to create an obligation. Here, the State said that it had been "planning" to obligate the funds earlier, but the State's own document indicates that this was merely a general intent to obligate all federal funds and that the choice to provide the $133,970 in funds to District II was made subsequent to the end of the fiscal year (based on the somewhat arbitrary factor that that district was geographically closest to the State office so the contract amendment could be processed relatively quickly). State's Ex. 10. We therefore conclude that the State's reliance on Montana and Texas is misplaced. C. The disallowance should not be reversed on equitable grounds. In the last part of its brief, the State argued that for the Board to uphold the disallowance in this appeal would be "inequitable and contrary to the goals of administrative law." State's Brief, p. 10. One basis for this was the explanation that during 1984 there was a major reorganization of the State government which streamlined the contracting process and caused a temporary disruption which delayed the "formalizing" of Contract Amendment No. 3. The State also argued that the disallowance would work a particular hardship on the State's program in light of declining State revenues and recent budget cuts. State's Brief, pp. 10-11. The Board's power is expressly limited by Department regulations, which provide that we are "bound by all applicable laws and regulations." 45 CFR 16.14. The Board has also concluded in previous decisions that it is not empowered to award grants. Here, we have found that the State did not meet the regulatory requirement to obligate the $133,970 during FY 1984. We also note that the failure to obligate the funds in a timely manner appears to have been caused by the State's own delay, as reflected in the State's admission that "(allocation) of these funds . . . had been planned for several months but no contract was executed." State's Ex. 6. The significance of the State's point that the contracting(9) process was disrupted is further weakened by the fact that Contract Amendment No. 2 was signed on September 28, 1986, just prior to the close of the fiscal year. It would appear to have been a simple matter to have included the $133,970 in that amendment, rather than executing a separate amendment at a later date. The State's apparent implication that the obligation requirement is an overly technical one is not a proposition we can accept. The purpose behind the requirement is to enable the federal Commissioner on Aging to fulfill a statutory duty to timely reallot to other states any amount which was allotted to a state which that state has not used for the intended purpose. Section 304(b) of the Older Americans Act; see 45 Fed. Reg. 21145 (March 31, 1980). Thus, OHDS was reasonable in holding the State to the requirement. Conclusion For the reasons stated above, we uphold the disallowance.

##FN001 /1/ The blanks on the NGA form which were apparently intended to describe the time period to which the budget applied were not filled out. However, two contract amendments, State's Exhibit 5c and OHDS' Exhibit 2, describe the precisely identical budget as pertaining to the period July 1, 1984 to June 1, 1985. ##FN002 /2/ Only the original contract stated that the attached NGA was "incorporated by reference." State's Ex. 5a, p. 2 of the contract. However, Contract Amendments Nos. 2 and 3 and their attached NGA's appear in an identical format, indicating that these NGA's were part of the contract amendments to which they were appended. OHDS' Ex. 2; State's Ex. 5c. Further, the parties in their briefs assumed that the two later NGA's were also incorporated by reference. ##FN003 /3/ The State in its brief emphasized that before March 1986, including the time when the notice of appeal was filed, the State was not represented by counsel. The State observed that the record indicates the State's apparent admission that the funds in dispute were not "obligated" during the fiscal year, but explained that this apparent admission stemmed from a misunderstanding of the technical meaning of obligation of funds. The State urged the Board to "look beyond" the statement that the funds were not "obligated" during the fiscal year. State's Brief, pp. 8-10. We find that we do not need to consider whether the State should be bound by its earlier statements since, as explained in the decision, we have analyzed the parties' complete arguments and appeal files and have concluded on the record that the funds were not obligated by the end of FY 1984. ##FN004 /4/ The "computation of grant" section also includes on line 1 ("Estimated total cost") the $2,428,983 which is the total budgeted amount and on line 6 ("Federal share of net cost") the $1,205,332 which appears on the budget as the total federal share. A careful reading of the "Remarks" section of the NGA indicates, however, that the $2,428,983 is only an "estimated net project cost" and that the $1,205,332 is a "ceiling" on the federal share and is subject to certain conditions (i.e., satisfactory progress, adequate justification, and availability of funds). State's Ex. 5b. ##FN005 /5/ The Agency in that case did not even dispute that the NGA there might per se constitute a binding commitment of funding, but instead objected to the State's practice of awarding the funds by the NGA to a lead agency, which then would have to redistribute the funds to the actual entity which would provide the program services. In the present case, by contrast, there is no issue of a redistribution of funds by the contractor.

394

APRIL 25, 1987

00789

GAB Decision

08

September 22, 1986

Tulsa Community Action Agency; Docket Nos. 85-240; and 85-241; Audit Control Nos. 06-45135 and 06-55181

Settle, Norval D.; Stratton, Charles E. Teitz, Alexander G.

(1) The Tulsa Community Action Agency (TCAA) appealed two decisions by the Office of Human Development Services (OHDS) disallowing $34,400 and $51,488 under TCAA's Head Start grants for its 1981 and 1984 program years respectively. OHDS based its disallowances on independent audits of TCAA's operation of its Head Start program. For reasons discussed below, we affirm the 1981 disallowance. We affirm in part and remand in part the 1984 disallowance.

I. The 1981 Program Year

Based on an audit by the firm of Underwood and Beaubien, OHDS disallowed $34,400 for TCAA's 1981 program year:

-- $28,287 for direct costs in excess of amounts authorized under the grant, and

-- $6,113 representing a prior period adjustment to TCAA's fund balance.

The $28,287 overexpenditure TCAA disputed OHDS' finding that the $28,287 represented an overexpenditure. Rather, TCAA contended that the $28,287 represented an accounts receivable item stemming from TCAA's operation of a day care center in addition to its Head Start activities. TCAA claimed that it had not collected all the reimbursement due from parents and the Oklahoma Department of Human Services for the day care operation. TCAA asserted that Underwood and Beaubien erroneously treated these receivables as overexpenditures for 1981. TCAA explained in great detail its problems with Underwood and Beaubien and contended that there was reason to doubt the accuracy of the final audit product. TCAA pointed out that the 1981 audit was unique in not listing any accounts(2) receivable, as such receivables were recognized in the 1980, 1982, and 1983 audits of TCAA performed by other auditing firms. In response OHDS argued that TCAA did not question the findings of Underwood and Beaubien when the final version of the audit report was issued in 1984. OHDS disputed TCAA's assertion that the 1981 audit was unique in not disclosing accounts receivable. OHDS contended that only one audit of TCAA in the period 1978 to 1983 showed accounts receivable. OHDS declared that TCAA had not provided any evidence that the $28,287 represented accounts receivable. The only argument TCAA has offered the Board to support its claim for the $28,287 is what can be termed a negative inference: because TCAA had accounts receivable in 1980, 1982, and 1983, it must have also had one in 1981 that the audit erroneously termed an overexpenditure. OHDS has questioned that assertion and TCAA has not submitted evidence to rebut OHD's objection. In response to repeated Board requests, TCAA was unable to provide the Board with any evidence to support its claim. A fundamental principle of grants management is the requirement to document costs, and a grantee has the obligation to provide documentation to support its claim. See, e.g., New York State Department of Social Services, Decision No. 204, August 7, 1981. Since TCAA has been unable to document that the $28,287 was an accounts receivable and not an overexpenditure, we find that OHDS' disallowance of the $28,287 was proper. The $6,113 prior period adjustment OHDS disallowed TCAA's claim of $6,113 for a prior period adjustment because of the lateness of TCAA's claim. OHDS, in its disallowance notification, referred to a September 1981 Grants Management Policy statement: /1/

When the Grantee detects an overcharge on a previously submitted report of expenditures, a revision must be submitted to the Grants(3) Management Officer no matter how long the lapse of time. When a revised report of adjustment to previous audit information representing additional claims by the grantee is necessary, it should be submitted with appropriate explanation to the GMO as promptly as possible but no later than one year from the due date of the original report or audit. GMO will not accept revised reports or audit adjustments when these reports are received more than one year after the due date of the original report. (emphasis in original)

TCAA submitted its claim for an adjustment to its 1981 program year in April 1984. TCAA explained that the lateness of the submitted adjustment was directly due to difficulties it experienced with Underwood and Beaubien in completing an acceptable audit. On February 22, 1982, TCAA contracted with Underwood and Beaubien to perform an audit of the 1981 program year. OHDS had informed its grantees that audits were due 120 days after the end of the budget period. OHDS Ex. A. Underwood and Beaubien, however, did not complete the audit until August 1982. The OHDS Regional Audit Director began a review of the audit working papers and, on March 11, 1983, found Underwood and Beaubien's audit unacceptable. After Underwood and Beaubien did not act to correct the rejected audit, TCAA contacted the Oklahoma State Board of Accountancy for assistance. Underwood and Beaubien then began to re-work the audit. Ultimately, Underwood and Beaubien produced an audit acceptable to OHDS in March 1984, more than two years later than the date of the contract. One month later TCAA submitted its claim for an adjustment of its 1981 program year costs. TCAA thus argued that events beyond its control prevented it from submitting its adjusted claim any earlier. TCAA contended that the adjustment could not have been submitted until an acceptable audit was finalized. According to TCAA, OHDS' rigid adherence to the one-year limit for any adjustment is patently unfair in light of the particular of facts of this case. OHDS did not dispute the difficulties TCAA had with the audit firm, but argued that those problems should not be considered mitigating factors so as to permit a late adjustment. OHDS maintained that all grantees, including TCAA, had been instructed on the time frames for the submission of audits and adjustments. These instructions specifically stated that audits from Head Start grantees were due 120 days after the end of the budget period, and (4) that any proposed adjustment should be submitted no later than one year after the due date of the original audit. Thus, according to OHDS, TCAA's adjustment to its 1981 program year budget should have been submitted no later than May 1983 for it to have been considered. OHDS contended that the ultimate responsibility for accurate and current record-keeping lies with the grantee, not the audit firm. 45 CFR 74.61(a) (1981). According to OHDS, if TCAA had been monitoring its accounts as required by regulation, the need for any adjustments would have been recognized in sufficient time to meet OHDs requirements. OHDS added that, in any event, the prior year fund balance had been assigned to a subsequent year and was no longer available for any adjustment. The Board asked OHDS whether, if the audit had been timely performed and TCAA had then submitted an adjustment of $6,113 within one year, it would have accepted that adjustment. OHDS replied that it probably would have been accepted because funds were then available, but now the funds had been reassigned to a subsequent year. OHDS May 16, 1986 response, p. 3. Without the benefit of a reliable audit, we agree with TCAA that it would have been extremely difficult for TCAA to request an accurate prior year adjustment within the time constraints imposed by OHDS. While it is true that TCAA itself selected Underwood and Beaubien as its auditors, it is clear to us that TCAA could not have reasonably foreseen the difficulties it would experience in getting an acceptable audit. Further, OHDS admitted that TCAA's request would in all probability have been granted if it had been timely submitted. In holding TCAA to a one-year deadline, OHDS has not cited any statutory or regulatory authority for such a time limitation. Rather, OHDS has referred to a February 1981 letter sent by its Regional Office to all grantees within that jurisdiction, the contents of which were made a Grants Management Policy Statement in September 1981. The one-year limitation, therefore, appears to have a lesser status than a binding law or regulation. In light of the particular circumstances of this case, the rigid application of such an administrative requirement might be considered arbitrary. We believe that, if a grantee can make out a prima facie case that the one-year filing requirement could not be met, OHDS should be required at a minimum to justify its application of the filing deadline, rather than merely rigidly applying it. Here, however, we believe that a remand for an OHDS review is unnecessary in light of OHDS's unrebutted position that,(5) regardless of the merits of TCAA's position, funds are no longer available for a prior period adjustment. The Board specifically asked OHDS to inquire further into the possibility of finding funds for the adjustment, but OHDS replied again that funds were not available. The Board cannot order OHDS to make the adjustment if money is no longer available for disbursement. That would be tantamount to the Board awarding a grant, a power clearly beyond the Board's authority. See, e.g., Pinellas Opportunity Council, Inc., Decision No. 80, February 6, 1980. Accordingly, we have no alternative but to uphold OHDS's refusal to accept TCAA's proposed prior year adjustment solely on the basis of the lack of availability of funds. /2/

II. The 1984 Program Year

Based on an audit of TCAA's 1984 program year by the auditing firm of Kaye Colyer Wirz, Inc., OHDS originally disallowed $51,488. The disallowance, consisting of an adjustment of entries from a prior period to uncollectible accounts receivable, was itemized as follows: Uncollectible receivables from $45,772.20 Varick Day Care Center Disallowed graduation costs 252.86 deemed to be uncollectible Funds due to Head Start for 1980 4,645.00 disallowed costs deemed to be uncollectible Reimbursement expected from (785.00) St. Patrick's Head Start Center Not to be reimbursed fees 16.25 expenses Disallowed costs not written off 1,546.69 from previous audit period Uncollectible Accounts TOTAL $51,448.00

% (6) The $785 was credited to TCAA's account and reduced the disallowance. During the course of the appeal, TCAA submitted documentation, accepted by OHDS, that it had already repaid the disallowed costs of $1,546.69 not written off from a previous audit period. The amount of the disallowance thus amounted to $49,901.31.

TCAA gave no indication that it was appealing the disallowed graduation costs ($252.86) or the disallowed fees ($16.25). Thus, only two disallowed items remain at issue: $4,645 for uncollectible disallowed costs from 1980 and $45,772.20 in alleged uncollectible receivables. /3/ The $4,645 uncollectible disallowed costs This amount, according to TCAA, relates to funds owed TCAA by the Tulsa Public Schools since 1980. TCAA related that it held numerous meetings with the Tulsa Public Schools in 1982 in an attempt to collect the $4,645. TCAA claimed that is spent $1,000 in auditing fees trying to recover the funds. TCAA stated that it did not believe it would economically be valid to expend further sums to collect the money, and that such an effort could damage the good relationship it had with the Tulsa Public Schools, whose in-kind support to the Head Start Program TCAA valued at $50,000. Accordingly, TCAA requested that the disallowance of $4,645 be forgiven. As we stated earlier, the Board's authority is limited. It cannot award funds to a grantee, nor can it "forgive" an overexpenditure of grant funds. The foregiveness of a disallowed item would be tantamount to the awarding of a supplemental grant. Sumter County Opportunity, Inc., Decision No. 112, July 16, 1980; GLEAMS Human Resource Commission, Inc., Decision No. 162, April 28, 1981. Accordingly, we sustain the disallowance of $4,645. The $45,772.20 in uncollectible receivables During the course of these appeals the parties agreed that this disallowed item involved the status of 27 children who received services from TCAA. The point of dispute between the parties was whether these 27 children were merely the recipients of services at a day care operation run by TCAA or were actual Head Start enrollees. (7) The Wirz audit reviewed and adopted the findings of a prior audit of TCAA's 1982 and 1983 program years by the auditing firm of Coopers & Lybrand. The Coopers & Lybrand audit classified 27 children as day care services recipients, eligible for payments from the Oklahoma Department of Human Services (DHS), for which services TCAA was due payment from the children's parents. Coopers & Lybrand therefore treated the costs of the services provided to the children as an account receivable not attributable to the Head Start program. TCAA argued that the Wirz audit was erroneous because it relied on the Coopers & Lybrand audit, which had incorrectly classified the children as non-Head Start children. TCAA contended that Coopers & Lybrand's erroneous assumption regarding the children was attributable in part to the confusion created by the Underwood and Beaubien audit referred to above, with Coopers & Lybrand auditing the 1982 and 1983 program years while the 1981 audit was still unresolved. TCAA explained that Coopers & Lybrand had mistakenly assumed that any child who was eligible for a DHS payment was a day care child and not a Head Start child. TCAA distinguished day care children from Head Start children as follows:

-- Head Start enrollees are eligible for DHS payments, but their parents do not pay any type of co-payment.

-- Day care enrollees are also eligible for DHS payments, but their parents must pay the co-payment.

TCAA contended that none of the parents of the 27 children provided any payments, and that, therefore, Coopers & Lybrand's conclusion that uncollected payments were due TCAA as accounts receivable was erroneous. TCAA submitted voluminous documentation, including Head Start attendance records, affidavits from parents, and USDA Child Care Feeding Program records signed by Head Start employees. In each group of documents various names of some, but not all, of the 27 children were identified. TCAA also submitted a July 21, 1986 letter from Coopers & Lybrand stating that its audit had identified day care children based on their receipt of DHS payments. OHDS admitted, upon review of these documents, that the documents tended to support TCAA's contention for some of the children. July 10, 1986 Conference Call. OHDS refused, however, to concede that all the children were Head Start enrollees in the absence of more specificity in identifying(8) the children who received Head Start services and the years in which the services were provided. OHDS stated that the recent Coopers & Lybrand letter was not sufficient evidence to reverse the disallowance. The Board inquired whether a new audit was possible, but TCAA responded that the costs of such an audit were prohibitive unless OHDS agreed to provide the funds. OHDS replied that it did not believe such funding was available. As stated above, a grantee has the responsibility to document all claimed costs. Here, TCAA has submitted material which OHDS has admitted does indicate that at least some of the children may have been Head Start enrollees. Clearly then, there is a good chance that the amount of the disallowance is overstated. TCAA insists that the whole disallowed amount for this item be reversed, but OHDS refuses to accede to that because of the lack of more specific documentation. The Board should not pass on which children did and did not qualify -- this is OHDS' responsibility. We are therefore remanding this particular item for further review. OHDS should review the documentation submitted by TCAA and arrive at a specific dollar amount for a disallowance. If TCAA questions the final OHDS decision on this matter, it may then have the opportunity to return to the Board, within 30 days of the OHDS decision. Conclusion For the reasons stated above, we affirm the disallowance of $34,400 for the 1981 program year and the disallowance of $4,645 for the 1984 program year. We remand the $45,772.50 in uncollectible receivables of the 1984 disallowance for further consideration.

##FN001 /1/ The disallowance pertained to the 1981 program year, which was the calendar year. TCAA was notified of the one-year limitation in February 1981, even though the requirement was not formally stated until September 1981. Although notice to TCAA was not given until the program year had begun, TCAA could not possibly be prejudiced, since this requirement could not apply until the report of expenditures was submitted after the end of the program year. ##FN002 /2/ OHDS may wish to consider whether it has any authority to reduce the $28,287 overexpenditure sustained above by the $6,113 prior period adjustment. ##FN003 /3/ The ultimate disallowance figure is calculated as follows: $45,772.20 + $4,645.00 + $252.86 + $16.25 - $785.00 = $49,901.31.

394

APRIL 25, 1987

00788

GAB Decision

13

September 19, 1986

New York Department of Social Services; Docket No. 85-94; Audit Control No. 02-50253

Ford, Cecilia S.; Teitz, Alexander G.

Ballard, Judith A.

(1) The New York State Department of Social Services (State) appealed a determination by the Health Care Financing Administration (Agency or HCFA) to disallow $957,969 in federal financial participation (FFP) claimed by the State for the development and implementation of the State's Welfare Management System (WMS) for the period October 1, 1977 through March 31, 1982. /1/ The State appealed only $748,810 disallowed for costs allegedly claimed at improper FFP rates. The Agency later withdrew its disallowance of $341,310 FFP, reducing the amount in dispute to $407,500 FFP.

The remaining amount in dispute relates to site preparation costs and training costs which the Agency alleged were claimed at the improper rate of FFP. For the reasons stated below, we uphold the Agency's disallowance. (2) 1. Site Preparation Costs ($115,855 FFP)

A. Background

Under Title XIX of the Social Security Act (Medicaid), FFP is available in the costs of a mechanized claims processing system at the rate of 90 percent for costs attributable to the design, development, or installation of the system and at the rate of 75 percent for costs attributable to the operation of the system. Section 1903(a)(3)(A) and (B). An HHS audit found that the State improperly claimed site preparation costs associated with the WMS, a mechanized claims processing system, at the 90 percent rate of FFP, rather than the 75 percent rate of FFP specified for these costs in the State Medicaid Manual. The auditors cited section 11275.25 of the State Medicaid Manual, which states, in part:

. . . Costs for site preparation are start-up costs for operations and will be matched at 75 percent FFP. . . .

To determine the excess FFP claimed, the auditors recalculated the amount claimed to reflect the appropriate FFP rate. HCFA disallowed the difference between the claimed amount at 90 percent and the auditors' recalculation at 75 percent.

B. State's Arguments

The State argued that site preparation costs were a necessary component of installation of a system and that, therefore, the Agency's interpretation that they were costs of operation was inconsistent with the governing statute and regulations. The State did not deny that it had timely notice of the Agency's interpretation, but argued in effect that the Agency had approved an alternative interpretation since it had approved and paid site preparation costs as part of the "developmental" costs in the State's Advance Planning Document (APD) and had approved reimbursement at 90 percent in the State's cost allocation plan (CAP).

C. Discussion

1. Whether the Agency's interpretation is consistent with the statute and regulations The State described the site preparation costs at issue here as the costs of "modifying the situs of a computer center or remote installation to accommodate the environmental (heating and cooling), electric, and telecommunication needs of the(3) system hardware." State's brief, p. 8. /2/ The State argued that, under HCFA regulations, as well as general Department regulations on automatic data processing, all peripheral or auxiliary equipment used in support of electronic computers is included as an integral part of a system, and, therefore, site preparation of the type described is a necessary component of the installation of any system. The State further alleged that site preparation had to be performed prior to the installation and testing of the computer system hardware and could not be delayed until the system was ready for operation. Thus, the State concluded that HCFA's interpretation that site preparation costs are costs of operation was inconsistent with the statute and regulations. At first look, the State's argument appears to have merit since from a layman's view the costs described by the State would appear to be costs necessarily incurred before a State could properly install a computer and its peripheral or auxiliary equipment. A closer examination of the HCFA regulations makes it clear, however, that the State's position is not based on a reasonable reading of those regulations. Agency regulations provide certain definitions intended to aid in determining whether a cost is properly attributable to design, development, or installation of a system or to operation of a system. Definitions relevant here are as follows:

"Design" . . . means the putting together of (a) new or more efficient automatic data processing system. This includes the use of hardware to the extent necessary for the design phase.

"Development" means the definition of system requirements. . . . This includes the use of hardware to the extent necessary for the development phase.

"Hardware" means automatic equipment used for a . . . system. This equipment accepts and stores data, performs calculations and other processing steps, and produces information. Hardware includes:

(1) Electronic digital computers;

(2) Peripheral or auxiliary equipment used in(4) support of electronic computers;

(3) Data transmission or communications equipment; and

(4) Data input equipment.

"Installation" means the integrated testing of programs and subsystems, system conversion, and turnover to operational status. This includes the use of hardware to the extent necessary for the installation phase.

"Mechanized claim processing and information retrival system" means a system of software and hardware used to process Medicaid claims and to retrieve and produce . . . information about services. . . .

"Operation" means the automated processing of claims, payments, and reports. "Operation" includes the use of supplies, software, hardware, and personnel directly associated with the functioning of the mechanized system.

"Software" means computer programs, procedures, and associated documentation used to operate the hardware.

42 CFR 433.111 (1979). /3/ Under the regulations, the fact that a cost might be considered related to "hardware" does not mean that the cost is automatically reimbursable at the 90 percent rate. Some "hardware" costs are claimable only at the 75 percent rate for operations. Only the use of "hardware" is claimable at the 90 percent rate and then only to the extent necessary for the design, development or installation phase of a system. Moreover, the State's argument that the site preparation costs were a necessary component of installation relied on viewing installation as the physical act of establishing a computer at a particular site and attaching all of the peripheral and auxiliary equipment. Indeed, the State's argument that the Agency's interpretation was contrary to the statute also relied solely on this meaning of the term "installation." Yet, the definition of the term "installation" in the regulations does not specifically include costs of modifying the site and limits "hardware" itself to use necessary for testing, system conversion, or turnover to operations. The State did not argue that the regulatory definition was inconsistent with the statute or its legislative history, nor did the State relate its argument to the specific definition of "installation" in the regulation. (5) Finally, as we discuss further below, the regulation does not require the result that all costs that must be incurred prior to operations are costs of design, development, or installation. The key question here is the nature of the cost, not the time when the cost is incurred. To be reimbursable at the 90 percent rate, costs must be "attributable to" design, development, or installation. Costs which are "associated with" the functioning of the system are operations costs reimbursable only at 75 percent. The Agency's interpretation that site preparation costs are costs of operations is a longstanding one, which is reasonable. On June 10, 1974, HCFA issued Part 7 of the Medical Assistance Manual which contained instructions regarding FFP for mechanized claims processing systems. Section 7-71-50 provided clearly that:

Costs for site preparation are start-up costs for operations, and will therefore be matched at 75% FFP.

MSA-PRG-31, 7-71-50, p. 52, Agency Exhibit (Ex.) R-2. Moreover, the regulations at 42 CFR 433.110 (1979), pertaining to the rates of FFP for costs of a mechanized claims processing system, specifically mention that the provisions of Part 7-71-00 of the Medical Assistance Manual are applicable also to these costs. Subsequently, in July 1981, the states were sent Part 11 of the State Medicaid Manual. This part replaced the Medical Assistance Manual and other Medicaid instructions. Part 11 covered mechanized claims processing systems. Section 11275.25 of the State Medicaid Manual covered site preparation costs; in fact, it contained the same provision verbatim regarding site preparation costs as appeared in MSA-PRG-31 in 1974. See Agency Ex. R-3. The State did not deny that it had notice of these provisions. The Board has held previously that actual notice of the Agency's policy interpretation, if reasonable, is sufficient to bind a state to its terms. See Maine Department of Human Services, Decision No. 712, December 11, 1985; New York State Department of Social Services, Decision No. 520, February 29, 1984; and Social Service Board of North Dakota, Decision No. 166, April 30, 1981. The manual provisions are reasonable. They flow from the regulations, which limit 90 percent FFP to use of hardware to the extent necessary for design, development, or installation. The manual provisions distinguish generally between equipment or supplies purchased for operational purposes, where the intent is for continued use, and these things when purchased (or rented) solely for testing purposes. Treating site preparation costs as operations costs also makes sense since(6) they are the types of costs generally not charged in a lump sum but required to be depreciated or amortized over a period of time or charged through a use allowance. Finally, we do not think that the State had a valid point when it alleged that site preparation costs should be considered part of design, development, and installation because those costs are also the costs of "start-up" of operations. Design, development, and installation costs, like site preparation costs, may be necessary to "start-up" of operations, but this does not ineluctably lead to the conclusion that site preparation costs are properly charged as part of the costs of the design, development, or installation phase. Thus, we conclude that the Agency's interpretation in its manuals is a reasonable one, consistent with the statute and regulations. 2. Whether the Agency approved another interpretation Having determined that the Agency's interpretation in its manuals is reasonable, we now discuss whether the Agency somehow adopted another interpretation. The State relied on the Board's decision in New Jersey Department of Human Services, Decision No. 648, November 22, 1985, arguing that that case controlled here. In Decision No. 648, the Board found that the Agency's approval and payment of certain Statewide indirect costs at an enhanced rate of FFP undercut the reasonableness of the Agency's interpretation (advanced as a basis for the disallowance) that such costs were not directly attributable to a mechanized claims processing system. The State argued that this case was analogous since the Agency had approved its planning documents and cost allocation plan and paid the 90 percent rate for site preparation costs. The State's reliance on Decision No. 648 is misplaced. In that case, Agency issuances reasonably could be read as supporting New Jersey's interpretation that the costs at issue were subject to the enhanced FFP rate. Here, the Agency's issuances clearly and unambiguously stated that site preparation costs clearly and unambiguously stated that site preparation costs are reimbursable only at the 75 percent rate. Moreover, the "approval and payment" here simply do not have the same significance they had in Decision No. 648. At the outset, we note that the mere fact that the State may have been paid for site preparation costs at the 90 percent rate of FFP is not sufficient to show approval. The record fails to show that the State made any claims for reimbursement specifically identifying site preparation costs as costs claimed at the 90 percent rate. There is no indication that (7) the Agency was aware or should have been aware that the State was making such claims. Moreover, the record does not support the State's assertion that the Agency previously approved site preparation costs of the WMS at the 90 percent rate of reimbursement. The State argued that site preparation costs were contained in the Advanced Planning Document (APD) (State Exhibit 9) approved by the Agency (State Exhibit 2). These documents, however, do not indicate what the State claimed they indicate. The APD does not specifically state that site preparation costs are considered part of "development" or "installation" or that the State will claim them as such at the 90 percent rate of FFP. /4/ The only mention of site preparation is on a "Summary Schedule" (Ex. 9, p. 28), showing when the State anticipated taking certain steps in making the WMS operational; that schedule does not mention what rate of FFP will be claimed for these costs. Instead, the rate of reimbursement for the costs of designing, developing and implementing the WMS is discussed in the APD at pages 39-40. Those pages indicate that the State was seeking approval of a special FFP rate, upon which all FFP reimbursement requests for WMS from all Department programs would be based. The Agency approval of the APD, which the State contended supported a 90 percent rate of reimbursement for these costs, instead merely stated that the Agency "(approves) the plan except for the 'composite rate' method of claiming WMS cost." The letter then states that FFP may be claimed at the appropriate rate if costs of the WMS are allocated properly. The letter further states that, until the State's cost allocation methodology is approved, approval is given for the State to claim at a rate of 50 percent for documented costs actually incurred for the WMS project from April 1, 1975. State Ex. 2, p. 1. The record also does not support the State's contention that the Agency had approved reimbursement at 90 percent in the State's cost allocation plan for these site preparation costs. As the Board has stated previously, the purpose of a CAP is to set forth the method a state will use in distributing certain joint costs among several benefitting programs. Consequently, approval of a CAP is not approval of particular costs to be claimed. See Oregon Department of Human Resources, Decision No. 729, March 20, 1986, pp. 15-16, and cases cited therein. Costs claimed in accordance with(8) the plan still must be allowable under the applicable cost principles, regulations, and law and are still subject to any administrative or statutory limitations. Id. at 16. In this particular case, the initial CAP approval indicated that the agreed upon methodology applied only to "design and development costs of WMS." State Ex. 3. The State provided no analysis to show the Board where in the CAP it states specifically that site preparation costs are to be considered design and development costs under the CAP. In light of the fact that the Agency had interpreted site preparation costs as operational costs since 1974 and this CAP was not approved until 1977, it would not be reasonable for the State to assume that the Agency's silence in the CAP approval on these particular costs meant that site preparation costs could be considered design and development costs. The record indicates that the Agency in 1979 explicitly told the State to convert from a developmental costing to an operational costing method because HHS did not accept the concept that WMS would remain in a developmental status until operational in all counties. State Ex. 5, Memorandum dated May 25, 1979, p. 8. This supports the Agency's argument that the key question here is the nature of the cost, not the time when the cost is incurred. Thus, we conclude that the Agency did not approve payment of these costs at the 90 percent rate either by payment of the State claims, approval of the APD, or approval of the CAP. We therefore conclude that the Agency did not disavow its interpretation in the manual provisions. Since that interpretation is reasonable, and the State had timely notice of it, the State is bound by it. Accordingly, we uphold the disallowance of $115,855 in site preparation costs. II. Training Costs ($291,645 FFP)

A. Background

The auditors determined that the State improperly claimed training costs associated with the WMS program at the 90 percent FFP rate rather than the 50 percent FFP rate allowed by regulation. The auditors cited the provisions of 42 CFR 432.50(3), which states, in part:

For personnel engaged in design, development, or installation of mechanized claims processing and information retrieval systems, the rate is 50 percent for training. . . .

The auditors, therefore, recalculated the State's claim to reflect the appropriate FFP rate. The Agency disallowed the(9) difference between the amount claimed at 90 percent and the amount allowed by the auditors for training at 50 percent.

B. State's Arguments

The State essentially argued that the regulation cited by the auditors is inconsistent with section 1903(a)(3)(A) of the Act. The State argued that the statute allows 90 percent for all costs attributable to the design, development and installation of a system, including costs of training staff engaged in design, development, or installation of a system. The State also argued that regulations in effect at the time of the approval of the APD (45 CFR 250.120(b) and (e)) did not limit costs of training staff engaged in design, development, or installation to 50 percent reimbursement. The State contended that the later version of the regulations, cited by the auditors, was a substantive change from the previous version, contrary to a statement in the Federal Register that no substantive change was intended. /5/ The State also argued that despite the regulation the Agency continued to reimburse the State at 90 percent FFP and to approve Supplemental Planning Documents (SPDs) and CAPs containing 90 percent FFP for such training costs. C. Discussion We conclude that costs of training personnel engaged in design, development, or installation of the WMS are not reimbursable at the 90 percent rate of FFP. First, contrary to the State's assertions, as early as 1974 the Agency's regulations at 45 CFR 250.120(b) and (e) provided that FFP is not available at the rate of 90 percent FFP for(10) the cost of training personnel engaged in the design, development, or installation of a mechanized processing system. That provision stated:

* * *

(b) Federal financial participation at 90 percent is available for salary and other compensation, and travel costs of personnel engaged in design, development, or installation of mechanized claims processing and information retrieval systems and at 75 percent for salary and other compensation, travel and training costs of personnel engaged directly in the operations of such mechanized systems. . . .

* * *

(e) Federal financial participation at 50 percent is available in the costs of all other staff employed in the administration of the plan.

* * *

45 CFR 250.120(b) and (e) (1974) (emphasis added). The present regulations at 42 CFR 432.50(3) provides:

(3) For personnel engaged in the design, development, or installation of mechanized claims processing and information retrieval systems, the rate is 50 percent for training and 90 percent for all other costs specified in paragraph (a) of this section.

In the earlier provision, "training" is not included as one of the costs for which reimbursement is available at 90 percent whereas "training" is specifically mentioned as a cost reimbursable at 75 percent. We find the absence of any mention in the earlier version of "training" at 90 percent significant because the regulation provides that then only 50 percent reimbursement is available. 45 CFR 250.120( e). The later version, which provides this all in one subsection, merely makes explicit what is logically implicit in the earlier version. Thus, we find no substantive change between the former version and the later version and further determine that the State was on notice or should have been on notice at the time it submitted its APD in 1976 of the Agency's regulations at 45 CFR 250.120(e) that costs of training of staff engaged in design, development, or installation of a mechanized claims processing system were reimbursable only at the 50 percent rate of FFP. (11) Second, the State's argument that 42 CFR 432.50(3) is inconsistent with section 1903(a)(3)(A) is flawed. The Act provides that the Secretary shall pay 90 percent FFP of the amounts expended as are attributable to design, development, and installation of a system. Training costs of personnel engaged in design, development, and installation are not necessarily included in a reference to costs attributable to design, development, and installation of a system. We find reasonable the Agency's position here that training personnel engaged in design, development or installation of the WMS would be counterproductive to the goal of encouraging states to develop a system as efficiently as possible, as provided by section 1903(a)(3)(A). It makes no logical sense to take valuable time and resources to train someone to design a system (although it is logical to train a data processor how the system works once the system is designed and installed). The Agency has shown reasonable policy considerations why these costs are not necessarily costs "attributable to" the design, development, or installation of a system. Thus, we conclude that the regulations are not inconsistent with the Act. Finally, we cannot agree with the State that the Agency should be estopped from disallowing these costs because it allegedly reimbursed the State at 90 percent FFP and approved SPDs and CAPs containing provision for 90 percent FFP for such training costs. /6/ The record does not show that the State made any specific claims for reimbursement for such training costs at the 90 percent rate. Consequently, there is no indication that the Agency was aware that the State was making such claims when the Agency paid the State's claims. Similarly, the State has not pointed to, and we are unable to find, a provision of the CAP or the SPD which specifies that such training costs are reimbursable at 90 percent FFP. Thus, the fact that the Agency may have approved a SPD or CAP does not mean it approved these costs at the 90 percent rate. See, also, our discussion in section I.C.2., pp. 6-8, above. The record does not support a finding of estoppel here. At the very least, the record must show that all the elements(12) necessary to estop a private party are present. Thus, the State must establish the basic elements of equitable estoppel:

The party asserting estoppel must show more than that he was ignorant about some matter. Among the more important requirements of estoppel are that the party to be estopped has misrepresented or wrongfully concealed some material fact and that this party acted with the intention that the asserting party rely to his detriment on this misunderstanding.

State of New Jersey v. Department of Health and Human Services, 670 F. 2d 1284, 1297 (3rd Cir. 1982), quoting from United States ex. rel. K & M Corp. v. A & M Gregos, Inc., 607 F. 2d 44, 48 (3rd Cir. 1979); see also Arkansas Department of Human Services, Decision No. 717, January 8, 1986; New Mexico Human Services Department, Decision No. 708, December 6, 1985. Here, the facts discussed above show that the traditional elements of estoppel are not present. Even if the State had established the traditional elements of estoppel, something more is required to estop the federal government. The Supreme Court has stated that "it is well settled that the Government may not be estopped on the same terms as any other litigant. "Heckler v. Community Health Services of Crawford County, 467 U.S. 51, 60 (1984). The Supreme Court has refused to decide whether even "affirmative misconduct" will suffice to estop the federal government. See Schweiker v. Hansen, 450 U.S. 785 (1981); INS v. Hibi, 414 U.S. 5, 8 (1973). What is clear is that the federal government cannot be estopped in the absence of "affirmative misconduct." The Supreme Court has never defined "affirmative misconduct," but it clearly requires something more than inaction over a long period of time. See INS v. Miranda, 459 U.S. 14, 17-18 (1982). We also have no evidence here of affirmative misconduct on the part of the Agency. Thus, we conclude that the costs of training personnel engaged in design, development or installation a mechanized system are reimbursable only at the 50 percent rate. Accordingly, we uphold the disallowance of $291,645. (13) Conclusion For the reasons stated above, we uphold the disallowance.

##FN001 /1/ With its notice of appeal, the State provided copies of two disallowance determinations. The first, by the Acting Deputy Assistant Secretary for Management Analysis and Systems, discusses audit findings from ACN 02-50253. The determination letter noted that two categories of costs remained in dispute: $748,810 in costs claimed at improper FFP rates from HCFA and $199,904 in nonpersonal services claims by Erie County. (The disallowed amount of $199,904 was assigned Docket No. 85-95 and has been decided by the Board in Decision No. 713. That decision has no bearing on the instant matter.) The second determination, by the HCFA Regional Administrator, duplicated in part the findings of the Deputy Assistant Secretary for Management Analysis and Systems concerning the HCFA share of the audited costs. The Board assigned Docket No. 85-94 to the appeal of the costs charged to HCFA. Consequently, our decision here disposes of both determinations on HCFA costs. ##FN002 /2/ The Agency appeared to be alleging that the State must now provide documentation to show that the costs it claimed were in fact the type of costs described by the State as site preparation costs. We agree with the State that since the audit did not raise this as an issue, the State was not required to further document these costs in its appeal file. ##FN003 /3/ These regulations appeared in substantially the same form in 45 CFR 250.90 (1974). ##FN004 /4/ We also note that the APD refers to "development and implementation" of WMS and does not track the terminology in the HCFA regulations. This is not surprising since WMS is a broader system, intended to serve programs other than Medicaid. ##FN005 /5/ The regulation providing for FFP for costs of staff involved in design, development, or installation of a system was first codified at 45 CFR 250.120 (1974). This regulation was later redesignated as 42 CFR 450.120. See 42 Fed. Reg. 52827 (September 30, 1977). The Agency later decided to bring together in one regulation all the Agency's policies on staffing and training costs applicable to the Medicaid program. Thus, 42 CFR 450.120 was deleted and 42 CFR Part 446 was amended by adding a new section 446.175(3). See 42 Fed. Reg. 60564 (November 28, 1977). It was in the preamble to the publication of 42 CFR 446.175(3) that the Agency stated that there were no substantive changes made to the current policies in 42 CFR 450.120. This regulation was later redesignated as 42 CFR 432.50(3). 43 Fed. Reg. 45199 (September 29, 1978). ##FN006 /6/ The State also argued that Board Decision No. 648 was controlling here for the same reasons it indicated for site preparation costs. As we indicated above, we do not find that decision controlling here. See Section I.C.2, p. 6, above.

394

APRIL 25, 1987

00787

GAB Decision

09

September 11, 1986

New Mexico Human Services Department Docket Nos. 85-261-86-32-86-61-86-93

Ballard, Judith A.; Settle, Norval D.

Teitz, Alexander G.

(1) The New Mexico Human Services Department (State or HSD) appealed the decision of the Health Care Financing Administration (HCFA or Agency) disallowing a total of $2,387,433 in federal financial participation (FFP) claimed by HSD under Title XIX (Medicaid) of the Social Security Act (Act). The amounts disallowed represent the federal share of State gross receipts taxes reimbursed by HSD as part of the costs incurred by providers and fiscal intermediaries in furnishing medical and administrative services. The disallowances were based on HCFA's view that payments for the tax were not actual expenditures by the State within the meaning of applicable federal law because the State collected the tax from the providers and intermediaries. /1/

This is the third in a series of appeals involving the general issue of the availability of FFP for state reimbursement of taxes. Our conclusions here parallel those in the decisions resolving the other appeals. (See Hawaii Department of Social Services and Housing, Decision No. 779, August 21, 1986, and California Department of Health Services, Decision No. 786, September 11, 1986). As in Hawaii and California, we conclude that federal law was ambiguous concerning whether State income from gross receipts taxes paid by Medicaid providers and fiscal intermediaries had to be deducted from HSD's payments to the providers and fiscal intermediaries in determining the amount of expenditures eligible for FFP. We also conclude that the State's interpretation(2) of applicable law was reasonable under the circumstances of this case where: (1) the approved State plan in effect during the disallowance period provided for reimbursement of the gross receipts tax; (2) program regulations supported the State's interpretation; and (3) HCFA had paid FFP for HSD's full payments including gross receipts taxes for almost 19 years. Thus, the Agency was unreasonable in attempting to apply a different interpretation retroactively. Accordingly, we are compelled to overturn the disallowances. As in Hawaii and California, nothing in this decision contradicts the Agency's position that generally expenditures claimed for FFP must be "net" of any applicable credits. Furthermore, we emphasize that nothing in this decision precludes HCFA from promulgating a rule or issuing formal policy guidance giving notice of HCFA's intent to require states prospectively and specifically to apply gross receipts taxes received from providers and intermediaries as credits against Medicaid payments to them. This decision is based on the written record (including comments received in response to a draft decision issued in Hawaii) and a conference. We incorporate by reference portions of the analysis in the Hawaii and California final decisions. Background New Mexico has had a gross receipts tax in effect throughout the State's participation in the Medicaid program (since 1966). This tax is imposed on the gross receipts of all for-profit businesses (with a few exceptions not relevant here) for the privilege of doing business in the State. The providers and fiscal agents involved in this case, like all other business in New Mexico, paid this tax on their gross receipts as an expense of operating in the State. New Mexico's State Medicaid plan did not specifically provide that State taxes, per se, would be reimbursed. However, the plan in effect throughout the period in question did specify that all costs not expressly provided for in the plan would be reimbursed in accordance with the terms of the Provider Reimbursement Manual (HIM-15), applicable to Medicare. (See Appellant's Brief, p. 5) Under these Medicare principles, it is clear that the State would reimburse providers and fiscal agents for gross receipts taxes. The State first calculated a rate using other provider costs and then added on the amount of the gross receipts tax. The State gave two reasons for this. First, State-owned and non-profit providers were exempt from paying the tax. Thus, if the tax were part of the initial rate calculation these providers would receive reimbursement for an item that was not a true cost. The second reason the State calculated the tax separately was that some providers paid more tax than others. Thus, others might be reimbursed for more than their actual costs. This occurred because(3) the amount of tax varied depending on locality. While all providers paid the base State tax rate of 3 3/4%, some also paid additional municipal and county rates. Under State law, municipalities and counties could assess their own gross receipts tax if they so chose. The municipal and county rates could vary within State set limits. During the period in question here and the prior period not involved in this disallowance (i.e., 1966 to 1984), the State claimed FFP in the amount it reimbursed providers and fiscal agents for gross receipts tax. Until a deferral notice issued on July 9, 1985 (almost 19 years after the start of the program), HCFA always paid the State's claims for FFP in the amounts paid providers for medical services and fiscal agents for administrative costs. /2/ Thereafter, HSD published a notice that it proposed to stop the tax reimbursements to providers and, on August 21, 1986, HSD issued a final regulation to that effect. Two days later, the New Mexico Health Care Association brought suit in Federal District Court to enjoin both HSD and the Agency from withholding reimbursement of gross receipts tax. On September 13, 1985, the Court issued a preliminary injunction barring HSD from withholding payments for the tax to long-term care providers. No such relief was ordered against the federal government. /3/ On November 7, 1985, HCFA issued its first disallowance of $1,289,764 for the period January 1, 1984 through March 31, 1985. This disallowance covered the State's claims for State gross receipts tax only, not county or municipal gross receipts tax. Subsequently, on January 8, 1986, HCFA disallowed an additional $337,378 for the same time period. This disallowance covered the State's claims for reimbursements of county and municipal gross receipts taxes. Thereafter, the Agency disallowed an additional $760,291 covering State, county, and municipal taxes for the following quarters ending September 30, 1985. The State appealed all the disallowances, totalling $2,387,433. I. Did "federal law" mandate the disallowances here? As in the Hawaii and California appeals, HCFA based the disallowances on its view that "federal law" (i.e., section 1903(a) of the Act and Office of Management and Budget Circular A-87) required the(4) disallowances. In those cases, we concluded that section 1903(a) and the Circular simply are not that specific; while HCFA's interpretation is not necessarily inconsistent with them (and thus might reasonably be imposed through a regulation or guideline), it is unreasonable to conclude that the Act and the Circular themselves required the disallowances so as to justify retroactive action. The parties' arguments here are essentially the same as in Hawaii and California, and we incorporate the applicable discussion and conclusions. Below, we calrify how the analysis in those cases applies here, and discuss arguments raised solely by New Mexico.

A. The statute did not mandate the disallowances.

The Agency here cited section 1903(a)(1) as the statutory basis for its disallowances of State expenditures for gross receipt taxes reimbursed to providers for medical services. The Agency also cited the analogous section, 1903(a)(7), as the basis for its disallowances of gross receipts taxes reimbursed to fiscal agents for administrative costs. We concluded in Hawaii that section 1903(a)(1), on its face, did not compel the disallowances. (Hawaii, supra, pp. 3-5) We concluded in California that section 1903(a)(7) did not compel the disallowances either. (California, supra, p. 5) We adopt the analyses on pages 3-5 of Hawaii and page 5 of California and conclude that neither section of the Act compels the disallowances here.

B. OMB Circular A-87 did not mandate the disallowances.

As in Hawaii and California the Agency argued that OMB Circular A-87 compelled the disallowances and the State argued that it did not. The arguments presented by the parties here were essentially the same as in those cases. In Hawaii and California, we decided that the Circular did not conclusively establish that taxes paid by providers had to be treated as "applicable credits" against reimbursements to providers. (Hawaii, supra, pp. 5-8 and California, supra, p. 6) HCFA did not argue that there was any difference between Hawaii's excise tax and New Mexico's gross receipts tax which should produce an analysis or result different from that in Hawaii (and we do not see any such difference). The only possible difference in the circumstances surrounding the two States' taxes is that Hawaii's tax was reimbursed indirectly through a rate, whereas New Mexico's tax may have been reimbursed directly in part. HCFA did not argue that this should produce a different result, and we see no reason why it should. Accordingly, we conclude that the analysis regarding A-87 at pages 5-8 in Hawaii applies here as well. The Circular did not compel the disallowances here, and, indeed, as(5) discussed in Hawaii, contained language which reasonably could have led the State to believe the tax was an allowable cost eligible for FFP. /4/ II. Was the State's interpretation reasonable under the circumstances of this case? As in Hawaii and California, we conclude that, in addition to the ambiguity and mixed messages in A-87, there are other factors which set a context in which New Mexico reasonably determined that it did not have to treat the gross receipts taxes as "applicable credits" offsetting State payments to the providers and fiscal intermediaries for medical services and administrative costs. Below we address similar factors present in this case.

A. The State plan as support for the State's interpretation.

In Hawaii the approved State Medicaid plan applicable during most of the disallowance period adopted the use of Medicare principles of reimbursement, and under those principles it was clear that the taxes in question were allowable costs. The Board concluded that, in the absence of any Agency issuance stating clearly that taxes had to be treated as applicable credits, the State plan supported the State's interpretation. (Hawaii, supra, pp. 9-10) As in Hawaii, New Mexico's State Medicaid plan also adopted Medicare principles of reimbursement. The parties' arguments were essentially the same here as in Hawaii. Accordingly, we adopt the analysis on pages 8-10 of Hawaii here and conclude that New Mexico's State plan supported the interpretation that gross receipts taxes received by the State did not have to be netted

B. The program income regulations as support for the State's interpretation.

In this case the parties presented the same arguments as in the Hawaii and California appeals with regard to the effect of the program income regulations. We incorporate by reference the analysis on pages 10-12 of Hawaii here. (In California we also adopted that analysis.) (6) III. Notice.

A. The documents.

In the cover letter to the draft decision issued in Hawaii, sent for comment to the parties here, the Board noted that if the Board's initial conclusions were adopted as the final decision, then FFP would be available to the State until such time as the State had actual notice of the Agency's present interpretation. The Board noted that actual notice was required before a party could be adversely affected by an unpublished change in Agency policy. (See Alabama Department of Pension and Security, Decision No. 128, October 31, 1980; Oregon Department of Human Resources, Decision No. 129, October 31, 1980; Utah Department of Social Services, Decision No. 130, October 31, 1980; New Mexico Human Services Department, Decision No. 382, January 31, 1983; and see 5 U.S.C. 552(c)(1)(D) and (E)). The Board asked the parties in New Mexico to comment on whether certain documents in the Hawaii cases should be considered notice of a change in Agency policy. The documents included (1) a letter from the Agency advising the State that its claim for FFP was being deferred pending further consideration, and (2) the subsequent disallowance letters. The parties' arguments in response were essentially the same here as in Hawaii. We incorporate the analysis at pages 15-22 of Hawaii and conclude that neither the deferral nor the disallowance letters can be considered notice under the circumstances of this case.

B. The Administrative Procedure Act.

At the close of the conference in this case, the Board suggested that the parties brief the effect on this case, if any, of two provisions of the Administrative Procedure Act (APA) pertaining to notice, sections 552 and 553 of 5 U.S.C. The two sections pertain to different requirements for notice. Section 553 deals with notice and comment requirements for rule making; section 552 is the Freedom of Information Act section, and states when there must be publication in the Federal Register. The Agency throughout these proceedings relied on a provision in section 553(b). This section first states that notice of proposed rule making shall be published in the Federal Register, but then goes on to say:

Except when notice or hearing is required by statute, this subsection does not apply - (A) to interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice;. . . .

(7) The Agency's position was that there was no change in Agency policy pertaining to taxes since there never was any definite official policy to pay FFP; any statement of policy that FFP was not available was simply an interpretive (or "interpretative") rule, not requiring notice and comment rule making. The Agency relied on Cabais v. Egger, 690 F. 2d 234 (D.C. Cir., 1983), which rejected the "substantial impact" test in considering whether notice and comment was required. New Mexico differed sharply with the Agency's position on section 553, insisting that rules which change agency practice must be promulgated under 553, even if the Agency labels them interpretative or general policy statements. New Mexico relied, in addition to 553, on the requirements for publication in the Federal Register under section 552( a)(1), which apply to:

(D) substantive rules of general applicability . . . and statements of general policy and interpretations of general applicability formulated and adopted by the agency;. . . .

The subsection provides further that:

Except to the extent that a person has actual and timely notice of the terms thereof, a person may not in any manner be . . . adversely affected by, a matter required to be published. . . .

On their face these provisions seem directly applicable here. However, the Agency attempted to distinguish this case, by saying that subsection (D) is not applicable where a statute is "self-effectuating, and therefore no interpretation by an agency is required." (Respondent's supplemental brief, July 30, 1986, p. 6) The Agency continued further that the Agency has not "formulated and adopted" the policy where "the statutory provision has a single meaning" and the statute implements itself and "provides notice of the policy to the public." (Id., p. 7) In any event, argued the Agency, New Mexico had "actual notice." We have decided above, as we did in Hawaii and California, that neither the statute itself, nor the statute read together with A-87, clearly and unambiguously precluded FFP for taxes; the states were not on constructive notice that FFP was unavailable. Thus, subsection (D) of section 552(a)(1) applies because the statute simply was not "self-effectuating." We have also dealt in Hawaii and California with the Agency's argument that there was no change in policy since the Agency never had a formal written policy on the issue. The Agency argued that FFP for expenditures for taxes was paid inadvertently or erroneously, and that its present position on taxes was an(8) initial interpretation of the Act. The fact that the Agency provided FFP for taxes for 18 years in the Hawaii cases and here, and some six years in the California cases, seriously undermines the argument, however. (See also, fn. 2 above) Even if we agreed with the Agency, however, we would conclude that subsection (D) of section 552(a)(1) applies, since application of that subsection does not depend on whether the interpretation was an initial one or a changed one. We need not decide the further issue of whether the requirements for notice and comment rule making of section 553 of the APA apply here, because we have determined that the publishing or actual notice requirements of section 552 do apply, which is dispositive. Actual notice was required before the State could be adversely affected. /5/ We have found above, as we did in Hawaii and California, that neither the deferral letters nor the disallowance letters constituted "actual notice." Since actual notice was required, and New Mexico did not receive it, the disallowances must be reversed. We need not reach the issue of what would constitute actual notice, since that is not necessary for our decision. We indicated in Hawaii, and we repeat here, that an action transmittal might well be sufficient but we have also stressed that the making of policy and the method of promulgating it is for the Agency. (9) Conclusion Based on the foregoing, we sustain the State's appeal.

##FN001 /1/ We use "HSD," "New Mexico," and "State" interchangeably when referring to the appellant in this decision. Nevertheless, it is useful in picturing what happened in this case to note that, while HSD paid the providers for medical services, the providers did not pay gross receipts taxes back to HSD. Rather, the providers paid gross receipts taxes to the New Mexico Taxation and Revenue Department; the money went into the "tax administration suspense fund" for transfer later either to the State general treasury or the local jurisdiction in which the taxable transaction occurred, as provided by State statute. ##FN002 /2/ For several years prior to this, Agency representatives had expressed concerns about the State's reimbursement of gross receipts tax but had taken no steps to terminate FFP for the reimbursements. (Appellant's Ex. 18) ##FN003 /3/ The Court issued a final order on March 7, 1986, continuing injunctive relief against HSD. The order granted injunctive relief against HCFA only if its basis for denying FFP was that payment of the gross receipts tax was not an allowable cost to the providers. Further action was stayed, at the suggestion of the parties, pending Board decision. ##FN004 /4/ The parties appeared to agree that, even for institutional Medicaid providers, the tax was treated as an "add-on" and was not reimbursed as part of a per diem rate. (Transcript of Conference, pp. 63-64) The matter is not entirely clear, however, since under Medicare principles (which the State plan used), reimbursements to institutional providers must be based on a per diem rate calculated using the underlying provider costs, including taxes. Thus, it may have been that the parties simply meant that an overall per diem rate was calculated using other provider costs and then the increment of the rate attributable to taxes was calculated separately since it could vary from locality to locality. ##FN005 /5/ We referred in Hawaii to the internal memorandum of February 1983 from an attorney in the Office of the General Counsel, which gave an opinion that FFP was not available for a Georgia state sales tax on pharmaceuticals for Medicaid patients (the State was exempt by state statute), and which indicated that FFP might not be available for sales taxes generally. (Respondent's Tab 30, Ex.1) The memorandum went on to say that arguably the "new policy" of not allowing FFP for sale taxes constituted an interpretative rule, not subject to the notice and comment provisions of section 553. But the memorandum also went on to say that, given the uncertain state of the law notice and comment was the appropriate action. HCFA was advised to give actual notice to all jurisdictions that participated in the Medicaid program, and to "proceed along both avenues, addressing the problem in the short term by actual notice, and in the long run, by publication." Id., p. 5.

394

APRIL 25, 1987

00786

GAB Decision

10

September 11, 1986

California Department of Health Services; Docket Nos. 85-156; 85-238; 86-31; 86-94; 86-153;

Ballard, Judith A.; Settle, Norval D.

Teitz, Alexander G.

(1) The California Department of Health Services (State or DHS) appealed several decisions of the Health Care Financing Administration (HCFA or Agency) disallowing a total of $7,429,283 in federal financial participation (FFP) claimed by DHS under Title XIX of the Social Security Act (Act). Subsequently, California withdrew its appeal with respect to $35,372.43, leaving $7,393,910.57 in dispute. This amount represents the federal share of State sales taxes reimbursed by DHS as a cost incurred by a contractor in rendering administrative support services under the Medicaid program as a fiscal intermediary. The disallowances were based on HCFA'a view that payments for the sales tax were not actual expenditures by the State within the meaning of applicable federal law because the State collected the tax from the contractor. /1/

This decision resolves the second in a series of appeals involving the general issue of the availability of FFP for State reimbursements of taxes. Our conclusions here parallel those in the other appeals. (See Hawaii Department of Social Services and Housing, Decision No. 779, August 21, 1986; and New Mexico Health Services Department, Decision No. 787, September 11, 1986. (2) As in Hawaii, we conclude that federal law was ambiguous concerning whether State income from sales taxes paid by the contractor here had to be deducted from DHS's reimbursements to the contractor for its costs in determining the amount of expenditures eligible for FFP. We also conclude that the State's interpretation was reasonable under the circumstances of this case, where: (1) a contract, which HCFA approved, specifically provided for reimbursement by DHS of all taxes which the contractor was legally required to pay; and (2) program income regulations supported the interpretation. Thus, the Agency was unreasonable in attempting to apply a different interpretation retroactively. Accordingly, we are compelled to sustain the appeal except for the portion withdrawn by California. /2/ As in Hawaii, nothing in this decision contradicts the Agency's position that generally expenditures claimed for FFP must be "net" of any applicable credits. Furthermore, we emphasize that nothing in this decision precludes HCFA from promulgating a rule or issuing formal policy guidance giving notice of HCFA's intent to eliminate sales taxes prospectively and specifically as a cost item eligible for FFP. This decision is based on the written record, including comments received from the parties in response to a draft decision issued in the Hawaii appeals. We incorporate by reference much of the analysis of the Hawaii decision. Facts. Under California law, a 6% sales tax was imposed on all retail sales of tangible personal property (with certain statutory exceptions not relevant here). (State's Appeal File, Ex. C) The sales tax was a tax on the retailer; the retailer commonly collected the tax from the purchaser, but was liable for the tax whether or not it did so. The statute contained no exception for retailers selling to the State. DHS contracted with Computer Sciences Corporation (CSC), a fiscal intermediary, to handle the processing of State Medicaid (Medi-Cal) claims, and related functions. This dispute centers around sales taxes on the computer services which CSC provided to DHS under the contract. (3) The State described the process of contracting in this case generally as follows: (1) the State issued a Request for Proposal (RFP); (2) prospective contractors responded; (3) the State sent Invitations to Bid (IFBs) to those whose responses met State standards; (4) the State accepted CSC's bid and entered into a contract. The contract was formally entered into when the parties signed a cover page which incorporated by reference the RFP, IFB, and certain other documents not relevant here. (Tape of Conference Call, April 14, 1986; see Appellant's April 14, 1986 submission, Tabs B and C) On August 14, 1978 DHS signed its first contract with CSC. The contract contained language in the IFB stating that the State would reimburse the contractor for "taxes imposed by the State Board of Equalization on items conveyed to the State. . . ." (See Attachment to March 11, 1986 submission) By letter dated August 31, 1978, HCFA approved the contract. (Appellant's April 14, 1986 submission, Tab A) Subsequently, CSC sought advice from the California State Board of Equalization regarding whether CSC had to pay sales tax on the computer services provided to DHS. /3/ On September 20, 1979, the State Board of Equalization ruled that CSC did have to pay sales tax, since the transaction involved a transfer of tangible personal property. (Respondent's brief, p. 6) CSC thereafter paid the tax and the State reimbursed CSC for the payments in accordance with the terms of the contract. The State, in turn, filed with HCFA claims for FFP for tax reimbursements to CSC as part of its total claims for expenditures. The State claimed the expenditures as administrative costs of providing medical services under the Medicaid program. For years, the Agency paid these claims without reservation. On June 2, 1983, HCFA approved a State RFP for a follow-up contract. The State submitted an RFP showing an "issue date" of "March 21, 1983" on some pages and "May 10, 1983" on others. The State represented that this was the RFP the Agency had approved on June 2. The Agency did not dispute this representation. The portion of the RFP showing the issue date May 10, 1983 contained the following provisions on sales tax:

(4) 8.9.4 SALES TAX

Sales tax relates only to products or services delivered to the State as part of this Contract for which a sales tax liability is incurred.

8.9.6 SALES TAX INVOICE

The Contractor shall invoice the State quarterly for sales tax charged for the delivery of products to the State. All sales tax shall appear on this quarterly invoice itemized by the contract areas. Sales tax shall not appear on any of the other invoices received by the State for payment. The Contractor may invoice the State monthly, if it can demonstrate to the Contracting Officer that monthly sales tax payments must be made.

On October 1, 1983 the State entered into its second contract with CSC. (Tab C, April 14, 1986 submission) The cover page to the contract incorporated the RFP by reference. /4/ The State continued to reimburse CSC for sales tax and claim FFP for these expenditures. HCFA continued to pay these claims until June 19, 1985, when HCFA disallowed a total of $6,444,098 in FFP. This represented sales tax reimbursements to CSC claimed by the State during the period July 1, 1979 through March 31, 1985. The Agency, thereafter, disallowed additional claims for sales tax, bringing the total disallowance to $7,429,283 (later reduced to the amount in dispute here) for the period through the quarter ending March 31, 1986. I. Did "federal law" mandate the disallowances here? In Hawaii, HCFA based the disallowances on its view that federal law (i.e., section 1903(a) of the Act and Office of Management and Budget Circular A-87) required the disallowances. We concluded in Hawaii that section 1903(a) and the Circular simply are not that specific; while HCFA's interpretation is not inconsistent with them (and thus might reasonably be imposed through a regulation or guideline), it was unreasonable to conclude that the Act and the Circular themselves required the disallowances so as to justify a retroactive disallowance. The parties' arguments regarding "federal law" in this case are essentially the same as in Hawaii, and we incorporate the applicable discussion and conclusions from that decision (see pp. 3-10). (5) Below, we discuss minor ways in which the analysis here differs. The overall result, however, is the same.

A. The statute did not mandate the disallowances.

While in Hawaii the Agency argued that section 1903(a)(1) mandated the disallowances, in this case the Agency argued that 1903(a)(7) mandated them. /5/ Section 1903(a)(1) provides that a state with an approved Medicaid plan may receive:

an amount equal to the federal medical assistance percentage . . . of the total amount expended during such quarter as medical assistance under the State plan. . . . (emphasis added)

Section 1903(a)(7) provides that a state with an approved Medicaid plan may receive:

an amount equal to 50 per centum of the remainder of the amounts expended during such quarter as found necessary by the Secretary for the proper and efficient administration of the State plan. (emphasis added)

The two sections of the Act differ only with regard to the percentage of FFP they authorize and the fact that 1903(a)(1) provides FFP for medical services while 1903(a)(7) provides it for administrative costs. As in Hawaii, the Agency argued here that the disallowances were compelled because the statute was clear and unambiguous on its face in meaning that only "actual" or "net" expenditures were eligible for FFP. But, in effect, this argument only begs the question; we concluded in Hawaii that the statute was not sufficiently specific on its face to preclude reimbursement of the tax in circumstances like those here. (Hawaii, supra, pp. 3-5). Since the two sections of 1903(a) are essentially the same, and the focus of the Agency's arguments with regard to the two sections was identical, the statutory analysis and conclusions in Hawaii apply here as well. We incorporate them here and conclude that 1903(a)(7) did not compel the disallowances in this case.

(6) B. OMB Circular A-87 did not mandate the disallowances.

As in Hawaii, the Agency argued that A-87 required the disallowances and the State argued that it did not. The arguments presented by both parties were essentially the same as in Hawaii. There, we concluded that OMB Circular A-87 did not mandate the disallowance of FFP for State reimbursements of excise tax; the Circular did not conclusively establish that the taxes paid by providers had to be treated as "applicable credits" against reimbursements to the providers. (Hawaii, supra, pp. 5-8). HCFA did not argue that there was any difference between Hawaii's excise tax and California's sales tax which should produce an analysis or result different than that in Hawaii (and we do not see any such difference). The only difference in the circumstances surrounding the two states' taxes worth commenting on is that Hawaii's tax was reimbursed indirectly through a rate, whereas California's tax was reimbursed directly. HCFA did not argue that this should produce a different result, and we see no reason why it should. Accordingly, we conclude that the analysis regarding A-87 at pages 5-8 in Hawaii applies here as well. The Circular did not compel the disallowances here, and, indeed, as discussed in Hawaii, contained language which reasonably could have led the State to believe the tax was an allowable cost. II. Was the State's interpretation reasonable under the circumstances of this case? In Hawaii we concluded that, in addition to the ambiguity in A-87 itself, there are other factors which set a context in which the State reasonably thought that it did not have to treat excise taxes as "applicable credits" offsetting payments to providers for medical services. (Hawaii, supra, p. 8.) Below we address such factors also present in this case.

A. The contract as support for the State's interpretation.

In Hawaii, the State Medicaid plan, which HCFA approved, adopted the use of Medicare principles of reimbursement, and under those principles it was clear that the taxes in question were allowable costs. The Board concluded that, in the absence of any Agency issuance stating clearly that taxes had to be treated as applicable credits, the State plan supported the State's interpretation. (Hawaii supra, pp. 9-10) (7) In this case there was no similar State plan provision. Nevertheless, there was a somewhat similar circumstance involving contracts, also approved by HCFA, between DHS and CSC. The State argued, and the Agency did not dispute, that the contracts bound the State to reimburse CSC for sales taxes paid on the transfer of computer tapes and other items to DHS. Language in both contracts supports the State's position. The 1978 contract contained language, quoted above (p. 3), to the effect that DHS would reimburse any taxes which the State Board of Equalization imposed on CSC in its dealings with DHS. When in 1979 the State Board advised that CSC had to pay the sales tax on the transfer of computer tapes, DHS became bound to reimburse CSC for the cost of the tax. The 1983 contract contained language (in section 8.9.6, also quoted above (p. 4)) setting forth how the contractor should bill DHS for sales tax charged on the delivery of products to DHS. The State also argued that the Agency's approval of the contracts meant that the Agency agreed to provide FFP in State outlays for the tax. The State argued that the Agency should have known when it approved the provisions that the State would claim FFP for tax reimbursements because the State claimed FFP on the "overwhelming portion" of all fiscal intermediary costs and sales tax was a fiscal intermediary cost under the contract (Appellant's Brief, pp. 2, 6) /6/ The Agency argued that approval of the contract could not be interpreted as Agency agreement to provide FFP for all State payments to CSC under the contract. The Agency argued that many costs which the State reimbursed under the contract were not "eligible" for FFP. (Respondent's Brief, p. 5) On this point, the Board asked the State why Agency approval of the contract provisions should have bound the Agency to provide FFP for sales tax if the relevant contract provisions did not specify whether taxes were the type of cost that would be eligible for FFP. (Tape of Conference Call, April 14, 1986) The State explained (and the Agency did not deny) that the contracts did not specify that particular costs would be eligible for FFP; the contracts merely specified what costs the State would reimburse the fiscal intermediary. (8) The State argued that whether the federal government shared in the State's expenditure depended on whether the program was a federal matching program (as opposed to State-only funded program). The State explained that the computer tapes on which CSC paid tax contained the names of beneficiaries of both "State only" and "State/Federal matching" programs. The State argued that the Agency should have known that its approval of the contracts implied agreement to share in all costs under the federal matching programs for which the State had agreed under the contracts to reimburse CSC. This Board has previously held that mere Agency approval of a state contract does not preclude the Agency from disallowing contract costs which are clearly unallowable under an applicable cost principle or other program requirement. Here, however, the Agency has pointed to no Agency policy issuance which specified that taxes must be "netted" against program expenditures incurred by a state. In the absence of such a requirement, the fact that the Agency approved contracts containing specific provisions for reimbursing sales tax to the contractor, without informing DHS that no FFP would be available in that type of contract costs, provides support for the State's position that DHS could reasonably have thought that FFP was available in the sales tax (particularly in view of the ambiguity and mixed messages of the Act and OMB Circular A-87). We also find it significant that HCFA approved the first (1978) CSC contract, reimbursed DHS for several years for the tax under that contract, approved a second contract with even more specific language on taxes in 1983, and continued reimbursement of the tax for about two more years.

B. The program income regulations as support for the State's interpretation.

The disallowances involved in this decision were initially joined (and later severed) for purposes of briefing with the Hawaii cases. Therefore, important arguments raised in briefing the Hawaii case before it was severed from this case are considered here to the extent relevant. One such argument concerned whether the program income regulations at 45 CFR 74.41 required that the Agency provide FFP. We concluded in Hawaii that, while the regulations may not actually have required the Agency to provide FFP, they supported Hawaii's interpretation. (Hawaii, supra, p. 12) We incorporate the discussion at pages 10-12 here by reference and conclude that the regulations support California's interpretation as well. (9) III. Additional Arguments As in Hawaii (in fact, while the cases were joined), the parties here made several additional arguments. The arguments were essentially the same as those discussed in section III (pages 12-15) of the Hawaii decision, and we incorporate that discussion here. IV. Notice In the cover letter to a draft decision in Hawaii sent for comment to the parties the Board noted that, if the Board's initial conclusions were adopted as the final decision in that case, FFP would be available to Hawaii until such time as that State had actual notice of the Agency's present interpretation. The Board pointed out that actual notice was required before a party could be adversely affected by a change in policy. /7/ (See Alabama Department of Pension and Security, Decision No. 128, October 31, 1980; Oregon Department of Human Resources, Decision No. 129, October 31, 1980; Utah Department of Social Services, Decision No. 130, October 31, 1980; New Mexico Human Services Department, Decision No. 382, January 31, 1983; and see 5 U. S.C. 552(a)(1)(D) and (E)). The Board asked the parties in this case to comment on(10) whether certain documents here and in the Hawaii case should be considered notice of a change in Agency policy. The documents included (1) a letter from the Agency advising the State that its claim for FFP was being deferred pending further consideration, and (2) the subsequent disallowances. The parties' arguments in response were essentially the same as those presented in Hawaii. We incorporate the analysis at pages 15-22 of Hawaii here and conclude that the deferrals and disallowances also cannot be considered notice under the circumstances of this case. Conclusion Based on the foregoing, we sustain the State's appeal (except for the portion withdrawn by California).

##FN001 /1/ We use "DHS", "California," and "State" interchangeably when referring to the appellant in this decision. Nevertheless, it is useful in picturing what happened in this case to note that, while DHS paid the contractor for its costs, the contractor did not pay sales taxes back to DHS. Rather, the contractor paid sales taxes to the State Department of Taxation and most of the tax money went into the State's general treasury. In fact, of the 6% sales tax, portions went directly to cities and counties, and to local transit systems. Since we find for the State, we need not consider whether any distinction should be made between sales taxes paid by the contractor which go to the State itself, and those that go to local governmental entities. ##FN002 /2/ The withdrawal represented State refunds to the contractor, Computer Sciences Corporation, of sales taxes previously paid. The State made the adjustment in the disallowance after an inquiry from the Board about an amendment to the California sales tax law which exempted sales of certain types of custom computer services and provided for pro rata retroactive refunds. If the Agency can establish that further refunds should have been obtained, it may choose to proceed against California for FFP paid for taxes which CSC, and therefore DHS, was in fact not legally obligated to pay. ##FN003 /3/ The sales tax question arose, in part, because CSC, unlike the previous contractor, provided computer tapes (containing the names of beneficiaries) to DHS, which, in turn, issued Medicaid payments. The previous contractor had issued the checks directly; thus, there was no transfer of tangible personal property and no tax. While sales tax was charged on other computer services as well as the transfer of computer tapes, the parties in briefing focused their attention on the tax charged on the computer tapes, which were clearly the largest cost item. (Appellant's March 6, 1986 submission, p. 7 and Appellant's January 13, 1986 submission, p.

"dated March 1983." Nevertheless, as stated above, the State represented the RFP provisions dated May 10, 1983 to be part of the contract and the Agency did not dispute that representation. Therefore, we consider the portion dated May 10, 1983 also to have been part of the contract. ##FN005 /5/ The disallowance letters cited an additional rationale for the Agency's action that "reimbursement to the State for the State tax included in its payment for an administrative expense cannot be considered as necessary for the proper and efficient administration of the State plan." This point was not developed further in the briefing, however, and we therefore do not find it necessary to respond beyond noting that this basis for the disallowance is not an independent one, but is part and parcel of the overall dispute; our determinations in Hawaii and in this case thus compel the consideration of the tax as necessary for proper administration of the Medicaid plan in California (during the time in question). (See, however, Fn. 2) ##FN006 /6/ The State also argued that the Agency should be estopped from disallowing funds in this case because its "blanket approval" of the contract "affirmatively misled" the State. (Appellant's Brief, p. 7) The Agency responded that the State had not suffered the "legal detriment" necessary for estoppel. The State replied that indeed it did suffer a legal detriment, given that the State operates an annual balanced budget and would have to reduce funding (and thus services) under current programs to pay back the disallowed funds. We do not decide the estoppel issue here since we conclude that the contract supports the State's position for other reasons and find for the State on other grounds. ##FN007 /7/ The Agency also argued that there was no change in policy since the Agency never had a formal written policy on the issue. The Agency argued that FFP for State expenditures for such taxes was paid "inadvertently" and that its present position on taxes was an initial interpretation of the Act. (Agency Response Brief, p. 21) The fact that the Agency provided FFP for taxes for some 18 years in the Hawaii cases and 6 years in this case seriously undermines the argument, however. The Agency, in effect, admitted that actual notice was required when it asserted in joint briefing that its pronouncement on excise taxes constituted an interpretative rule. (Agency Reply Brief, pp. 18-19) Section 552(a)(1) of 5 U.S.C. (the Administrative Procedure Act) specifically identifies "statements of general policy or interpretations of general applicability," as well as substantive rule changes, as among the Agency actions requiring publication in the Federal Register or actual notice before a party can be adversely affected. Thus, actual notice was required here whether the new interpretation was an initial interpretation (as the Agency argued) or a changed interpretation (as the State argued). Even if the Agency policy were considered an "interpretative rule," exempted from notice and comment rulemaking under 5 U.S.C. 553(b)(A), notice would be required before the State could be adversely affected. (See section 552(a)(1) of the APA)

394

APRIL 25, 1987

00785

GAB Decision

23

September 8, 1986

Washington, Department of Social And Health Services; Docket No. 86-8; Audit Control No. 10-50202

Ford, Cecilia S.; Settle, Norval D. Ballard, Judith A.

(1) The Washington Department of Social and Health Services (State) appealed a decision by the Health Care Financing Administration (HCFA or Agency) to disallow $1,080,380 in federal financial participation (FFP) claimed under Title XIX (Medicaid) of the Social Security Act (Act) for the period January 1, 1980 through December 31, 1981. The claims disallowed were for intermediate care facility (ICF) services provided by the Cherry Heights Villa Care Center (Cherry Heights) to patients under 65 years of age. The disallowance was based on an audit report finding that Cherry Heights was an institution for mental diseases (IMD).

Section 1905(a) of the Act excludes from the definition of "medical assistance," for which Medicaid funding is available, services to individuals under age 65 who are patients in an IMD. Agency regulations define an IMD generally as having the "overall character" of an institution primarily for the care and treatment of persons with mental diseases. The IMD exclusion has been addressed in a number of Board and court decisions; the key holdings in those decisions are that an ICF may be an IMD and that evidence gathered by the Agency using unpublished "criteria" may support a disallowance if it shows that the facility was an IMD under the regulatory definition. In this case, the Agency relied primarily on evidence related to certain "patient-counting" criteria. As we discuss below, application of these criteria requires particular care since an ICF can properly treat some patients with mental diseases without becoming an IMD. Here, we found a number of deficiencies in the process used by the Agency to classify patients, including instances where there was a failure to follow guidance the Agency itself has adopted or where the record simply did not support the Agency's findings. In addition, unlike other cases where we found substantial other evidence to support(2) determinations that the facilities in question had the requisite overall character of an IMD, here the supporting evidence was either flawed or lacked probative value. We find that the record does not support a determination that Cherry Heights was an IMD, and, accordingly, we reverse the disallowance. Relevant Statutes and Regulations Title XIX of the Social Security Act, as amended, provides grants to states for furnishing medical assistance to eligible low-income persons. Section 1905(a), in defining "medical assistance," specifically excludes payments for services and care to "any individual who has not attained 65 years of age and who is a patient in an institution for . . . mental diseases." Section 1905(a) (18) (B). /1/ This exclusion has been present in the Medicaid program from the program's inception in 1965. The exclusion rests on a Congressional intent not to finance through the Medicaid program long-term custodial care for institutionalized individuals traditionally the responsibility of state and local governments. S. Rep. No. 404, 89th Cong. 1st Sess. Pt. I, 144-47 (1965). The regulations implementing the exclusion for IMD patients define an IMD as --

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 CFR 435.1009 (1978-1981). To interpret these general statutory and regulatory standards, the Agency established "criteria" in a series of(3) transmittals to field staff between 1975 and 1977, the "Field Staff Information and Instruction Series" (FSIIS). The Agency characterized these criteria as interpretive rules and stated that "(obviously) some . . . are more probative as to whether a facility, given its 'overall character,' is 'primarily' engaged in an IMD type activity. . ." See Joint Consideration: "Institutions for Mental Diseases," Decision No. 231, November 30, 1981, pp. 24-25. In December 1982, the Agency issued section 4390 of the State Medicaid Manual, which explained its guidelines for determining if a facility is an IMD and amplified the criteria to be used. Section 4390 lists ten factors to be used cumulatively to determine the facility's overall character. Some of those factors concern the facility's status (e.g., licensure) and resources (e.g., locked wards). Several factors concern patient population. /2/ (4) The patient population factors require that patients be classified as mentally diseased or physically diseased. In section 4390 the Agency stated that patients with a diagnosis which was listed in the latest revision of the International Classification of Diseases (ICD-9-CM) would be classified as mentally diseased only if the institutionalization resulted from that diagnosis. /3/ The Agency excluded from consideration as a mental disease (despite their listing in the ICD-9-CM) certain diagnoses related to the general category of "senility," stating that "these diagnoses represent the behavioral expression of underlying neurological disorders." To determine if a patient's institutionalization resulted from the diagnosis of mental disease, the Agency stated that patients with both a mental disability and a physical problem, either of which would independently require nursing home care, would not be classified as mentally diseased. Specifically, the Agency stated:

(Patients) with longstanding mental disability may develop major physical problems and vice versa. When it is clear that institutional care initially resulted from one or the other, the patient should be classified according to the initial disability. When no clear-cut distinction is possible, the patient should not be included in the mentally ill category.

(5) Prior Board Decisions and Judicial Precedent Both the Board and the courts have devoted considerable scrutiny to the issues raised in determining if a facility is an IMD. The Board issued its most detailed analysis in Decision No. 231, involving appeals from four states. Each of these states appealed the decision. The Board also considered an appeal of an IMD determination in Massachusetts Department of Public Welfare, Decision No. 413, April 29, 1983, and, most recently, was asked to review certain issues related to IMD status involved in an Eighth Circuit Court case in Granville House, Inc., Decision No. 529, April 9, 1984. Below, we summarize issues relevant to the instant case addressed in prior Board decisions and judicial precedent. * In Decision No. 231, the Board upheld the Agency's determinations that certain facilities were IMDs, based upon an examination by the Board of the overall character of the facilities. The Board found that the term "institution for mental diseases" was not restricted to large, state-financed mental hospitals, but could include private skilled nursing facilities (SNFs) or intermediate care facilities (ICFs) which were primarily maintained for the care and treatment of patients with mental diseases. The United States Supreme Court upheld the Board's determination that an ICF could be an IMD. Connecticut v. Heckler,

U.S. , 105 S. Ct. 2210 (1985).

In Decision No. 231, the Board specifically upheld the characterization of facilities by the Agency based upon evidence related to the FSIIS criteria, including the percentages of patients institutionalized because of diagnoses of mental diseases under the ICDA. The Board recognized the substantial difficulties in the classification of patients, and the possibly disruptive effects of small shifts in patient percentages for facilities close to the 50 percent mark. In the cases being considered, however, the Board found that the percentage of mentally diseased patients was only one of several factors upon which the Agency based its determinations of the overall character of each facility. The Board's decision on these issues was upheld by the court in California v. Bowen, Civ. No. 5-82-180-EJG (E.D. Ca. May 21, 1986); see, also, Illinois v. Heckler, No. 82C-1349 (N.D. Ill. June 30, 1986). * Decision No. 231 was reversed with respect to Minnesota facilities by the Eighth Circuit, in Minnesota v. Heckler, 718 F. 2d 852 (1983), which affirmed a district court ruling, and with respect to three Illinois facilities by the district court in Illinois v. Heckler, No. (6) 82C-1349 (N.D. Ill. June 30, 1986) (the court upheld the disallowance with respect to six facilities). These courts found that the Board had relied too heavily on patient-counting factors, such as the number and percentages of mentally diseased patients, rather than on the treatment being given by, and the general nature of, the facilities. * The Board examined the treatment issue in Decision No. 413 and agreed that patient diagnoses and related factors should not be the sole factors in determining that a facility is an IMD and that treatment should be considered. Decision No. 413, p. 14. But the Board disagreed with the contention that the IMD exclusion extended only to psychiatric hospitals or certified facilities providing active treatment for mental diseases of the type appropriate to acute care patients. Decision No. 413, pp. 11-14. The Board noted that Congress had apparently recognized that many IMDs provide little active psychiatric treatment. Decision No. 413, p. 12. * In Decision No. 529, which addressed the status of alcholism-treatment facilities in Minnesota, the Board concluded that, because of the complex nature of alcoholism and the various means of treating it, the Agency could not determine that a facility was an IMD based upon the mere presence of alcoholics "without more definitive rules or guidelines which enable HCFA and its constituents to better evaluate what types of alcoholism treatment are, and are not, conclusive of IMD status." The decision included a lengthy discussion of the dual nature of alcoholism as both a mental and physical affliction. The Eight Circuit agreed with the Board, requiring that the Agency develop such guidelines on remand (although disagreeing with Minnesota and the District Court that this had to be accomplished through notice and comment rulemaking). Granville House, Inc. v. Department of Health, Education and Welfare, 722 F.2d 451 (8th Cir. 1985). Case Background Cherry Heights was certified as an ICF with 180 beds by the State during the period of January 1, 1980 through December 31, 1981. During that period, the State paid the facility approximately $2.6 million under the Medicaid program for providing services to Medicaid patients, who comprised 96 percent of the total patient population. The federal share of these payments was $1,080,380. The Agency disallowed the State's claim for FFP because an audit conducted by the Office of the Inspector General had(7) found that the facility was an IMD during the period January 1, 1980 through December 31, 1981. The audit was conducted in 1982 but the results were modified in light of section 4390 of the State Medicaid Manual and Board Decision No. 529. The audit report was not issued in final form until mid-1985. The audit report primarily presents findings based on classification of patients; the auditors found that 61 percent of the admissions to the facility (involving 58 percent of patients) were of patients with mental disease and that 62 percent of the patient days during the audit period were for patients with mental diseases. /4/ The audit report also contained findings regarding mental health services provided at the facility, the average age of the patient population, the hospitals from which the patients were admitted, and the opinions of the facility's staff. The audit report included no evidence related to other Agency criteria factors, such as whether the facility was licensed as a psychiatric facility, advertised as such, had locked wards, or had any agreement with an established mental hospital to provide alternate care. Neither the proximity to a state mental institution nor the findings of an Independent Professional Review team were mentioned in the report. The State submitted a patient-by-patient challenge to the classification of approximately 98 of the 642 admissions examined by the auditors, as well as challenging the classification of 81 admissions of patients who had a(8) diagnosis of alcoholism. /5/ The State also challenged generally the process used in classifying patients, as well as the finding that the facility specialized in providing mental health services. In addition, the State raised a number of legal issues. The State challenged the use of the Agency's unpublished criteria and guidelines, relying on the Eighth Circuit's decision Minnesota. The State also argued that, under Decision 529, the Agency must classify patients with a diagnosis of alcoholism as physically ill. The Agency relied primarily on the Supreme Court's decision in Connecticut. On the whole, the Agency's response to the State's detailed analysis of patients and the difficulties with the audit process was very general, even after the Board asked questions designed to elicit more specific responses. Below, we first discuss some general considerations from previous Board and court decisions which we think are relevant to our analysis here. We then discuss the subsidiary factors relied on by the Agency, and, finally, we address the patient-counting data and the review process used to classify the patients. Discussion I. The Agency's use of criteria to collect evidence was not a ground for reversal. The auditors cited the FSIIS criteria in the audit report as indicators of the overall characteristics of IMDs. The State asserted that the Agency determination was improperly based on these criteria, which the State asserted were "invalid" and had been rejected on judicial review. The State cited Minnesota v. Heckler, 718 F.2d 852 (8th Cir. 1983), stating that the court had remanded the IMD determination and had requested that the Agency develop new IMD criteria. (9) The State mischaracterized the Minnesota litigation. The Court in Minnesota stated that the Agency must consider treatment in determining whether the Minnesota facilities were IMDs. This did not invalidate the other criteria; they remain factors which may indicate useful evidence in the determination of IMD status. On remand in Minnesota, the Agency agreed to revise its audit of the facilities by considering the additional factors cited by the Court in addition to the FSIIS standards used in its initial determination. We affirm our prior decisions and emphasize that the application of the criteria is permissible to collect evidence as long as the evidence is then weighed to ensure that the regulatory standard, relating to facility's overall character, is met. As we discuss next, however, prior Board decisions and the reviewing courts have recognized that there are difficulties in applying the patient-counting criteria. II. Patient counting data must be strictly scrutinized. An analysis of the court decisions reviewing Decision No. 231 indicates that the primary reason the Illinois and Minnesota courts found the evidence inadequate in those cases was the courts' perception that the Board had relied too heavily on diagnosis-based patient-counting data. Although we disagree with the courts' evaluation of the extent of that reliance in Decision No. 231, what is important is the courts' underlying concerns with the problems of patient classification and 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 based upon historical diagnosis which did not reflect the patients' current conditions (what the states referred to as "labeling" of patients). The courts' concern with treatment reflects the idea that, if there is evidence that a facility is treating a patient for mental illness, it is clear that the diagnosis of mental illness is not simply labeling based on historical diagnoses. If patients are classified based on historical diagnoses, the resulting evidence is not truly probative of the character of the facility; a historical diagnosis simply does not reflect the nature of the facility, unlike evidence of the condition which caused the patient to be placed in the facility. Another reason for caution in applying patient-counting factors is that an ICF can properly treat a patient with a mental disease. See, Illinois, slip op. at 14. If a facility treats some patients with mental diseases and(10) develops appropriate services it is likely that other patients with mental diseases will be placed in the facility. We have recognized in our past decisions that when a facility was not established as a facility specializing in 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 requisite 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. The patient-counting criteria rely on the classification of patients according to whether they are institutionalized primarily because of a mental disease or a physical disease. Such classifications involve a judgment requiring medical expertise. The Board has no independent medical expertise; nonetheless, the Board can review appropriately the reasonableness of the process used to make such classifications and can evaluate conflicting expert testimony. In prior Board decisions, we gave little weight to alleged errors in patient classification since, even eliminating the errors, we still found either overwhelming percentages of the patients properly classified as mentally ill or other strong evidence that the facility had the overall character of an IMD. Moreover, we found in each of those cases that the review process used by the Agency was reliable. Here however, the other factors cited by the Agency were minimal and the evidence in the record does not fully support the major other factor (mental health services). Moreover, although we do not agree with all of the State's challenges to patient classification, it is clear that errors were made and that the review process in general was less reliable than in other cases we have examined. III. The Agency focused primarily on patient-counting factors Although the eight criteria contained in the FSIIS were listed in the introduction to the audit report, the Agency's conclusions were based primarily on the alleged high proportion of patients with diagnoses of mental diseases and other patient-counting factors. /6/ (11) The auditors mentioned factors other than patient counting in only one section of the report. The report referred to the psycho-social services provided to the mentally ill at the facility. The Agency also alleged that the facility employed a full-time psychologist and five full-time mental health specialists who provided "psychosocial" services to the residents, and that outside mental health consultants visited weekly. Although the document describing services offered by the mental health department at Cherry Heights shows that the facility offered some programs for patients with problems such as chronic psychiatric histories or thought disorders, some of the programs are simply directed at helping patients to adjust to life in an institutional setting and would be appropriate for any ICF patient. The Agency made no findings relating the mental health programs to specific patients to show that they were receiving mental health services of a particular type. Moreover, although section 4390 of the State Medicaid Manual refers to "an unusually large proportion" of the facility staff specializing in mental diseases as evidence that the facility is an IMD, the audit report contained no analysis of how Cherry Heights staff compared with other ICFs of the same size. The State, in its response to an order to develop the record, listed only 2.48 full-time equivalent mental health workers. Even if we accepted the audit report as establishing that there were six full-time equivalent mental health specialists, these employees would still comprise less than 10 percent of the staff, which was primarily made up of nurses' aides. Although the State admitted that most other ICFs in Washington had no formally trained mental health workers, the State noted that there(12) were no other ICFs of a comparable size in the State. Cherry Heights had almost twice as many patients as the largest of the other 33 ICFs in the State. Given the absence of any evidence that the percentage of mental health workers was substantially higher than might be anticipated in any large facility with some mentally diseased patients, we find that the presence of some mental health workers on the staff does not establish that the facility was primarily engaged in treating mentally diseased patients. /7/ This is especially so since some of the mental health programs would be appropriate in any ICF. The presence of mental health professionals on the staff or as consultants and the provision of programs directed at patients with mental diseases is also explained by the uncontested fact that the facility contained some proportion of patients with mental diseases, either as a primary or secondary diagnoses. The presence of such patients also explains an agreement between the facility and the Seattle University School of Nursing to provide nursing experience to students, which the auditors alleged was to provide psychiatric nursing experience. Agency's Ex. A.; State's Ex. 1, Audit Report, p. 12; Affidavit of Ronald P. Benoy. /8/ The auditors also asserted that the facility was used as an "alternative facility" for the care and treatment of mentally ill patients because of overcrowding in other facilities for the mentally ill. Audit Report, States'(13) Ex. 1, p. 11. This assertion was based on the auditors' finding that 13 percent of the Medicaid patients at the facility were admitted directly from Western State Hospital, a State-owned IMD. Another 20 percent, approximately, were discharged from the psychiatric ward of Harborview Medical Center, a general purpose public hospital. /9/ The audit report did not state whether the patients admitted from Western State or Harborview were admitted primarily for care of a mental or physical disease. The audit report contained no evidence of either an explicit agreement to act as an alternative care facility or of any State policy to that effect. No evidence or analysis supported the auditors' assertion of overcrowding at other facilities. The fact that individual patients were admitted to Cherry Heights immediately after receiving care for an acute psychiatric problem from a state hospital might have bearing on the reason for those patients' placement at Cherry Heights. The underlying purpose behind the factor cited by the auditors (i.e., whether the facility was being used as an alternate to a State mental institution), however, was to determine whether a state is attempting to avoid its traditional responsibility for IMD care by dumping patients out of state mental hospitals into ICFs or otherwise using an ICF as a de facto IMD. The evidence here did not establish that Washington was using Cherry Heights in this manner. In sum, the factors cited by the Agency, other than the patient-counting factors, could reasonably have been present in an ICF which was not an IMD at all. None of these factors distinguish the facility from an ICF which accepts some mental patients, or identify the facility as "primarily engaged" in the treatment of mental diseases. Having found little suport for the Agency's determination in the evidence presented on these factors, we must carefully scrutinize the auditors' findings dependent on patient-counting. IV. The audit process resulted in a misapplication of the patient-counting criteria. In this section we review the State's challenges to the application of patient-counting factors with respect to(14) patient classification. /10/ The classification of patients was performed in a number of steps. First, the auditors examined Medicaid patient medical records and recorded certain information on audit forms. The forms contain identifying information and sections to indicate diagnoses, medications, and behavioral characteristics. The auditors, who apparently had no medical training, then classified the patients. These forms were reviewed by a nurse who classified the patient on the basis of the form alone, without reference to the underlying medical records. Some of the forms were also reviewed by a staff physician in Region IX, although the audit report does not indicate the precise number. In addition to this process, Agency "medical personnel" (the audit report does not specify whether this was a doctor or a nurse) examined the medical records of 40 patients and concluded that the auditors had obtained complete and appropriate information on the forms. The State submitted a patient-by-patient challenge to the determinations with respect to a total of approximately 98 admissions. This included approximately 42 admissions with a diagnosis of alcoholism or related symptoms classified as primarily due to mental diseases by the Agency (the State claimed to contest 47 admissions, but apparently included at least 3 duplicates and two admissions which the auditors had changed from a mental to a physical classification), and approximately 55 other admissions classified as primarily due to mental diseases (the State claimed to contest 57 admissions, but at least 2 were duplicates). /11/ (15) The State also raised procedural issues regarding the adequacy of the bases for the Agency's medical determinations, the qualifications and credibility of the medical personnel making the determinations, and the consistency of those determinations with the principles set forth in Agency regulations and policy documents. Below, we discuss first the general issue of whether there was an adequate basis in the record for accurate patient-counting determinations. Then, we discuss challenges to the qualifications of the patient classification team. Finally, we discuss issues associated with the application of Agency guidelines, particularly with respect to physically-based mental diseases and alcoholism. a. Was there an adequate basis for accurate patient classification? The State alleged that certain of the forms, prepared by the auditors and used as the basis for the medical determination, did not provide complete information upon which an accurate determination could be based. The State indicated a number of forms which listed medications appropriately administered for physical diagnoses. On some forms, however, no corresponding physical diagnosis is listed. The State argued that this contradiction indicates that the information listed by the auditors on the forms is incomplete. See, e.g., State's Ex. 7, D. F. (admission of 5/8/80). /12/ The Agency responded that the medications cited by the State were items such as "vitamins, nutrients, aspirins, anti-acids, decongestants, lice control, itching control, etc." Agency's Brief, p. 16. Our review of the patient forms submitted by the State indicated, from a layman's perspective, that the Agency response was true in some instances, but not in others. In itself, we would not find much significance in this, since the number of patients involved is not large and there was no evidence presented that any missing information would have affected the classification of those patients. But the inaccuracy pointed out by the State, and the overly general response of the Agency (along with other factors, discussed below), diminished our view of the credibility of the Agency's review process. (16) The State challenged the failure of the auditors to indicate on the forms whether a mental diagnosis was episodic, acute, chronic, in remission, or controlled. If a patient's mental disease was under control, then the diagnosis -- although still recorded in the patient's medical records -- would not necessarily be the reason for the patient's institutionalization. The diagnosis would merely be for historical purposes, or to indicate a continued maintenance program of medication. /13/ The Agency responded that mistakes in classifying patients with historical diagnoses of mental diseases were not important, since the mere fact that these patients had mental diagnoses should be considered as a broad indicator that the overall character of the facility was an IMD. If the Board were to accept this argument, we would render meaningless the Agency's policy in section 4390 of the state Medicaid Manual which states that the significant element is not the diagonsis itself, but whether "each patient's need for institutionalization results from a mental disease." This policy indicates that the Agency recognized that classification should not be based upon an historical diagnosis, but must be made with reference to the reasons for institutionalization at the time of admission. This makes sense because otherwise patients with historical or controlled mental diseases would face unwarranted discrimination. Thus we must reject the Agency's argument that historical diagnosis are important in themselves, as indicators of the overall character of the facility. We acknowledge that historical diagnoses may be relevant to an inquiry concerning patient's current health status, and were properly considered by the Agency. But the failure of the aduitors to distinguish between historical and current diagnoses in the forms used by the medical evaluators created the possibility of mistaken classifications on a large scale. The possibility of error is particularly strong when other indicators of the status and severity of a mental diagnosis, such as the treatment being given, are not indicated on the patient forms. The State challenged the failure of the auditors to list details of the types of treatment received by patients, which would indicate the severity of the mental disease and allow a medical professional to accurately determine the relative importance of a mental disease as a reason for the patient's institutionalization. (17) The auditors did not list dosages of medication, frequencies of treatment with medication, or patient utilization of mental health services (apart from a few references to a senior citizens' group offered by the Mental Health Department of Cherry Heights). /13/ The audit report does not list visits by either mental health or other medical professionals. The Agency defended its reliance on diagnoses, rather than treatment, by stating that it assumed that treatment appropriate to each diagnosis was provided. We recognize that treatment can not be considered so critical a factor in determining whether a facility is an IMD as to permit states to claim federal participation in the costs of "warehousing" patients in facilities which do not provide appropriate treatment. That was precisely one of the evils Congress sought to avoid. See Decision No. 413. As the Agency pointed out in its brief, the issue is not whether the patients were receiving the appropriate quality of care; we must assume that the patients were receiving treatment appropriate to their needs. If the patients' diagnoses and medical records indicated that patients should have been receiving treatment for mental diseases, then the overall character of the facility must be considered to be an IMD, whether or not the appropriate treatment was actually given. But treatment is a critical factor in a situation in which the diagnoses can be considered as either mental or physical diagnoses, such as alsoholism, or in determining the primary reason for the institutionalization of patients with both physical and mental diagnoses. See Decision No. 529. Treatment is an indicator of the judgement of the attending physician of the nature and severity of the patient's alleged mental diagnoses, and of the overall character of the facility as to whether it is concerned primarily with the physical or mental aspects of the patients' health problems. Because of these several irregularities brought forward by the State, we agree that the patient classifications necessary to support the patient-counting criteria as evidence of the overall character of the facility were flawed. We are not persuaded that the effects were minor by the Agency's assertion that the medical personnel examined the underlying medical records in 40 cases, and found that "the information collected by the auditors from the medical records provided an adequate basis for determining the(18) primary reason patients were at the facility." Agency's Response to Order, p. 4. Those 40 cases were not a random sample; they were the cases which were undecided after an intitial review by the medical personnel. We can not determine whether those cases were representative of the entire set of cases. Furthermore, the very fact that the medical personnel went back to the underlying medical records indicates that the patient forms were not considered, at the time, an adequate basis for a determination in a close case. Yet, the Agency provided no evidence to support its determination in close cases other than the patient forms. b. Were the patient determinations made by qualified medical personnel? In challenging Agency medical determinations concerning individual patients, the State implicity challenged the credibility and qualifications of the Agency medical personnel who categorized the patients. The Agency offered little information concerning the qualifications of the medical personnel. In section 4390, the Agency recommended that review teams have "at least one ohysician or other member who is familiar with the care of mentally ill individuals." The audit report states that the "medical personnel" made the determinations, and identified the medical personnel as "one physician and two nurses." State's Ex. 1, Audit Report, p. 2. /14/ Each patient form was reviewed by a nurse and a determination was made in a space labeled "Nurse's Determination." State's Ex. 7. There is no indication that the physician reviewed all of the forms, although changes indicate that some of the forms were reviewed by the physician. The record does not indicate whether the Agency medical personnel had any experience in the area of mental health. The physician was identified as "a medical doctor currently employed with the Public Health Service, Region X," but the Agency did not allege that he was licensed to practice in any state, or that he had any experience in evaluating or treating mental patients. On the other hand, the State's challenges to the Agency medical determinations were based on a review by two nurses with experience in psychiatric(19) nursing and nursing home services, in consultation with three doctors with experience with psychiatric patients. In Decision No. 231, we found that the classification of patients in a facility in Connecticut had a high degree of credibility because the classification had been conducted by a review team guided by a psychiatrist with significant experience in the area of mental health. While we also upheld IMD determinations based on evidence gathered by less qualified review teams, we agree with the State's implication that, with a less qualified review team, the patient classifications are more open to doubt. c. Were the patient-counting determinations consistent with Agency policy? The State alleged that the patient classification was inconsistent with Agency policy in several respects. We have already discussed the State's argument that the Agency failed to prevent classification on the basis of historical diagnoses or diagnoses which were not the primary reason for institutionalization. The State also pointed out that the auditors recorded on the forms, and used for patient evaluation, entries which were not diagnoses under the ICD-9-CM (which section 4390 of the State Medicaid Manual states will be used for patient classification). We do not believe that recording of these other symptoms or diagnoses was necessarily improper, to the extent the forms were not evaluated merely on a mechanical basis but were evaluated by medical personnel who presumably could distinguish between relevant and irrelevant medical information. We agree with the Agency's assertion that these medical personnel could exclude superfluous information in exercising medical judgment. We note, however, that classifications made without ICD diagnoses from the attending medical personnel must be made cautiously and conservatively. /15/ (20) A more difficult question was suggested by the State in its arguments related to alcoholism: whether the Agency improperly classified as mental diseases those diagnoses, such as organic brain syndrome and Wernicke-Korsakoef syndrome, which are diagnoses resulting from physical damage to the brain. In State Medicaid Manual section 4390, the Agency stated that diagnoses related to senility were excluded from classification as mental diseases because they "represent the behavioral expression of underlying neurological disorders." The State alleged that this rationale covered some of the diagnoses cited by the State, and the Agency did not deny it. When we asked the Agency to explain the basis for distinguishing among physically-based disorders, the Agency response was wholly insufficient: the only explanation the Agency offered was that section 4390 had specifically excluded senility-related diagnoses, but had not mentioned others. Agency's Response to Board Order, pp. 8-9. We do not determine, in this case, whether the Agency improperly failed to apply the rationale from section 4390 to other neurological disorders; no evidence in this record suggests that the Agency could not reasonably classify these physically-based diseases as mental diseases, since they are listed as mental diseases in the ICD-9-CM. We simply find that the Agency, at the very least, was bound to offer an explanation of the classification of these diagnoses and failed to do so. The State also challenged generally the classification of 81 patients with a diagnosis of alcoholism, stating that a determination that these patients were primarily institutionalized because of a mental disease was inconsistent with Agency policy. The State cited Board Decision No. 529 for the proposition that the Agency could not base a determination that a facility is an IMD on the basis of the classification of alcoholics as mentally ill without developing rules or guidelines to evaluate whether the facility treats alcoholism as a mental or as a physical disease. The State pointed out that the audit report was issued in draft prior to the Board's decision, and treated alcoholism as a per se mental disease. After the Board decision, an Agency medical official reevaluated all (21) patients with a diagnosis of alcoholism. State's Ex. 1, Audit Report, p. 21. The State alleged that this reevaluation was perfunctory, and had failed to examine whether alcoholism was being treated as a physical or a mental disease by the facilit, relying instead upon "secondary" diagnoses of mental diseases. /16/ State's Brief, pp. 4-5. The reevaluation process described by the Agency appears to be appropriate, but examination of the patient forms submitted by the State indicates that the reevaluation may indeed have been merely perfunctory. The audit report stated that alcoholism was considered as a physical disease in the reevaluation, and that patients were classified as mental only if the primary reason for institutionalization was found to be a different diagnosis of a mental disease. State's Ex. 1, Audit Report, p. 21. The Agency stated that the reevaluation was not made on the basis of a secondary diagnosis, but on a determination that alcoholism was a secondary diagnosis. When no determination was being made on the basis of a classification of alcholism as a mental disease, Decision No. 529 was not applicable. Here, the Agency alleged that the reevaluator assumed the worst, classifying alcoholism per se as a physical diagnosis. While this process appears consistent with Agency policy, the results described below indicate that the process was not diligently followed. As the State pointed out, a significant number of patient forms for admissions classified as primarily mental patient admissions show a diagnosis of alcoholism with no other mental diagnosis. These admissions should not have been classified as mental patient admissions without further Agency guidance and evidence of the type of treatment. See, e.g., State's Ex. 5, L.H. (admission of 6/30/80); H.P. (admission of 12/24/79). The incorrect classification of these admissions leads us to conclude that the reevaluation of the classification of patients with diagnoses of alcoholism was not carefully and accurately performed. Our finding that the Agency improperly classified admissions involving patients with a diagnoses of alcoholism is in addition to our earlier criticism of the determinations with(22) respect to the 42 individual patients with a diagnosis of alcoholism challenged by the State on other grounds. In summary, there are substantial questions here about whether the patient classifications were consistent with Agency policy. These questions, when considered with the other factors discussed above concerning the process used to classify patients, lead us to conclude that the patient classification data is unreliable. IV. The cumulative evidence of the overall character of the facility is not sufficient to support a determination that the facility was an IMD. In prior Board decisions, the Board has upheld determinations that a facility was an IMD based upon a consideration of the cumulative evidence. The Board recognized that no single factor or set of factors were necessarily determinative, but that evidence of a range of factors could indicate an overall pattern and reveal the character of the facility. Here, the Agency did not present a sufficient record which might indicate, taken as a whole, the character of the facility. The audit report relied primarily on only a few factors associated with the characteristics of the patient population. Other factors presented were inconclusive and incompletely developed. See discussion, pp. 10-13. The patient population factors were determined on the basis of inadequate underlying factual data, by personnel who may not have been sufficiently knowledgeable about mental diseases, and may, consequently, have been determined inconsistently with stated Agency policy. These patient-counting factors, which the Board has recognized as the most problematic factors, must, therefore, be viewed as inconclusive as well. See discussion, pp. 13-22. In addition, the Agency failed to adequately explain its basis for certain interpretations of Agency policy in applying the patient-counting factors. On the whole, we did not find this evidence to be as credible and probative of overall character as the evidence we reviewed in our previous cases. Conclusion For the reasons stated above, we conclude that the record provides insufficient evidence to support a determination that the Cherry Heights Villa Care Center was an IMD during the audit period from January 1, 1980 through December 31,(23) 1981. Therefore, we reverse the disallowance imposed by the Agency in this case.

##FN001 /1/ Under section 1905(a) (15) of the Act, FFP is available for intermediate care facility (ICF) services, other than such services in an IMD. Section 1905(c) defines an ICF as an institution licensed to provide "health-related care and services to individuals . . . who because of their physical or mental condition" require institutional care but not at the level of hospital or skilled nursing care. (Emphasis added.) ##FN002 /2/ 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 care and treatment. This may be ascertained through review of patients' records and may also be indicated by the fact that an unusually large proportion of the staff has specialized psychiatric training; 5. The facility is under the jurisdiction of the State's mental health authority; 6. More than 50 percent of the patients have mental diseases which require inpatient treatment according to the patients' medical records; 7. A large proportion of the patients in the facility has 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 CFR 456.1); 9. The average age in the facility is significantly lower than that of a typical nursing home; 10. Part or all of the facility consists of locked wards. As we discuss later in this decision, the audit findings here relate to the factors above numbered 4, 6, 7 and 9. There is no evidence related to the remaining six factors. ##FN003 /3/ An earlier version of this classification system was discussed in previous Board decisions and referred to as the ICDA. ##FN004 /4/ The statistics concerning patients and admissions were somewhat confusing because of multiple admissions of individual patients. We found the statistics on patient days to be more probative. An analysis based on patient days might have been more convincing, particularly if the analysis took into account the changes in the character of patient days over the course of the audit period. This analysis would, of course, be subject to the same challenges of patient classification. The chart included as Exhibit B to the audit report, State's Exhibit 1, alleged a trend at the facility of an increasing percentage of mental patient days. If the Agency had relied only on the later periods when the percentages of mental patient days were higher, then the case might have been stronger that the facility had become an IMD. ##FN005 /5/ Since the auditors' findings relate to patient admissions and some patients had multiple admissions, there are some difficulties in translating the figures to percentages of patient population; however, it is fair to say that the State conceded that about 40 percent of the patients were primarily mentally ill and the auditors found that about 30 percent of the patients were primarily physically ill. ##FN006 /6/ During the course of this proceeding, the Agency submitted two affidavits from auditors stating that the facility's administrator stated to them, on or about March 11, 1982, that the "primary purpose of the facility is to provide care and treatment of persons with mental diseases." We give considerably less weight to the offhand statements of facility staff, made subsequent to the audit period, then we gave to the contemporaneous written admission policies or advertisements of the facilities we examined in previous decisions, particularly absent further indication of the context of such statements. The audit report indicated a trend toward the treatment of patients with mental diseases at the facility; therefore, statements relevant to a later period may not be relevant to the entire audit period. Furthermore, there is no question that a majority of the patients may have had diagnosed mental diseases; the contested issue is whether these diagnoses were the primary reason for their institutionalization at the facility. See Affidavits of Ronald P. Benoy and Michael E. Coblentz; State's Ex. 1, Audit Report, p. 13. ##FN007 /7/ In its response to the Board's Order to Develop the Record, the Agency stated that a comparative analysis of staffing and services would be burdensome, but that, given time, the Agency could generate a report with enough samples of various institutions to support its position. This statement did not even amount to an offer of proof, since it was merely hypothetical, and was not responsive since our question clearly and directly indicated that we found no evidence in the record to support the Agency's position. ##FN008 /8/ Although an affidavit submitted by an auditor stated that the facility's Nursing Director said that this was the purpose of the agreement, the agreement itself does not refer to psychiatric nursing experience. The contemporaneous notation made by the auditor at the bottom of a copy of the agreement merely stated that the Nursing Director said that the students' experience "involves working with psychiatric patients." Agency's Ex. A. In any case, given the acknowledged percentage of patients with mental diseases, we do not find this agreement to be very probative in itself. ##FN009 /9/ The audit report found that 23 percent of Medicaid patient admissions were for patients admitted directly from Harborview, but, in a random sample, the auditors found that 10 percent of these admissions were not from the psychiatric ward. ##FN010 /10/ The Agency asserted one ground in support of its IMD determination which was based on the patient population but was not dependent on patient classification: the relatively young age of patients compared with patients in other ICFs. While this may be sufficient as an indicator to trigger an Agency investigation, it has no direct probative value with respect to IMD status. The relatively young age of patients could have a reasonable explanation other than that the facility is an IMD, such as a preference for placing younger people together no matter what the reason for their institutionalization. ##FN011 /11/ In this case, the Agency's determination was based largely on the finding that during the audit period, 58 percent of the patients were admitted primarily because of mental diseases. Unlike in other facilities we have considered (where much higher percentages of mentally diseased patients were found), in this facility a shift in the characterization of only a small number of patients would diminish the significance of the patient population data as an indicator of IMD status. ##FN012 /12/ We refer to the patients by initials to protect privacy. ##FN013 /13/ The patient forms indicated only whether the diagnosis were present at the time of admission, not whether the diagnosis were active or historical. ##FN013 /13/ Compare, with respect to dosages, the Massachusetts review described in Decision No. 413 at page 14. ##FN014 /14/ The patient forms contain spaces labeled "Auditor's Evaluation." It is not clear why this space was included if the determinations were made by the medical personnel. Apparently, these spaces were for preliminary evaluations. See Agency's Response to Order, p. 3. ##FN015 /15/ Additionally, the State alleged that the Agency improperly classified as mentally diseased patients with senile dementia and related diseases or mental retardation, which had been explicitly excluded from the classification of mental diseases by section 4390 of the State Medicaid Manual. While we agree that classification of a patient as having a mental disease because of senile dementia or mental retardation would be improper, we found only two possible cases of this error in the audit forms submitted by the State. States' Ex. 7 A.K. (admission of 1/7/80) (senility); M.M. (admissions of 2/10/80 and 3/4/80) (mental retardation). It is not clear to us that these patients were necessarily classified improperly, since other indications of mental diseases on the patient forms might have been a basis for the classifications. In light of our other findings, we did not find it necessary to consider in any further depth the sufficiency of the evidence in support of these classifications. ##FN016 /16/ In the draft audit report, 92 admissions with a primary diagnosis of alcoholism had been included in the mental category. In the reevaluation, the Agency changed only 11 admissions to the physical category. The Agency did not provide any patient forms from those 11 admissions, which might have shown how those 11 admissions were distinguishable from the other 81.

394

APRIL 25, 1987

00784

GAB Decision

02

September 2, 1986

New York State Department of Social Services; Docket No. 86-101

Ballard, Judith A.; Settle, Norval D.

Teitz, Alexander G.

(1) The New York State Department of Social Services (State) appealed a decision of the Office of Family Assistance, Family Support Administration, disallowing $601,925 claimed under title IV-A of the Social Security Act. The disallowance was taken by the Agency on the ground that the State's claims were not filed within the applicable time limits imposed by Pub. L. 96-272 and the implementing regulations. * All but $536 of the costs claimed represented amounts originally paid under the State-funded Home Relief program to individuals whom the State later determined were eligible for title IV-A payments. The remaining $536 represented State and local training costs paid by the State which the State also reclassified as expenditures for which federal financial participation (FFP) was available under title IV-A. The State asserted that the claims were timely filed, arguing that the expenditures were not made until the State recognized that they were eligible for FFP. The State also argued that the claims fell within the statutory exception to the time limits for "audit exceptions, or adjustments to prior year costs." The State noted, however, that the Board had rejected similar arguments in New York State Department of Social Services, Decision No. 521, March 6, 1984, and requested that the Board issue a summary decision based upon its holding in Decision No. 521. The Agency stated that it had no objection to the issuance of such a summary decision.

In Decision No. 521, the Board held that merely having a State audit which showed that the State had underclaimed was not enough to bring the State within the exception for(2) "audit exceptions, or adjustments to prior year costs." The Board also held that the reclassification of expenditures from non-federal participating to federal participating did not affect the time when the expenditures occurred. Under 45 CFR 95.13(b), the expenditures for title XIX services in question in that case were made when the provider was paid. Here, the expenditures were made not for title XIX services as in Decision No. 521, but for assistance payments and for training under title IV-A. Section 95.13(a) provides that expenditures for title IV-A assistance payments are made "in the quarter in which a payment was made to the assistance recipient, (or) his or her protective payee. . . ." Section 95.13(d) provides that expenditures under title IV-A for training are made "in the quarter payment was made by a State agency to a private agency or individual; or in the quarter to which the costs were allocated in accordance with the resources for each program." The State asserted, however, that Decision No. 521 governed here even though title IV-A rather than title XIX services were at issue. Since the time of expenditure as defined by regulation does not in either case depend upon when the State recognized the eligibility of the expenditure for FFP, we agree that Decision No. 521 is applicable here. Conclusion For the reasons stated above, we sustain the disallowance in the amount of $601,925.

##FN000 //* This was part of a larger disallowance totalling $1,785,481. (Disallowance letter dated May 7, 1986) Of that amount, the State appealed only $650,605. Pursuant to its agreement with the parties, the Board will issue a separate decision with respect to $48,680 of the $650,605 which presents a different issue.

394

APRIL 25, 1987

00783

GAB Decision

08

August 28, 1986

Northern Michigal Health Services; Docket No. 86-95; Audit Control No. 05-45251

Stratton, Charles E.; Teitz, Alexander G.

Ballard, Judith A.

(1) The Northern Michigan Health Services, Inc. (grantee or appellant) appealed the decision of the Public Health Service (PHS or respondent) disallowing $10,412 in Community Health Center grant funds paid to a physician already employed full-time in the National Health Service Corps (Corps) for services performed in the capacity of grantee's medical director. PHS based its decision on grounds that the salary arrangement violated the terms of the applicable PHS Grants Policy Statement (GPS) provision specifying conditions under which salary payments by a grantee to a federal employee are allowable.

We uphold the PHS decision because grantee did not establish that there was no possibility of dual compensation, as required by the GPS provision. This decision is based on the written record, including documents submitted in an earlier appeal. Background This Board had previously remanded to PHS an earlier disallowance involving this same matter; the present appeal arose out of the PHS decision on remand. In the earlier case, PHS had asked the Board to rule on a single question which PHS contended was dispositive of the case: whether the undisputed fact that grantee did not obtain PHS' approval prior to making the salary payments from grant funds established that grantee had failed to comply with the applicable GPS provision. That provision reads as follows:

Federal (U.S. Government) employees. -- The following rules apply to payments made from a grant to Federal employees:

* * *

(2) 3. Salaries and travel: Allowable when the employee is:

a. Working under a grant to a Federal institution.

b. During nonduty hours, in leave-without-pay status, or on detail to a State or local government, provided (1) reimbursement is in accordance with terms mutually acceptable to the grantee institution and PHS, and (2) all parties concerned are assured that there is no possibility of dual compensation or a resulting conflict of interest. (1976) /1/

The Board ruled that the provision did not, as PHS had alleged, preclude PHS from granting approval retroactively. On remand, PHS considered the matter and issued a second decision. That decision again disallowed the salary payment, but this time on grounds that the salary payment violated specific GPS conditions. (See Respondent's April 18, 1986 decision letter.) Arguments PHS argued that item 3b of the applicable GPS provision contains three separate conditions, all of which must be met for the salary payment to be allowable:

1. The employee must be performing the work during nonduty hours, or on leave-without-pay status, or be on detail to a State or local government; and

2. Reimbursement must be in accordance with terms mutually acceptable to the grantee institution and PHS; and

(3) 3. All parties concerned must be assured that there is no possibility of dual compensation or a resulting conflict of interest. /2/

PHS concluded that it could not now approve the salary payment because the payment did not meet conditions two and three. PHS noted that, although the evidence was insufficient to determine whether the medical director duties were performed during nonduty hours (which would satisfy condition one), failure to meet any one of the conditions was a sufficient basis for the disallowance. /3/ With regard to condition two, PHS concluded that it did not consider the salary arrangement to be "acceptable." PHS cited two reasons for this conclusion. First, PHS argued that the salary arrangement contravened the PHS policy consideration that scarce Community Health Center grant funds be used for the program, rather than as a salary supplement to a federal employee who was already being paid a full salary. Second, PHS argued that the salary arrangement violated: (1) a federal statute prohibiting dual compensation (18 U.S.C. Sec. 209); (2) the Standards of Conduct for federal employees, which specifies that employees may not engage in any "outside activities" for an organization with which their(4) official duties are directly related (45 CFR 73.735.704); (3) the Corps policy prohibiting "moonlighting"; and (4) a contract between the physician and grantee (referred to as "Principles of Practice"), in which the physician allegedly agreed not to contract privately with grantee until after completion of his Corps assignment. PHS acknowledged that the physician, not the grantee, violated these provisions. PHS emphasized that it was neither applying the legal remedies available under these provisions against the grantee nor concluding that the grantee violated these provisions. PHS stated that it was merely considering the provisions so as to determine whether the salary arrangement was acceptable. PHS concluded that it could not consider the arrangement acceptable since acceptance would condone the violations. With regard to condition three, PHS argued, in effect, that it was not satisfied that there were adequate assurances that the salary arrangement did not result in dual compensation. PHS argued that this condition contained a very strict standard, insofar as even a possibility of dual compensation would be a violation. PHS argued that there was at least a possibility of dual compensation under circumstances such as those in this case, where the physician was paid for separate services rendered to the same organization and there were no time records showing when he performed which service. PHS argued further that if the medical director services were performed during duty hours there would be dual compensation since a doctor in the Corps can be required to spend up to 20% of his work hours, for which he is fully compensated by the Corps, on medical director duties. Grantee argued that the salary payments were for "extra" hours worked in addition to the doctor's regular clinical duty hours and, thus, there was no dual compensation. Grantee also argued that PHS had approved the salary payment by approving the overall budget, which included the medical director salary as part of total expenditures in the personnel category. Grantee argued further that the disallowance was senseless since grantee was entirely dependent on federal funds, so making grantee repay any money would necessarily reduce its services, thereby injuring the medically underserved people the program was designed to help. Finally, grantee argued that PHS should recover the funds from the physician since, otherwise, grantee would have to pay twice for the same services. Analysis To comply with the requirements of item 3b, all three of its conditions must be met. Respondent's description (page 3 above) of three necessary conditions for compliance are consistent with (5) the Board's reading of the requirement. Moreover, grantee has not proposed an alternate reading (and there does not appear to be any reasonable one). While we do not agree entirely with how PHS evaluated the conditions in this case, we conclude that the overall result was not unwarranted under the circumstances here. On one hand, PHS read certain provisions applicable to the physician in an overly narrow fashion, as though they established that there was, in fact, dual compensation or conflict of interest here. Moreover, in our view, there is some question about whether these provisions were intended to apply to the facts here. On the other hand, grantee had a burden to show that paying the physician a medical director salary, in addition to his salary from the Corps, did not constitute dual compensation. The GPS provision, as well as general principles intended to ensure that grant funds are expended properly, require this. (See, e.g., OMB Circular A-122, Att. A, Sections 2.a. and 3.a., and Att. B., Section 6 (June 27, 1980).) Grantee's primary substantive argument to show that there was no dual compensation was that the medical director salary was for extra work beyond the normal clinical duties of the other Corps physicians working for the same facility. In effect, grantee argued that its assertion proved that there was no dual compensation and, therefore, it would be unreasonable for PHS to withhold approval of the salary payment. We do not agree. The mere unsupported assertion by grantee that the physician worked extra hours is insufficient to establish that, in fact, he did. When the Board, in proceedings in the appeal of the first disallowance, requested additional information which might establish whether or not there was dual compensation, grantee's submissions were inconclusive. Grantee submitted the following:

(1) an agenda, minutes, and handouts from a January 12, 1982 meeting of grantee's Board of Directors, showing that grantee was at that time negotiating with the doctor for a private contract under which he would be paid separate salaries for the medical director and clinical duties but would spend 80% on clinical duties and 20% on medical director duties;

(2) a May 20, 1982 letter from grantee's Project Director to PHS, requesting an extension of grantee's Corps assignment;

(6) (3) minutes from an August 10, 1982 Board of Director's meeting, stating that the Board would give the doctor a choice of receiving $10,000 as medical director or spending 20% of his time in that capacity; and

(4) minutes from an August 26, 1983 Board meeting, showing that the subsequent medical director of grantee organization was paid $10,000 salary for that service.

(Board Docket No. 85-93, Att. to Appellant's September 16, 1985 letter) While these documents give a general idea of the facts surrounding the doctor's employment, they do not establish that there was no dual compensation. At most, they establish that (1) the doctor was planning to leave the Corps and contract privately with grantee to perform both clinical and medical director duties; (2) grantee requested and the doctor received an extension of his Corps assignment with grantee before the contract was final; (3) grantee intended to give the doctor the option of spending 20% of his service time on medical director duties and receive only his Corps salary or receive an additional