Georgia Department of Medical Assistance, DAB No. 1055 (1989)

DEPARTMENTAL APPEALS BOARD

Department of Health and Human Services

SUBJECT: Georgia Department of DATE: May 31, 1989 Medical
Assistance Docket Nos. 88-167 and 89-22 Decision
No. 1055

DECISION

The Georgia Department of Medical Assistance (Georgia, State) appealed
two determinations by the Health Care Financing Administration (HCFA,
Agency) disallowing a total of $1,031,589 in federal financial
participation (FFP) for the period August 1, 1986 through September 30,
1988. The disallowance represented the difference between the 75
percent enhanced funding rate for administrative costs attributable to
the operation of the State's Medicaid Management Information System
(MMIS) under Title XIX of the Social Security Act (Act), and the 50
percent FFP rate generally available for Medicaid administrative costs.

This case presents issues identical to those recently decided in New
York State Dept. of Social Services, DAB No. 1023 (1989). In that
decision we determined that it was within the Agency's discretion to
establish a policy that distinguishes between indirect costs of a
state's Medicaid agency that would qualify for the enhanced funding
rate, and statewide and department-wide indirect costs which would
qualify for only the 50 percent rate for administrative costs. We found
that New York had notice of this policy and was bound by it. Therefore,
we upheld the disallowance.

During the present appeal, we indicated to the parties that the State's
position appeared to have been fully addressed by the Board in the New
York decision. The Board indicated it would base its decision here on
the decision in New York unless the State could show good cause why the
New York decision did not control.

As we discuss below, we find that the Board's decision in New York
should control here also. In so doing we discuss why the State's
arguments against New York controlling here did not persuade us.

I. Background

In 1972, Congress amended Title XIX of the Act to include enhanced rates
of FFP for administrative costs for, among other things, the operation
of an MMIS. Section 1903(a)(3)(B) of the Act provides for reimbursement
of:

75 per centum of so much of the sums expended during such quarter
as are attributable to the operation of [MMIS] systems . . .

Section 433.15 of 42 C.F.R. implements the various FFP rates for
administrative costs. Section 433.15(b)(4) provides simply:

Operation of mechanized claims processing and information retrieval
systems: 75 percent.

A MMIS is a mechanized claims processing and information retrieval
system, and is defined as:

a system of software and hardware used to process Medicaid claims,
and to retrieve and produce utilization and management information
about services that is required by the Medicaid agency or Federal
Government for administrative and audit purposes. 45 C.F.R.
433.111.

In New Jersey Dept. of Human Services, DAB No. 648 (1985), the Agency
disallowed the same types of costs that are at issue here, namely,
statewide and department-wide indirect costs allocated to New Jersey's
MMIS. In that decision, the Board rejected the Agency's argument that
some indirect costs were "directly attributable" to the operation of
New Jersey's MMIS while others were not. The Board found that the
Agency had not clearly established, and notified New Jersey of, a policy
that limited the enhanced funding rate only to indirect costs that
originated from a state's Medicaid agency. In addition, in the Board's
Ruling on Request for Reconsideration of DAB No. 648, issued on November
22, 1985, the Board denied the Agency's request for reversal of the
Board's decision, but stated:

[T]he question in Decision No. 648 was not whether the Agency was
precluded from stating such a distinction as a matter of policy but
whether the Agency had, in fact, stated such a distinction.

Ruling on Request for Reconsideration (1985), p. 14, n. 8.

On July 11, 1986, the Agency issued Revision 8 to Part 11 of the State
Medicaid Manual (Revision 8), which became effective on July 31, 1986.
In relevant part, Revision 8 provides:

11275.30 Attributable Costs Under 90-Percent and 75-Percent FFP
for FFP for Overhead Costs

Only the direct overhead costs resulting from the operation or
development of an MMIS are eligible for the enhanced FFP rates.
Such costs are usually the non-personnel costs such as electricity,
rent, shared facilities, caused by the operation or development of
the MMIS.

Overhead costs not directly resulting from the MMIS cost center are
reimbursed at the 50-percent FFP rate. Such costs are the
statewide overhead (A-87) costs and the costs associated with the
State agency's overhead functions (personnel staff, budget staff,
legal staff, commissioner's office, etc.) assigned to the MMIS cost
center through the State agency's cost allocation plan. This
applies also with respect to a fiscal agent's costs.

11275.32 List of Reimbursable Costs for State Systems

Although the functions of the Medicaid Program are addressed by the
MMIS, some Medicaid operations are not part of the automated claims
processing and information retrieval system. In deciding whether
costs should be applied to MMIS, certain issues impinge on the
decision. For the most part, the higher FFP will be granted for
costs directly incurred by the approved MMIS. Regulations at 45
CFR Part 74, Appendix E define direct costs as "those that can be
identified with a specific cost center" such as MMIS. "Indirect
costs are those that have been incurred for common or joint
objectives, and thus are not readily subject to treatment as direct
costs." Costs of shared facilities (which include common computer
hardware, common terminals, buildings, etc. used by the MMIS and
other components) are apportioned by an approved cost allocation
plan. These indirect costs, when directly attributable to the
MMIS, are funded at the higher FFP from 1903(a)(3) funds.

II. Summary of the Board's Determinations in New York State Dept. of
Social Services, DAB No. 1023 (1989)

The Board first determined in New York that the result there was not
controlled by the decision reached in New Jersey. There the Board
stated:

. . . the result in this case is not controlled by the decision
reached in DAB No. 648. In that case, we found that the Agency's
long-standing policy, during the relevant time period, was to pay
75 percent for all statewide and department-wide indirect costs
allocated to the MMIS. Thus, having determined to allow 75 percent
FFP for all of these indirect costs, we found no basis to conclude,
in the absence of a public reversal of that policy, that some
statewide and department-wide indirect costs were less equal, i.e.,
more remote, than others and therefore not eligible for 75 percent
FFP.

After the issuance of DAB No. 648, however, the Agency implemented
a policy, in Revision No. 8, as a "NEW POLICY" that does expressly
preclude 75 percent FFP for indirect costs which do not originate
in the State's Medicaid agency. The holding in DAB No. 648 did not
preclude the Agency from this subsequent action. Indeed, what the
Board found in DAB No. 648 was only that the Agency could not use a
non-substantive "clarification" of its policies to create a
distinction between indirect costs, and then base a disallowance on
that distinction.

New York, supra, p. 5.

The Board then determined that the Agency's new policy, Revision 8, was
not contrary to the plain meaning of the Act. The Board agreed with the
Agency that the statute does not define "attributable" costs or provide
any method for attribution that would mandate including indirect costs.
The statute provides only that reimbursement will be "75 per centum of
so much of the sums expended during such quarter as are attributable to
the operation of [MMIS] systems . . . ." The Board found that:

what the statute provides is the general standard to be applied,
i.e., that costs that are attributable are to be reimbursed at the
enhanced rate. What the Agency did, in Revision 8, was establish a
guide for determining which indirect costs qualified for enhanced
funding within the ambit of the statutory term "attributable." Why
the Agency succeeds in this case, and did not in DAB No. 648, is
because the Agency affirmatively expressed its policy to the State
in Revision 8. . . . We see no basis for concluding that the
Agency cannot change its policy judgment by means of another, later
policy issuance.

New York, supra, p. 8.

The Board also dismissed New York's arguments that because its cost
allocation plan was developed in accordance with the guidelines of
Office of Management and Budget (OMB) Circular A-87, the claims for
costs of the MMIS, both direct and allocable indirect costs, should be
entitled to 75 percent FFP. The Board indicated that OMB Circular A-87
is a guide for state and local government agencies and contains cost
principles and procedures for establishing cost allocation plan and
indirect cost rates for grants and contracts with the Federal
Government, but the Circular does not set FFP rates or govern an
Agency's implementation of its statutory authorities. New York at p. 8
n. 5.

The Board found that the Agency's policy to limit indirect cost
reimbursement was consistent with the Agency's overall policy of
regarding a narrow and circumscribed group of costs as being
attributable to the operation of the MMIS. The Board further determined
that where a state had actual notice of the Agency's reasonable policy
interpretation, the Board will not substitute its judgment for the
Agency's.

III. Analysis of Georgia's Arguments

A. The Board's decision in New York State Dept. of Social
Services, DAB No. 1023 (1989), controls the outcome here.

With two exceptions discussed below, the State did not dispute that the
Board in New York addressed all the major arguments presented here.
Rather, the State's argument why New York should not control was that
the Board wrongly decided that decision. The State argued that Revision
8 is contrary to the plain meaning of the statute and, therefore, is
without effect; Revision 8 is inconsistent with reimbursement under the
previous statements of Agency policy; and Revision 8 is not entitled to
deference, because it departs from the Agency's previous policy and the
Agency offered no reasoned analysis for its change.

We find that the State failed to show good reason why New York should
not control here. While the State argued that New York was wrongly
decided, the three reasons it cited for why that decision was wrong were
all discussed and decided in New York. As our summary above indicates,
that decision specifically found that Revision 8 was consistent with the
Act, and that while Revision 8 may be different from the Agency's
previous policy, the Agency may change its policy as long as it
affirmatively expresses its new policy to the State. The fact that the
State may not like the outcome of that decision and would prefer that
the Board adopt its position instead is not sufficient to persuade us
that our original analysis and findings were wrong.

Thus, we find that New York should control here.

B. Georgia's department-wide overhead costs are not
reimbursable at the 75 percent rate.

One argument raised by Georgia, which was not addressed specifically in
New York, was Georgia's contention that all its department-wide costs
should be reimbursed at the 75 percent rate. The State argued that in
New Jersey, supra, the Agency conceded that "indirect costs generated at
the Division of Medical Assistance and Health Services (DMHS), that are
allocable to the MMIS are reimbursed at the 75% FFP rate as indirect
costs directly attributable to the MMIS." The State contended that in
New Jersey the Medical Assistance program is administered by a division
of the New Jersey Department of Human Services. Georgia stated that its
Medical Assistance program is administered in a department devoted
entirely to that function. The State argued that, therefore, the
disallowed department-wide costs here are more closely akin to the New
Jersey Medical Assistance Division costs which the Agency conceded were
allowable at the 75 percent rate of FFP in New Jersey. The
department-wide costs in issue here are the costs of the Commissioner's
office, the Deputy Commissioner's office, the Legal Services Unit, the
Division of Administration, the Financial Services Unit, the General
Support Unit, and the Personnel Unit.

Clearly, the applicable policy here is the policy enunciated in Revision
8. We found in New York that the Board's previous decision in New
Jersey no longer controls in light of the Agency implementation of
Revision 8, identified as a new policy. The relevant provisions of
Revision 8 state the distinction between "direct overhead costs
resulting from the operation . . . of an MMIS" and "[o]verhead costs not
directly resulting from the MMIS cost center." The former, direct
overhead costs for which 75 percent FFP is available are explained as
"usually the non-personnel costs such as electricity, rent, shared
facilities, caused by operation of the MMIS." Overhead costs not
directly resulting from the MMIS cost center are described as statewide
overhead (A-87) costs and "the costs associated with the State agency's
overhead functions (personnel staff, budget staff, legal staff,
commissioner's office, etc.) assigned to the MMIS cost center through
the State agency's cost allocation plan." Revision 8, section 11275.30.
Thus, in light of the differing structure of the state department in
Georgia, Revision 8 would apply to preclude 75 percent FFP for the costs
of the state Medicaid agency disallowed here, which are analogous to the
department-wide central services costs in New York.

Revision 8 expressly and reasonably distinguishes between categories of
indirect costs. Georgia here cannot avoid one category of cost for
which the reimbursement rate is less by merely saying that the structure
of its Department is different. Notwithstanding Georgia's argument that
the department-wide costs here are the same as the costs allowed at 75
percent in New Jersey, Georgia has not shown the costs here to be
analogous to the Division of Medical Assistance costs in New Jersey.
Furthermore, the record shows that the Agency did not disallow all the
Department's costs allocated to the 75 percent MMIS cost center. The
Agency found that out of 123 positions in the Department allocated to
MMIS, 30 positions did not require performance of functions directly
attributable to MMIS; the Agency, therefore, disallowed the costs
allocated for these positions to the MMIS cost center at the 75 percent
operational rate. Appellant's Appeal File, Exhibit B, p. 4-6. The
State did not argue the validity of the individual positions for which
indirect costs were disallowed. Moreover, the State did not
specifically dispute the Agency's finding of a lack of a direct
relationship to MMIS for those costs.

We conclude, therefore, that the Agency correctly disallowed the State's
department-wide overhead costs: the costs of the Commissioner's office,
the Deputy Commissioner's office, the Legal Services Unit, the Division
of Administration, the Financial Services Unit, the General Support
Unit, and the Personnel Unit which are associated with the State
agency's overhead functions.

C. Fiscal agent overhead costs are not entitled to the 75
percent operational rate.

The second argument that the State claimed was not addressed
specifically in New York was whether fiscal agent home office expenses
which are allocable to the MMIS are entitled to the 75 percent enhanced
rate for operation of the MMIS. While this argument was not addressed
specifically in New York, the validity of Revision 8 certainly was.

Revision 8 specifically requires that overhead costs of fiscal agents be
treated the same as costs incurred by the State agency. Section
11275.30 of Revision 8 provides that "Overhead costs not directly
resulting from the MMIS cost center are reimbursable at the 50 percent
FFP rate . . . This applies also with respect to a fiscal agent's
costs." We already determined in New York that HCFA may change its
policy concerning what costs are to be matched at the enhanced rate as
it did in Revision 8. Thus, according to that policy, fiscal agent
overhead costs are only entitled to 50 percent reimbursement.
Therefore, we reject the State's argument.

Conclusion

Based on the foregoing, we uphold the Agency's disallowance of
$1,031,589.


Cecilia Sparks Ford


Alexander G. Teitz


Norval D. (John) Settle Presiding Board