New Jersey Department of Human Services, DAB No. 259 (1982)

GAB Decision 259

February 25, 1982 New Jersey Department of Human Services; Docket No.
80-13-NJ-HC Settle, Norval; Teitz, Alexander Ford, Cecilia

The New Jersey Department of Human Services (State), appealed a
notification of disallowance by the Health Care Financing Adminstration
(HCFA, Agency), denying $4,240,000 in federal financial participation
(FFP). The disallowance represented the federal share of costs for
allegedly ineligible nontherapeutic sterilizations performed under the
Medicaid program, Title XIX of the Social Securiy Act, for the period
April 1974 to December 1975. The Agency, after reviewing additional
documentation submitted by the State, reduced the amount of the
disallowance to $2,235,418.

(1) The major procedural issue presented is whether this dispute is a
program compliance question mandating a hearing before the Agency. The
major substantive issue is whether the State followed the requirements
for nontheraputic sterilizations set forth at 45 CFR 205.35. For
reasons stated below, we have concluded that the Board does have
jurisdiction over this matter and that the State is not entitled to FFP
for the period April 18, 1974 through September 7, 1975 because the
nontherapeutic sterilizations performed during this time did not meet
the regulatory requirements for informed consent. We additionally find
that the Agency has not established that the regulatory requirements
were violated after September 8, 1975, and we accordingly reverse the
disallowance for that period.

(1) There are no material issues of fact in dispute, We have,
therefore, determined to proceed to decision based on the written record
and briefs, including the parties' responses to an Order to Show Cause.

General Background of the Sterilization Regulations

Congress provided that a State is entitled to FFP (at a 90% rate) in
the costs of family planning services meeting certain requirements. 42
U.S.C. 1396b(a)(5). The Secretary interpreted family planning to
include sterilization services, although initially there were no
specific rules or regulations governing sterilizations. /1/ Congress (2)
had provided, however, that all family planning should be on a voluntary
basis. See, e.g., 42 U.S.C. 1396d(a)(4)(C). After national attention
was drawn to the problem of needy persons coerced to submit to
sterilization by threat of loss of welfare benefits, the Department
(then Health, Education, and Welfare (HEW), now Health and Human
Services (HHS) began to develop regulations to ensure informed consent
and voluntariness in federally funded sterilizations. The history of
these proceedings is discussed in detail in previous Board decisions.
Maryland Department of Health and Mental Hygiene, Decision No. 85,
February 28, 1979; California Depatment of Health Services, Decision
No. 123, October 2, 1980; California Department of Health Services,
Decision No. 209, August 31, 1981. Of interest here are: a 1973
"moratorium" on FFP in certain sterilizations; the court's decision in
the case of Relf v. Weinberger, 372 F. Supp. 1196 (D.D.C. 1974); and
regulations at 45 CFR 205.35, published April 18, 1974 (39 Fed. Reg.
13887).

The "moratorium" was a direction to heads of HEW components
administering family planning programs to withhold FFP in the
sterilization of individuals "under the age of 21" or legally incapable
of giving consent, pending issuance of regulations requiring informed
consent in federally funded sterilizations. The moratorium accompanied
Departmental guidelines for development of informed consent regulations,
and was published with the guidelines as a Federal Register Notice on
August 3, 1973. 38 Fed. Reg. 20930. Regulations issued pursuant to the
guidelines on February 6, 1974 were struck down in the Relf litigation.
The District Court in that case permanently enjoined the use of federal
funds "for the sterilization of any person . . . legally incompetent
under the applicable state laws to give informed and binding consent . .
. ." 372 F. Supp. at 1204. The District Court further found the
February 6 rules to be defective because they authorized federal funds
without requiring that legally competent persons be advised that their
federal benefits could not be withdrawn or withheld by reason of a
decision not to be sterilized and without requiring that such advice
"appear prominently at the top of the consent document. . . ." 372 F.
Supp. at 1205.

The April 18, 1974 regulations were published to replace those struck
down in Relf. Section 205.35 of 45 CFR contained requirements for Title
XIX state plans, including a requirement that no nonemergency
sterilization could be performed unless "legally effective" consent was
obtained. No minimum age for consent was specified in the regulation;
however, the preamble to the regulation referred to "continuing in
effect the moratorium set forth in the previous notice of the Department
with respect to sterilization of individuals under the age of 21 or
legally incapable . . ." 39 Fed. Reg. 13873. (3)$TIn addition to the
requirement of "legally effective" consent, section 205.35 provided that
no nontherapeutic sterilization could be performed sooner than 72 hours
following the giving of consent. Paragraph 205.35(a)(2)( i) set out the
requirements for a patient's informed consent. Specifically, paragraph
205.05(a)(2)(i) provided that each consent document shall display the
following legend printed prominently at the top;

NOTICE; Your decision at any time not to be sterilized will not
result in the withdrawal or withholding of any benefits provided by
programs or projects.

Case Background

During July and August 1975, Agency and State representatives
conducted on-site review at six large, urban general hospitals that were
performing sterilization procedures. The reviewers sought to determine
the degree of provider compliance with the Medicaid regulations for the
sterilization procedures. Audit Report No. 02-70212, "Review of the
Sterilization Program Under Family Planning Services of the Title XIX
Program New Jersey Department of Human Services," was issued on February
28, 1977. The auditors noted that "(in) the area of program compliance,
our audit was limited to an evaluation of the (Agency/State) program
compliance review . . . " (p. 3) According to the Audit Report, this
review found:

a) the hospitals had been unaware of any special Federal requirements
relating to non-therapeutic sterilizations; consequently, in none of
the hospitals the consent forms met Federal criteria, b) none of the
consent forms in any of the hospitals had the required statement to the
effect that: "Your decision at any time not to be sterilized will not
result in the withdrawal or withholding of any benefits provided by
programs or projects," c) none of the hospitals required a 72 hour
waiting period between the giving of informed consent and the
sterilization being performed and, d) several nontherapeutic
sterilizations were performed each year on patients under the age of 21.
(Audit Report, pp 8-9)

According to the audit report, the Agency then determined that the
State's Medicaid program did not comply with the requirements of the
April 18, 1974 federal regulations with regard to the consent form, (4)
72-hour restriction, and notice of non-loss of benefits. (Audit Report,
p. 9) The Audit Report states that the State concurred with this
determination. (Audit Report, p. 9)

The Audit Report stated that the conditions uncovered by the review
were attributable in general to the fact that the providers were unaware
of federal and state requirements: "Although the New Jersey Title XIX
State plan had been revised to adopt the Federal requirements, (the
State) had not issued guidelines and procedures to advise the
participating providers of these requirements and to insure that they
would be met." (Audit Report, p. 10) The State, according to the Audit
Report, did not issued detailed procedures and establish a monitoring
system to ensure compliance with the informed consent requirements until
December 1975. /2/

The Audit Report made several recommendations, including an estimated
disallowance:

(We) estimate that the cost of nontherapeutic sterilizations
performed when the State was not in compliance with Federal criteria
(April 1974-- December 1975) amounted to $7,200,000 ($4,240,000 Federal
share). (Audit Report, p. 11)

The Agency followed the recommendations of the Audit Report and
disallowed $4,240,000 in FFP on the basis that the State was in
violation of the consent criteria promulgated in Relf and of 45 CFR
205.35 as incorporatd into the State plan.

Parties' Initial Arguments

The State argued that the disallowance was improperly calculated and
that "(the) federal sterilization regulations, 45 CFR 205.35, as
promulgated on April 18, 1974, were developed at a time of confusion (5)
at both the state and federal levels as to the requirements to be
fulfilled in order to properly obtain FFP for nontherapeutic
sterilizations." (Application for Review, p. 1) The State argued that
the disallowance failed to take into account that the age of consent in
New Jersey was 18, not 21. The State further contended that the State
met the intent of the regulations to assure that nontherapeutic
sterilizations were performed only with the informed consent of the
recipients. Informed consent was obtained from the recipients prior to
the sterilizations, according to the State, although "perhaps not in the
exact manner as outlined in the federal regulaton but sufficient to
demonstrate or presume consent." (Application for Review, p.2)

The Agency then clarified the basis for the disallowance. The Agency
explained that the disallowance was not based on the fact that
individuals under 21 years of age were sterilized in violation of the
"moratorium." Rather, the Agency stated, "The disallowance letter . . .
cites only the court order (Relf) and the Federal regulations, as
incorporated into the State plan, as the legal basis for the
disallowance." /3/ (Agency Response, p. 16) The Agency stated that "(it)
is not necessary to rely on violations of the moratorium . . . since
all sterilizations performed during that period were in violation of the
informed consent requirement of Federal regulations and the State plan,
regardless of the age of the individual sterilized." /4(/( Agency
Response, p.17)

The Agency referenced the regulatory requirements for a 72-hour
waiting period before a sterilization and for valid consent documents
that included a notice that a refusal to be sterilized would not result
in a withdrawal or withholding of benefits as the basis for the
disallowance. The Agency argued that the review determined that valid
consent documents had not been executed by any Medicaid recipients who
were sterilized during the disallowance period. The Agency argued that
the disallowance through December of 1975 was appropriate since the
State could not show that the federal requirements were met merely
because it issued implementing newsletters on September 8 and December
15 of 1975. The Agency aasserted that because the State failed to
adequately monitor provider compliance until after the period of (6) the
disallowance, the State had the burden "to provide evidence that in any
given cases the requirements were actually met." (Agency Response, p.
25)

The State later presented a new argument, that the Agency's issuance
of a disallowance was improper and that this case is both a compliance
matter (42 U.S.C. 1396c) and a plan conformity dispute (42 U.S.C. 1316(
a) and (b)). The State contended that a recent Court of Appeals
decision contained an analysis of the statutory differences between
disallowance issues and plan conformity/program compliance issues that
gave credence to the State's position. The State additionally argued
that it was in compliance with federal regulations following the
publication of a September 8, 1975 newsletter sent to providers and that
any FFP disallowed for the period between September 8 through December
1975 should be reinstated. According to the State, "All of the
requirements of the federal regulations were contained in this
newsletter, and the disallowance should be reduced to reflect that
fact." (State's December 22, 1980 submission, p. 15)

Nature of the Agency's Action and Board Jurisdiction

The initial question before the Board is whether the Board is the
appropriate forum for the resolution of this case.

The issue of whether an Agency-questioned action by a state
participating in a federal medical assistance program merits a plan
comformity hearing, a program compliance hearing, or a notification of
disallowance with a right to reconsideration(Board review) continues to
be a source of confusion for the states, the Agency, and even the
courts. Since there is some comfusion over this issue, in this decision
we propose to distinguish the nature and result of these remedial
proceedings.

The critical question is whether the Agency's determination that
federal requirements for informed consent in sterilizations had not been
met because the State had failed to inform providers of the
requirements, as adopted by the State in its State plan, was a proper
subject for a disallowance or rather was a finding of a substantial
failure by the State in the administration of its State plan that
mandated a compliance hearing. For reasons set forth below, we find
that the Agency's action was a narrowly focused inquiry into one segment
of the State's medical assistance program, with a retroactive effect,
that can properly be termed a "disallowance" within the meaning of the
Social Security Act.

(7) A. Statutory Framework

1. Disallowance

Section 1316(d) of 42 U.S.C. provides: Whenever the Secretary
determines that any item or class of items on account of which Federal
financial participation is claimed under subchapter I, VI, X, XIV, XVI,
or XIX, XX of this chapter, or part A of subchapter IV of this chapter,
shall be disallowed for such participation, The State shall be entitled
to and upon request shall receive a reconsideration of the disallowance.

he Board was given jurisdiction to reconsider disallowances arising
under this section pursuant to 45 CFR 16.91 and 45 CFR 201.14, as
amended March 6, 1978. (43 Fed. Reg. 9265) /5/ The Board's decision is
the final administrative action in a reconsideration case.

2. Program Compliance Sec.ection 1396c of 42 U.S.C. states:

Operation of State Plans.

If the Secretary, after reasonable notice and opportunity for hearing
to the State agency administering or supervising the administration of
the State plan approved under this subchapter, finds --

(1) that the plan has been so changed that it not longer complies
with the provisions of section 1396a of this title; or

(2) that in the administration of the plan there is a failure to
comply substantially with any such provision; the Secretary shall
notify such State ageny that further payments will not be made to the
State (or, in his discretion, that payments will be limited to
categories under or parts of the State plan not affected by such
failure), until the Secretary is satisfied that there will no longer be
any such failure to comply. Until he (8) is so satisfied he shall make
no further payments to such State (or shall limit payments to categories
under or parts of the State plan not affected by such failure).
(emphasis added)

Section 1316(a)(3) gives a State the right to seek judicial review in
the United States Court of Appeals of a final determination on a program
compliance question made under section 1396c.

3. Plan Conformity

Section 1316(a) of 42 U.S.C. states:

(1) Whenever a State plan is submitted to the Secretary by a State
for approval . . . he shall, not later than 90 days after the date the
plan is submitted to him, make a determination as to whether it conforms
to the requirements for approval . . .

(2) Any State dissatisfied with a determination of the Secretary
under paragraph (1) with respect to any plan may . . . file a petition
with the Secretary for reconsideration of the issue of whether such plan
conforms to the requirements for approval . . .

(3) Any State which is dissatisfied with a final determination made
by the Secretary on such a reconsideration . . . may . . . file with the
United States court of appeals for the circuit in which the State is
located a petition for review of such determination . . . .

Section 1316(b) of 42 U.S.C. states:

For the purposes of subsection (s) of this section, any amendment of
a State plan . . . may, at the option of the State, be treated as the
submission of a new State plan.

4. Implementing Regulations

Regulations implementing these statutes are found at 45 CFR Parts 201
and 213 (1975).

State plans and amendments are submitted and reviewed pursuant to
section 201.3. A state dissatisfied with a determination made under
section 201.3 may, pursuant to section 201.4, seek reconsideration of
that determination in a hearing. Such a hearing is governed by the
procedures set forth at Part 213. (9)

Payments to a state may be withheld in whole or in part if it is
determined that a state plan is no longer in compliance with the
provisions of the Act or that in the administration of the plan there is
a failure to substantially comply with the provisions of the Act.
Section 201.6 (a). A state may request a hearing on such a
determination under section 201.6(c). Such a hearing is also governed
by the procedures of Part 213.

Reconsideration of a disallowance is available pursuant to section
201.14, as amended March 6, 1978, and 45 CFR Part 16.

B. Judicial Consideration of These Statutory Provisions

The plan conformity/program compliance/disallowance question has been
the subject of considerable judicial attention recently. Courts have
commented on the complexity of this issue because a particular set of
circumstances may not fall neatly into any of these classifications of
Agency procedures. See, e.g., State Department of Public Welfare of the
State of Texas v. Califano, 556 F. 2d 326, 330 (5th Cir. 1977); Solomon
v. Califano. 464 F. Supp. 1203, 1208 (D. Md. 1979).

Typically, the court cases arose from a state's protest of an action
by the Department that the Department characterized as a "disallowance."
The Department would expressly reject claims for FFP on the basis that
the claims represented unallowable costs. In reviewing these actions,
the courts generally looked beyond the Secretary's characterization of
the action as a "disallowance" to the underlying facts of each
particular case to determine if a disallaowance was the appropriate
action.

In State Department of Public Welfare of the State of Texas v.
Weinberger, 388 F. Supp. 1304 (W.D. Tex. 1975) aff'd sub. nom. State
Department of Public Welfare of the State of Texas v. Califano, supra,
the Texas Department of Public Welfare, which administered the Medicaid
and Medicare programs had purchased various services from other state
agencies at a cost of more than $92 million. Texas then submitted a
claim in this amount to HEW as the federal share for those services.
HEW's Secretary denied the claim. The Secretary's decision was preceded
by no notice, hearing, or opportunity for hearing at which the facts
relevant to Texas' claim might have been developed. The State was
affored reconsideration pursuant to 42 U.S.C. 1316(d) and 45 CFR 201.14.
Texas then brought an action, claiming it was denied a compliance
hearing as required by statute. The District Court classified HEW's
action as a plan conformity dispute under section 1316(a) rather than a
dispute under section 1316(d). The court pointed to the fact that HEW
had denied all payment for any of the purchased services as evidence
that HEW's termination of funds was a plan conformity dispute. The
Court concluded from the denial that (10) the termination of funds was
based on HEW's finding that Texas had failed to comply substantially
with the provisions of its State plan. Once it was decided the HEW's
termination was a plan conformity dispute, the Court held that HEW was
required by 42 U.S.C. 1396c to give Texas a full administrative hearing.
On appeal the Fifth Circuit looked to the record for HEW's reasons
denying Texas' claim and concluded that the reason for the denial of the
claim was that the claimed expenditures were outside the scope of the
approved plan under which the claim was made, and in some cases did not
conform with federal requirements. The Fifth Circuit concluded that the
plan conformity procedure in section 1316(a) was the best suited
procedure for reconsideration of Texas' claim.

he Fifth Circuit's holding in Texas was discussed by the Court in
State of Georgia v. Califano. 446 F. Supp. 404 (N.D. Ga. 1977). As a
result of an audit, HEW had disallowed $3.5 million which was paid by
Georgia to doctors who had provided services to Georgia Medicaid
patients. After unsuccessfully having the disallowance reconsidered
under 45 CFR 201.14, Georgia sued HEW for reimbursement of the $3.5
million, arguing that it was entitled to a hearing pursuant to 42 U.S.
C. 1396c. Georgia cited the Texas holding in support of its contention.
In dismissing Georgia's suit, the Court stated, at 413:

However, this holding (Texas) cannot be construed to suggest that any
withholding of funds must be preceded by a section 1396c hearing.
Indeed the legislative history of the act reveals that section 1396c was
not intended to be the exclusive method for HEW challenges to State
spending . . .

The Court then cited 111 Cong. Rec. 3068 (remarks of Sen. Javits,
Feb. 18 1965) to the effect that "to involve audit exceptions or issues
other than plan conformity in the judicial review process would create
many additional problems." The Court stated that the case before it
could not be properly characterized as a plan conformity dispute because
HEW did not terminate reimbursement of all physicians' services, but
refused to pay only the cost of services in excess of the State
plan.Labeling the case a "clerical dispute," the overpayment of
physicians for services rendered, the Court concluded that section 1396c
was inapplicable to the case and that the dispute between Georgia and
HEW was properly classified as an audit dispute under section 1316( d).

In Solomon v. Califano, 464 F. Supp. 1203 (D. Md. 1979), however, the
Court rejected HEW's decision to disallow $539,385 in FFP for the
alleged overpayment of nursing homes in Maryland. The dispute arose
over a formula established by Maryland to determine reimbursement (11)
rates for nursing homes. In remanding the case to HCFA's Administrator
for further hearing, the Court observed, at 1208, that, "procedurally,
this matter more closely approximates a non-conformity than a
disallowance issue."

The Fifth Circuit dismissed a State petition for review of an HEW
determination to disallow $20,054 in FFP paid to Alabama for use in its
Medicaid program in Medical Services Administration v. United States,
590 F. 2d 135 (5th Cir. 1979). As a result of an audit report which
determined that ineligible persons had received Medicaid benefits, HEW
disallowed $20,045. In rejecting Alambama's request for judicial review
of HEW's action, the Fifth Circuit stated that its jurisdiction over the
dispute centered on how it categorized the $20,045 deduction. The Court
agreed with HEW's contention that basically the case concerned an audit
dispute and that "the disallowance procedure is designed to operate in
connection with a routine audit of specific claims submitted by the
State to HEW for reimbursement." (at 136) The Court found that HEW's
decision to disallow was based on "an isolated and highly focused
inquiry" into Alabama's eligibility lists. (Id.) Additionally, the
Court noted that the State had argued that the deduction was actually
the result of noncompliance or a plan nonconformity only after debating
the accuracy of the audit for seven years and finding that it had
exhausted HEW's administrative reconsideration of the disallowance. As
the case involved a disallowance dispute under section 1316(d), the
Court dismissed the case for lack of jurisdiction.

Recently, the Third Circuit examined the conformity/compliance/
disallowance question in State of New Jersey v. Department of Health and
Human Services, Nos. 80-2809, 81-1400, 81-1445, 81-2147, and 81-2240
(3rd Cir. Dec. 23, 1981). The Court considered its reasoning consonant
with the pragmatic approach to section 1316 jurisdiction employed in
Texas, Medical Services Administration, and Solomon. The Court also
acknolwedged that recent Sixth Circuit (Department of Public Health,
State of Tennessee v. Departmental Grant Appeals Board, HHS, No, 81-3341
(6th Cir. Nov. 4, 1981)) and Ninth Circuit (State of Washington,
Department of Social and Health Services v. Schweiker, No. 81-7414 (9th
Cir. September 29, 1981)) decisions had dismissed state appeals of
Departmental Grant Appeals Board decisions, holding that a court of
appeals lacked jurisdiction to review disallowance determinations.

New Jersey had petitioned for judicial review of a series of
Department Grant Appeals Board decisions affirming disallowances by HHS
of certain expenditures submitted for reimbursement by New Jersey in
connection with Part D of Title IV of the Social Security Act, the
codification of the Child Support Enforcement Act. New Jersey argued
(12) that the decision to deny reimbursement was expressly grounded upon
the Secretary's conclusion that the State had failed to comply with the
statutory requirements. This, New Jersey argued, was a determination
involving the conformity of a State's AFDC plan to federal standards.
Therefore, according to the State, under 42 U.S.C. 1316(a) a court of
appeals had jurisdiction to review this determination. HHS argued that
the case entailed a disallowance of discrete expenditures and that the
governing statute was 42 U.S.C. 1316(d), which does not provide for the
immediate appellate-level judicial review.

The Court proceeded to an analysis of the IV-D program and what
events might trigger the plan conformity provisions of section 1316(a)
and the disallowance review procedures of section 1316(d). The Court
stated that an initial review of HHS' refusal to reimburse New Jersey
might confirm that it should be treated, for purposes of jurisdictional
review, as a disallowance under section 1316(d). HHS argued that it had
concluded neither that New Jersey's AFDC plan somehow did not conform
tofederal statutes nor that the State had failed to substantially comply
with the plan. Rather, HHS had found New Jersey's plan and its
administration satisfactory, but had also found that New Jersey claimed
IV-D funds for certain individuals who had not filed appropriate
applications. The Court, however, rejected this reasoning:

We decline, however, to adopt an approach which would permit the
Secretary to foreclose judicial review under section 1316(a) in
situations where one administrative route is pursued when another would
be more appropriate. HHS, for example, should not be entitled to
categorize as a "disallowance" what, in essence, amounts to a
determination that a state's IV-D program does not conform to a
federally mandated requirement. We agree with New Jersey, therefore,
that in deciding whether section 1316(a) or section 1316(d) procedures
are applicable, a court of appeals is obligated to look beyond the label
the Secretary puts on his or her actions, and instead is required to
conduct an independent evaluation of the underlying substance of the
dispute. To do otherwise would be to elevate form over substance, and,
in pratice, would make the jurisdiction of a court of appeals contingent
upon the Secretatry's unfettered discretion. (Slip op. at 18)

The Court concluded that the issue before it involved not merely an
audit disallowance, but rather a determination that New Jersey in the
administration of its State plan was not conforming to federal
regulations. in a footnote the Court stressed the fact that it was
looking to the substance of the circumstances of this case and not
holding that (13) all Agency actions termed "disallowances" should be
reviewed by an appellate court:

It should be stressed that we do not hold that New Jersey is entitled
to Sec. 1316(a) review merely because its challenge to the HHS
"disallowance" is premised on legal, as opposed to factual, grounds.
Had congress wanted courts of appeals to review directly all legal
matters surrounding the administration of a state's Social Security-type
programs, it of course could have written Sec. 1316 accordingly.
Instead, Congress chose, for whatever reasons, to limit the exclusive
jurisdiction of the federal appellate courts only to those situations
involving plan conformity. Neither do we wish to imply that any
administrative disallowance can be reviewed directly in this Court as
long as the protesting state asserts that the disallowance "really"
raises compliance-related questions. We do not, after all, resort to
such legal legerdemain in this case. Rather, we have independently
reviewed the substance of the particular dispute involved here, and have
concluded that the question of plan conformity lies at the heart of the
claims of which New Jersey seeks review. It is precisely for this
reason that Sec. 1316(a) review can be justified. (Slip op. at 29 n.
12)

While the Court assumed jurisdiction over the dispute, it nonetheless
adopted the holding of the Departmental Grant Appeals Board and
sustained HHS' action.

The Third Circuit affirmed its view on the conformity/compliance/
disallowance question in New Jersey v. Department of Health and Human
Services, No. 80-2438 (3rd Cir. Feb. 5, 1982). New Jersey appealed a
decision by the Departmental Grant Appeals Board affirming an HHS denial
of FFP for medical services provided by the State under the Medicaid
program to certain aged, institutionalized individuals. Relying on
State of New Jersey, supra, the Court took jurisdiction over the
dispute, finding that "the purposes of the (Social Security) Act and the
equities are best served by treating (the case) as a plan-conformity
dispute under section 1316(a)" and that the dispute did not arise from a
disallowance-type "clerical" problem. (Slip op. at 15-16) After
examining the facts of the dispute, the Court upheld the Departmental
Grant Appeals Board's decision and stated:

We find nothing in the Act or its legislative history that precludes
our treating the Grant Appeals Board's action on behalf of the Secretary
in this dispute as a (14)"final determination" rendered after an
"opportunity for hearing" sufficient to satisfy the requirements of 42
U.S.C. Sec. 1396c and thereby vest jurisdiction in this Court under 42
U.S.C. Sec. 1316(a)(3). (Slip op. at 18 n. 13)

Most recently, in State of New Jersey v. Department of Health and
Human Services, No. 81-1175 (3rd Cir. Feb. 11, 1982), the Third Circuit
dismissed a petition for review, rejecting New Jersey's contention that
"section 1316(a) procedures are necessary" where the controversy
concerns largely legal and not factual questions. New Jersey had sought
review by the Third Circuit of a Board decision upholding a HCFA
disallowance of payments during a discrete time period to one nursing
home because there was no effective certification.

C. The Parties' Analysis

The Board has determined that there is no plan conformity issue here;
accordingly, the question is whether a compliance hearing or a
disallowance was appropriate under the circumstances of this case. /6/

(15)$TThe Board has previously stated that "compliance issues and
disallowance issues are not mutually exclusive so that the same set of
facts may arguably call for either of the procedures." (Order to Show
Cause, p. 10) In directing the parties to further brief this issue, we
informed them about our tentative conclusion that the Board did have
jurisdiction over this case as it involved a disallowance reviewable
under section 1316(d) rather than an issue of State plan compliance.
(Id., p. 11)

In response the State referred to an Agency official who had stated
in 1978 that the matter was one of plan compliance and argued that "the
issue is not one of simple audit corrections or manipulations but
actually a question of program administration and the degree of
compliance necessary to carry out the intent of the sterilization
regulations in order to qualify for FFP." (State Response to the Order,
p. 3) The State contended that "the Board is jurisdictionally unable to
determine whether or not the New Jersey program was in substantial
compliance with the federal requirements regarding sterilization." (Id.,
p. 4) The State concluded that, while the Board may be correct that the
same set of circumstances may occasionally require use of both
compliance and disallowance procedures, the procedures cannot be done
simultaneously and that a compliance hearing is logically the proper
procedural first step. The State requested that the Board dismiss the
disallowance and remand the case to HCFA for a hearing.

The Agency argued that the disallowance procedures of 42 U.S.C.
1316(d), and not the compliance procedures of 42 U.S.C. 1396c, applied
to the facts of this case:

Compliance matters generally turn upon questions of broad and
continuing impact such as . . . whether the state is acting in a manner
which does not conform substantially to the statute and regulations
governing the program, or whether the state, although purporting to
operate under a previously approved plan, has substantially deviated
from it in practice. In keeping (16) with the major nature of the
deficiencies, the sanction for non-compliance is prospective and
draconian; namely, all future funding of the state's program may be
withheld until such time as the state has satisfied the Secretary that
it is operating in compliance with the law . . . .

Conversely, the disallowance procedure normally consists of a routine
audit of the specific items of expenditure made by the state under the
plan, and submitted to the Agency for payment. The focus is upon
specific items of expense made by the state. The state may be in
general conformity with its plan and federal requirements, but specific
items may not qualify for reimbursement.

(Emphasis in original)

(Agency Response to the Order, pp. 4-5)

The Agency stressed the specific nature of the disallowance and the
fact that the disallowance represented a retroactive sanction:

(The) decision to deny New Jersey . . . Federal funds represented an
isolated and highly focused inquiry into the allowability of specific
expenditures made at a specific time in the past by the State under its
Medicaid program. There is no claim that the underlying problem is
continuing. (Agency Response to the Order, p. 6)

D. The Board's Analysis

We believe that the Agency set out the basic distinctions among plan
conformity, program compliance, and disallowance procedures, but an
elaboration of these distinctions should prove beneficial to the
resolution of this case.

A section 1316(d) disallowance determination arises from an audit or
other agency review of a State's adherence to the federal requirements
for participation in a federally funded assistance program. /7/ 45 CFR
201.10. If the audit or review discloses that a state's claim for FFP
in expenditures for a particular item or class of items is not
allowable, a disallowance letter is issued to the state. As was stated
in Medical Services Administration, supra, a disallowance determination
(17)represents "an isolated and highly focused inquiry" into a state's
operation of the assistance program. It is a finding that specific
expenditures claimed by the state for a discrete time period are
unallowable. The penalty for a determination that improper expenditures
were claimed by a state is retrospecitve in its direct impact. The
amount claimed during the time period in question and found improper is
disallowed. No FFP will be given to the state for these claims, or if
the state had already received FFP for these claims, the state must
return the FFP. No prospective sanctions, however, are imposed as a
result of a disallowance determination.

A disallowance may often result from a "clerical dispute" as in State
of Georgia, supra. This does not mean, however, that a disallowance
will always involve a clerical dispute, since it may be premised on
legal, as opposed to factual grounds. State of New Jersey, supra, slip
op. at 29 n. 12. Many disallowance determinations appealed to the Board
have involved legal questions such as the interpretation of a regulation
or a statute. See, e.g., New York Department of Social Services,
Decision No. 151, February 26, 1981.

A finding by the Secretary, on the other hand, that a State plan no
longer complies with federal requirements or that the administration of
the plan fails to substantially comply with federal requirements arises
from more serious circumstances than the issuance of a disallowance.
Unlike the focused and specific nature of a disallowance, a
determination of program noncompliance is a finding that there are
serious flaws, with continuing impact. In Texas, supra, for example,
the essential issue was whether Texas was operating its entire social
service program in substantial violation of federal requirements.
Because of the importance of a charge of noncompliance, the sanctions
arising from such a determination are more severe than that of a
disallowance. The Secretary may withhold in whole or in part future
payments to a state until the state amends its plan or comes into
compliance with federal requirements. 42 U.S.C. 1396c; 45 CFR 201.6(
e).

The purpose of this threat to deny all future federal funding is to
compel a State to come into compliance with federal requirements as
quickly as possible. The sweeping nature of this sanction is also the
reason for allowing a state, after it has exhausted its administrative
appeal remedies at 45 CFR Part 213, to seek review of a final
determination of noncompliance directly in the Court of Appeals. It is
important to note that, if, at any time during the administrative
appeals process of Part 213, a state does come into compliance, the
administrative hearing is terminated. 45 CFR 213.14(c). (18)Because a
determination of noncompliance might require denial of all future
federal funding, the Secretary, exercising the discretion provided in
the statutes and regulations, might determine that a particular set of
circumstances requires only a "disallowance" when, arguably, a finding
of noncompliance would also have been possible. The Secretary might,
for example, determine that a particular state policy does not
constitute substantial noncompliance with federal requirements, but is
rather a limited practice that merits only a disallowance. As was
stated in the Order, noncompliance issues and disallowance issues are
not mutually exclusive so that the same set of facts may call for either
of the procedures. Courts have recognized this fact in their comments
that a particular set of facts does not fall neatly into either of these
categories. The Fifth Circuit in Texas, supra, for example, did not say
that HEW erroneously labeled the dispute in that case as a
"disallowance," but rather, after a review of the facts, that "the
plan-conformity procedure in section 1316(a) is the one best suited for
reconsideration of Texas DPW's claim . . ." 556 F.2d 326, 331.
(emphasis added) Thus, in many circumstances, it is not a question of
which of the remedial procedures is correct, but rather which is most
suitable.

E. The Board's Finding: This Dispute Did Involve a Disallowance.

Adopting the approach, suggested by the courts, of looking beyond the
label used by the Agency to characterize a dispute to the underlying
facts at issue, we find that the Agency was correct in terming its
action a disallowance.

The dispute arose after a review, as specified in 45 CFR 201.10, of
six hospitals in New Jersey. The review focused on whether the
providers obtained informed consent as required by the federal
regulation concerning sterilizations, as incorporated into the State
plan. There was no broad overview of the State's compliance with the
State Medicaid plan. The review found that the hospitals were not
meeting the federal requirements for informed consent and a 72-hour
waiting period and attributed this to the fact that the State had not
issued guidelines to the providers. The subsequent notification of
disallowance carried a retrospective sanction, requiring the State to
repay FFP claimed for the sterilizations in question. The notification
of disallowance was restricted to a discrete time period, April 18, 1974
to December 15, 1975.

It is important to note that at the time of the review and subsequent
Audit Report the State disputed the disallowance primarily on the
grounds that the amount was overstated and that the State had acted
consistently with the intent of the informed consent regulations. The
State argued essentially that it had substantially met the requirements
(19)and that this was sufficient. The State did not dispute that it had
a duty to implement the regulatory requirements nor dispute the
reviewers' factual finding that the State had not informed the providers
of the regulatory requirements. It was not until much later in the
history of this case, nearly one year after the State appealed to the
Board, that the State raised the issue that it should have had a
compliance hearing. See, Medical Services Administration, supra.

The language of 42 U.S.C. 1396c is significant because a finding of
noncompliance in the administration of a State plan is prefaced on a
failure to comply "substantially". /8/ Here, the Agency made no
determination that there was substantial noncompliance by the State.
After the review was completed, the State, in September and December
1975, issued guidelines to the providers and the federal requirements
were subsequently met. Thus, the State cured its failure to implement
the federal requirements and there was no continuing problem that would
have required a compliance hearing on the possibility of a prospective
cut-off of all, or even part, of the State's Medicaid funds. There was
no need for the Secretary to use his section 1396c noncompliance
authority when the State voluntarily came into compliance.

The State requested that the Board dismiss the disallowance and the
State have a hearing before the Secretary on the issue of compliance.
We believe that the State's issuance of the September and December
guidelines, thereby informing the providers of the federal requirements,
renders moot any question of whether a compliance hearing is required.
Furthermore, as stated above, 45 CFR 213.14(c) provides that, if it is
determined that a State has come into compliance with federal
requirements, (20)a compliance hearing will be terminated. The State
came into compliance when it issued the guidelines. /9/

As a last note on this subject, we refer to State of New Jersey,
supra, slip op. at 18 n. 13, where the Third Circuit treated review by
the Grant Appeals Board as sufficient to meet the hearing requirements
of section 1396c. Thus, it would appear then that the State not has
been prejudiced by the Board's review of this dispute.

The State's Implementation of 45 CFR 205.35

The central substantive issue in this appeal is whether the State
failed to implement guidelines, as required by the regulations and its
State plan, so that its providers could meet the informed consent
requirements for sterilizations of 45 CFR 205.35, specifically the
72-hour waiting period between consent and sterilization (205.35 (a)(
1)(iii)) and the need for a notice at the top of the consent form that
refusal of a sterilization would not result in the withdrawal or
withholding of benefits (205.35(a)(2)(i)).

These regulations were promulgated on April 18, 1974 (39 Fed. Reg.
13887), as a result of the Relf decision. The State admitted tha it did
not forward formal notice of the federal requirements to the
participating providers until September 1975. (State's Reply Brief, p.
14) The State contended, however, that there was no pattern of abuse of
sterilization procedures and that the State agency believed in good
faith that the consent forms utilized by providers were adequate to
prevent coerced sterilizations while statewide procedures were being
developed. At the least, the State argued, the State was in compliance
with federal regulations following the publication of its newsletter to
providers on September 8, 1975. The Agency has not disputed that the
guidelines set forth in this newsletter comply with the requirements set
forth in 45 CFR 205.35. (State's Reply Brief, first attachment)

The State, however, has not offered any evidence to dispute the Audit
Report conclusion that the six hospitals reviewed did not adhere to the
72-hour waiting requirement and performed sterilizations without
obtaining the patients' approval on consent forms that carried the
notice that refusal to have a sterilization would not result in a (21)
withdrawal or withholding of other benefits. The Agency claimed that
the review did not discover one valid consent form in any of the six
hospitals (Agency Response, p. 24), and the State has neither shown nor
even argued to the contrary.

The Agency argued that a "good faith effort" to comply with the
"intent" of the regulations was insufficient. As for the period after
the publication of the September 8, 1975 newsletter, the Agency argued
that the mere fact that providers were inormed of the regulatory
requirements does not establish that the requirements were in fact met.

The Board analyzed the informed consent requirements of section
205.35 in California Department of Health Services, Decision No. 209,
August 31, 1981. In that case the State of California asked the Board
to use a "lenient" standard in applying section 205.35 and to focus on
the "process" of informed consent rather than the documentation
requirements. The Board there held:

(The) State has not shown that Section 205.35 does not apply here.
Under 45 CFR 16.8(a), the Board is bound by applicable laws and
regulations. Thus, we cannot substitute our view of what constitutes
the "process" of informed consent for requirements clearly established
by Section 205.35. (p. 8)

The Board tentatively concluded that this same reasoning should apply
to this case:

Notwithstanding that a recipient consent process may have been follow
by the providers of sterilization services during the disallowance
period, this process apparently did not meet the federal requirements
and the providers were not even informed about the requirements until
September of 1975. There is nothing in the record now before the Board
to indicate that it was the providers' practice to have a 72 hour
waiting period before performing sterilizations or to use valid consent
forms. In fact, the Audit Report states the contrary. It is apparent
that the providers were unaware of the proper procedures until the
September 8, 1975 newsletter.

(Order to Show Cause, p. 13)

The Board then directed the State to show cause why the Board should
not sustain the disallowance for the period April 1974 to September 7,
(22) 1975 on the basis that sterilization procedures in the State did
not meet applicable federal requirements. The State declared:

It is apparent from the Order that the Board will not consider
arguments or facts set forth by the State to demonstrate substantial
compliance with 45 C.F.R. Sec. 205.35. This is apparent from the Board
reliance on (the California decision), wherein the Board rejected a
request for a more expansive reading of informed consent under this
regulation, reasoning that since it was bound by the regulations the
Board was mandated not to consider any but the promulgated documentation
requirements for disallowance purposes. Thus, any evidence
demonstrating substantial, but less than actual, compliance would
obviously not be considered by the Board. (State's Response to the
Order, pp. 1-2)

The State therefore did not submit any additional information to
support its claim. The State chose instead to mount the collateral
attack on the disallowance process, discussed above.

The State never contended that it had met the notice requirement of
section 205.35(a)(2)(i). We therefore fail to see how the State could
possibly demonstrate substantial compliance with section 205.35 when the
notice requirement, an integral part of section 205.35, was not met. It
is significant to note that the notice requirement was not merely an
administrative regulation promulgated by the Secretary, but was rather
considered by the court in Relf to be a prerequisite to consent being
"voluntary" within the meaning of the family planning statutes. See,
California Department of Health Services, Decision No. 13, October 2,
1980, p. 5. We do not consider ourselves to be merely applying an
overly rigid interpretation of the regulation, as the State implied.
Rather, our interpretation is consistent with the Relf-mandated notice
requirement and the underlying statutes. Therefore, we affirm the
disallowance for the period prior to September 8, 1975.

The disallowance for the period September 8 to December 15, 1975,
however, requires further analysis. The Agency/State review of the
providers was conducted in July and August 1975, before the State
informed the providers of the regulatory requirements on September 8,
1975. The Agency's finding that the providers were in fact not
following the regulations for the period after the publication of the
guidelines in the newsletter was not based on actual information about
the provider consent process after the State's initial implementation of
the federal requirements. Rather, the Agency's position was based (23)
on the assumption that the State's subsequent clarification of the
regulatory requirements in the December 15, 1975 newsletter (State's
Reply Brief, second attachment), with model consent forms, meant that
the providers were not following the September 8, 1975 guidelines or
that those guidelines were defective. The Agency supported this
conclusion by pointing out that the State did not have procedures in
place to adequately monitor the providers until after the disallowance
period.

The Board examined each party's burden of proof concerning this
period: the State's burden of justifying its claim for FFP, and the
Agency's burden of establishing a factual basis for a disallowance. The
Board noted that as a general rule a State has the ultimate burden of
justifying its claim for FFP and that it was questionable whether upon
issuance of the September 8 newsletter the providers immediately began
to meet federal requirments. The Board also noted that it was
questionable for the Agency to disallow funds primarily because a
disallowance was appropriate in an earlier time period. (Order to Show
Cause, p. 14)

The Agency repeated its earlier argument that the State had not yet
shown that it had effectively monitored the providers during this
period. The State argued, in turn, that the Agency had never sought to
examine or audit this period, and that the disallowance for this period
was therefore speculative. The State cited a prior Board decision, Ohio
Department of Public Welfare, Decision No. 226, October 30, 1981, to
support its contention that the Agency had the burden to show a basis
for this period's disallowance.

In Ohio the Board declared:

While as a general proposition it is true that the State bears the
ultimate burden of justifying its claim for FFP, the Agency shares the
burden of going forward with evidence, in the sense that the Agency
cannot merely make arbitrary counterclaims; if the Agency disputes a
claim by the State, and does so by statistical sampling methodology, the
Agency must, if asked, show the reasonableness of its methodology. The
State bears a similar burden, in that it has responsibilities of
justifying its claim and facilitating Agency access to necessary
records. These shared responsibilities track the cooperative nature of
Federal-state relations in assistance programs generally and of the
Medicaid program in particular. (p. 3)

(24) We are satisfied that the Agency has met its burden of
establishing that the State did not meet federal requirements for
sterilizations for the period April 1974 to September 8, 1975. As to
the later period, however, the Agency has not shown how the September 8
newsletter guidelines were defective in implementing the federal
requirements. The September newsletter specifically addressed the
problems that the on-site review discovered. While it is conceivable
that some providers in the State did not immediately follow the
September guidelines after their publication, we cannot assume, as the
Agency has, that all the providers of sterilizations in the State failed
to implement the guidelines. The disallowance for the period after
September 8, 1975 is based on the Agency's belief that there was total
continued failure to meet federal requirements during this period. This
ignores the fact that the State took a positive, concrete step in the
September 8 newsletter to implement the requirements. We believe that
for the disallowance for the period after September 8 to be sustained
the Agency must produce additional evidence that the sterilizations were
performed without the required informed consent. The Agency has not
done so. Accordingly, we reverse the disallowance for the period after
September 8, 1975.

Conclusion

For the reasons stated above, we find that the Board has jurisdiction
over this dispute and we sustain the disallowance for the period April
1974 to September 8, 1975. We reverse the disallowance for the period
after September 8, 1975. Our decision, however, does not preclude the
Agency from disallowing amounts for this period in the future, as long
as the Agency identifies a sufficient factual and legal basis for doing
so.

The Agency is directed to calculate the amount of the sustained
disallowance. If the State should dispute the amount of this revised
disallowance, it may, within 30 days of receipt of the revised
disallowance, appeal that determination to the Board. /1/ Through out
this decision "sterilizations" will refer to only nontherapeutic
sterilizations unless noted otherwise. /2/ A New Jersey Health
Services Program Newsletter, Volume 1-131, September 8, 1975, directed
to all physicians, implemented 45 CFR 205.35 by adopting guidelines for
sterilization procedures which largely repeat the federal regulation.
The Newsletter, Volume 1-140, December 15, 1975, refers to a recent
federal survey of hospitals and states, "(Results) of their findings
indicate that the New Jersey Medicaid Program is not in compliance with
Federal Regulations." The December newsletter contains provider
procedures and general information about sterilization procedures.
Attached to the December newsletter were model consent forms to be used
by the providers. /3/ The New Jersey Title XIX State Plan was revised
effective April 18, 1974, to incorporate the provisions of 45
CFR 205.35 (Transmittal No. 74-9-MA). /4/ In its Order to Show
Cause the Board tentatively found that the age of the recipients of
sterilizations and the calculation of the disallowance amount were no
longer issues in this appeal. Neither party has disputed these
findings. /5/ See Appendix B, paragraph (a) of the Board's new
regulations, 45 CFR Part 16, 46 Fed. Reg. 43816, for the current
statement of Board jurisdiction over Agency disallowances under Title
XIX. /6/ The plan conformity/program compliance/disallowance
issue is not clear-cut. It was the Board's preliminary conclusion that
the facts of this case did not call for the use of the plan conformity
procedures of 42 U.S.C. 1316(a) and (b). (Order to Show Cause, p. 9)
Approval of the State plan or a plan amendment is not at issue here.
The record indicates that the State had revised its State plan to
conform to the requirements of 45 CFR 205.35, effective April 18, 1974
(Administrative Record, Ex. 3), but had failed to issue guidelines to
advise the participating hospitals of these requirements. (Audit
Report, p. 10) Accordingly, we do conclude that there is no "conformity"
issue here, and for the remainder of this decision we prefer to use only
the terms "compliance" and "disallowance" when discussing how the
Agency's action should be characterized. We recognize, however, that
states, courts, and the Agency have used the terms "conformity" and
"compliance" interchangeably. In our view, however, while a hearing and
a U.S. Court of Appeals review are available for both types of disputes,
significant statutory distinctions exist between them. Conformity
issues arise when a State plan (or a State plan amendment treated as a
new State plan) is disapproved. See, e.g., Connecticut State Department
of Public Welfare v. Department of Health, Education, and Welfare, 448
F.2d 209 (2nd Cir. 1971); Arizona State Department of Public Welfare
v. HEW, 449 F.2d 456 (9th Cir. 1971), cert. denied, 405 U.S. 919 (1972).
Compliance issues arise when the Department seeks to cut off
prospectively all or part of a state's FFP payments based on a finding
that the plan no longer complies with the Act or that in the
administration of the plan there is a fialure to comply substantially
with the Act. The confusion may result from the fact that 45 CFR Part
213 hearings are provided for both types of determinations and that 42
U.S.C. 1316(a)(3) provides for U.S. Court of Appeals review of both
types of determinations. /7/ It is important to note that a
disallowance may result from a review other than a formal audit. For
example, established Agency practices such as the quarterly review of
expenditures and possible deferral of state claims, 45 CFR 201.15, may
also result in a disallowance determination. /8/ In analyzing
the compliance/ disallowance issue, some courts have pointed to language
in 45 CFR 201.6 which states that a "question of noncompliance of a
State plan may arise from . . . the failure of the State in practice to
comply with a federal requirement . . . ." From this the courts seem to
infer that any finding of a failure to comply with a federal requirement
should lead to a compliance hearing. We believe that this is a
misinterpretation of this provision. While it explains circumstances
under which a noncompliance question "may arise," the provision must be
read together with the regulation's previous sentence and with 42 U.S.
C. 1396c to the effect that a compliance hearing is required only when
the question results in a finding that the noncomplaince in
administration is "substantial." /9/ If there had been a
compliance hearing over the prospective loss of the State's funding and,
as a result of that hearing, the State had come into compliance, we
believe that the Agency would still have been entitled to recoup by
disallowance that amount of FFP that had been improperly claimed by the
State during the period when it had not been in compliance.

OCTOBER 22, 1983