Pennsylvania Department of Public Welfare, DAB No. 832 (1987)

DEPARTMENTAL GRANT APPEALS BOARD

Department of Health and Human Services

SUBJECT: Pennsylvania Department
of Public Welfare

Docket Nos. 85-104, 86-70, 86-112, and 86-220
Decision No. 832

DECISION

The Pennsylvania Department of Public Welfare (State) appealed four
determinations by the Health Care Financing Administration (HCFA or
Agency) disallowing $9,791,420 in federal financial participation (FFP)
for the period July 1, 1981 through March 31, 1986. The amount
disallowed represents the difference between the State's claims for
costs at the 75 percent rate available for operation of a Medicaid
Management Information System (MMIS) and the 50 percent rate available
generally for administrative costs. The parties have reduced the amount
in dispute to $5,876,361 FFP. 1/

For the reasons stated below, we uphold the Agency's disallowance as it
relates to certain functions of two divisions of the Bureau of Provider
Relations and reverse the Agency's disallowance for some postage costs.
In addition, the parties agreed to a remand to separately pursue 75
percent reimbursement for certain other functions of the two Bureau
divisions.

I. The dispute before the Board

The dispute before the Board involves whether the costs of two divisions
of the Bureau of Provider Relations (the Division of Provider Education
and the Division of Provider Inquiry) and certain postage costs are
costs attributable to the operation of the State's MMIS and thus
reimbursable at the 75 percent rate. During the Board proceedings,
including an informal conference held by telephone on October 16, 1986,
the parties narrowed the issues and stipulated to certain facts. 2/ The
parties have agreed to the following:

o The Agency agreed that the function of monitoring the State
training contract (as described in Paragraph 3.c of the
proposed stipulation) performed by the Division of Provider
Education is reimbursable at the 75 percent rate of FFP. 3/
The State must now support its claim with documentation
showing which personnel performed this function and how much
of their time was spent performing this function. The parties
agreed to pursue this issue on remand.

o Similarly, the Agency agreed that the function of making
on-line data entries regarding the recovery of monies and
adjustment to provider accounts (as described in Paragraph
4.c. of the proposed stipulation) performed by the Division of
Provider Inquiry is reimbursable at 75 percent FFP. The State
must now support its claim with documentation showing which
personnel actually made on-line data entries on the MMIS and
how much of their time was spent on this function. Again, the
parties agreed to pursue this issue on remand.

o The parties agreed that to the extent the functions of the
Bureau of Provider Relations for which the State claimed 75
percent FFP for operations of a MMIS are found ineligible by
the Board for such enhanced funding, the State will have the
opportunity to present documentation to the Agency that the
seven RNs in the Bureau and their supporting staff qualify for
enhanced funding as Skilled Professional Medical Personnel.

o Although the parties agreed to the facts contained in
Paragraphs 3.d. and e. of the proposed stipulation, the Board
determined that that information alone was not enough to
establish that the functions performed by the Division of
Provider Education (to conduct group or individual training
with certain providers and to conduct training on an
individual or group basis regarding major changes in the
program) were functions which were attributable to the
operation of a MMIS. These facts together with the record
here were not enough to establish entitlement to 75 percent
reimbursement. Therefore, it was agreed to remand this issue
to the parties to allow the State to present documentation to
show whether the training provided under this function was
attributable to the operation of a MMIS.

o It was agreed that the Board would decide whether the
following costs are entitled to 75 percent reimbursement as
costs attributable to operation of a MMIS:

- the costs of the Division of Provider Education's function
to develop and maintain provider handbooks.

- the costs of the Division of Provider Education's function
to write medical assistance bulletins.

- the costs of the Division of Provider Inquiry's function of
responding to certain provider questions regarding billing
problems.

- the costs of the Division of Provider Inquiry's function of
processing exceptions to the State's deadline for
submitting invoices.

Before examining these functions of the two divisions of the Bureau of
Provider Relations, we examine the State's argument that approval of its
cost allocation plan shows that the costs of the Bureau overall were
properly reimbursable at 75 percent. In addition, we examine the
various postage costs and determine whether these costs are reimbursable
at 75 percent.

II. Applicable law, regulations, and guidelines

Under sections 1903(a)(3)(A) and (B) of the Social Security Act (Act),
FFP is available in the costs of a mechanized claims processing system
at the rate of 90 percent for design, development, or installation of a
system and at the rate of 75 percent for costs attributable to the
operation of the system; otherwise, administrative costs are reimbursed
at a 50 percent rate. Section 1903(a)(7).

The Agency regulation at 42 CFR 433.111 (1980) provides certain
definitions applicable to MMIS. Definitions relevant here are:

"Mechanized claims processing and information retrieval system"
means 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.

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

(Emphasis added.)

The regulation at 42 CFR 432.50(b)(2) (1980) provides for FFP at a rate
of 75 percent for expenditures attributable to personnel "engaged
directly in the operation of mechanized claims processing and
information retrieval systems." The regulation also provides that rates
of FFP in excess of 50 percent are applicable only to those portions of
the individual's working time that are devoted to the duties that
qualify for the enhanced rate of reimbursement. 42 CFR 432.50(c)(1).

The regulations are supplemented by Chapter 11 of the State Medicaid
Manual (SMM or Manual). 4/ See State's Appeal File, Exs. 5 and 6.
Section 11275.21 of the SMM states that FFP at the 90 percent rate (for
design, development, or installation of a MMIS) and the 75 percent rate
(for operation of a MMIS) may be paid "only for those functions which
are attributable to an MMIS." State's Ex. 5. This section cites as an
example, for provider enrollment, that "only the costs of entering data
into the computer system and processing computer exceptions would be
reimbursed at 75 percent FFP" and that "[o]ther functions, even if
performed by the same unit or individuals, are reimbursable at 50
percent FFP." Section 11275.26 of the SMM includes a detailed checklist
of costs of a MMIS and the allowable reimbursement rates (90 percent, 75
percent, or 50 percent) for those costs. This section states that
"anything that is not on this list as being eligible for the higher
match will only be funded at the normal match." State's Ex. 6.

III. Bureau of Provider Relations

A. State's Arguments Concerning Cost Allocation Plan Approval

Before we discuss the disputed functions of the two divisions in this
Bureau, we first discuss the merits of the State's general arguments
concerning its entitlement to enhanced funding at the 75 percent
operational rate.

The State argued that it had a previously approved cost allocation plan
(CAP) for the period in question which clearly earmarked the cost
centers for the Bureau of Provider Relations' Division of Provider
Inquiry and Division of Provider Education as allocable to MMIS. 5/
State's Brief, p. 2; State's Appeal File, Ex. 8, p. III-3-52.
The State argued that the Agency is bound by the approved CAP,
especially where the Agency is not arguing that the particular costs
charged to MMIS cost centers were misclassified, but, instead, is
contending that entire cost centers are not eligible for reimbursement
at the 75 percent operational rate. State's Reply Brief, p. 1.
Moreover, the State reasoned that the CAP serves, at a minimum, the
function of establishing an agreed framework or contract between the
State and Agency within which the State is entitled to budget and claim
costs. The State also argued that the approval of the CAP constituted
evidence of how the Agency interpreted its regulations to allow the
activities covered by the Bureau of Provider Relations cost centers as
eligible for enhanced funding. Therefore, the State claimed that the
Agency was precluded from assessing this disallowance.

B. Effect of Cost Allocation Plan Approval

Approval of a CAP does not mean that the costs "approved" are then
automatically allowable. In Oregon Department of Human Resources,
Decision No. 729, March 20, 1986, we recognized that, although 45 CFR
95.517 provides that in order for costs to be claimed, they must be in
accordance with an approved CAP, that language does not mean that costs
allocated and claimed in accordance with an approved CAP are per se
allowable under programmatic and grants management regulations. 6/ In
fact, we specifically rejected Oregon's argument that the Agency had no
authority to take a disallowance if costs were claimed via an approved
CAP. We found that the regulations in 45 CFR Part 95 did not support
this position.

Moreover, as we stated previously, CAPs function primarily to delineate
proper cost allocation methods and procedures and do not address the
full range of substantive issues raised by the Agency's programs.
Approvals of the plans cannot be viewed as policy judgments on the part
of the Agency about cost allowability. Furthermore, the approvals are
specifically limited and do not purport to be approval of the
allowability of particular costs. See, e.g., New York State Department
of Social Services, Decision No. 449, July 29, 1983. Here, the
transmittal letters for the State's CAPs for 1982 and 1983 provide the
following caveat:

The plan is approved and costs claimed in conformance with the
plan are subject to the following conditions:

(2) the costs which are actually claimed by the State are
allowable under prevailing Department cost principles,
program regulations and law.

(3) the claims conform with the administrative and statutory
limitations of the programs against which they are made.

State's Appeal File, Ex. 8.

While the State argued that the Agency should especially be bound by the
approved CAP where the Agency contends an entire cost center is not
eligible for 75 percent reimbursement, the State has not shown why this
circumstance should be any different from the situation where the Agency
disallows particular costs charged to MMIS cost centers.

The regulation, 45 CFR 95.507, specifies that a CAP contain "a
description of the activities performed by each organizational unit and,
where not self-explanatory, an explanation of the benefits provided to
federal programs." See also 42 CFR 433.34(d) (1980). The CAP
provisions which provide narrative descriptions of the Division of
Provider Inquiry and Division of Provider Education do not mention any
relation to or activities involved with the State's MMIS. See State's
Appeal File, Ex. 8, pp. 37-38 and Ex. 9, pp. 60a-61a. Rather, under the
narrative descriptions in the CAP of the various Bureaus and Divisions,
the only division for which the description states specific
responsibility for the State MMIS and assigns specific cost centers to
the operational rate (75 percent), the developmental rate (90 percent),
and the general administrative rate (50 percent) is the Bureau of
Operations' Division of Medical Assistance Management Information System
(MAMIS). See State's Appeal File, Ex. 8, pp. 40a-41a. The only
reference in the CAP, moreover, of the Bureau of Provider Relations'
Division of Provider Education and the Division of Provider Inquiry cost
centers as allocable to the MMIS appears as follows:

The expenditures in the following cost centers are utilized for
capturing MAMIS [State's MMIS] activity and will be claimed
accordingly.

* * *

81 & 82-310 - 11,200 - MAMIS - 75% 11,300

State's Appeal File, Ex. 8, p. 43a.

There is no mention of why all the costs of these cost centers as
opposed to only certain costs related to specific functions were
properly claimed at the 75 percent rate. As the Agency pointed out, the
State here claimed all the costs of the Division of Provider Inquiry and
the Division of Provider Education as qualifying for enhanced
reimbursement for operation of a MMIS. As we discuss below in our
analysis of the specific functions, there are functions performed by
these divisions which the State has now conceded are not attributable to
operation of a MMIS, i.e., costs attributable to drafting parts of the
provider handbook and medical assistance bulletins. Since the State
claimed all the costs in these divisions at the enhanced rate without
any showing that all the functions performed by these divisions are
attributable to the operation of the MMIS, and where admittedly certain
functions are not entitled to enhanced funding, the Agency could
reasonably have initially questioned the entire cost center. The State
has the obligation to come forward and show that the costs disallowed
are entitled to enhanced funding. New York Department of Social
Services, Decision No. 204, August 7, 1981. As we indicated previously,
approvals of CAPs cannot be viewed as a policy judgment on the part of
the Agency about cost allowability. Thus, we cannot agree with the
State that approval of the CAP constituted dispositive evidence that the
Agency interpreted its regulations to allow the activities covered by
these two divisions as eligible for enhanced funding. 7/ Thus, the CAP
approval does not preclude the Agency from taking a disallowance here.

C. Division of Provider Education's Functions

The Division of Provider Education is responsible for developing and
maintaining provider handbooks. The State agreed that the State
Medicaid Manual expressly states that provider handbooks are
reimbursable only at 50 percent. Section 11275.26 of the Manual. The
State, however, contended that, while the handbooks as a whole are not
entitled to enhanced funding, those portions of the handbook which
provide detailed instructions to providers on how to submit invoices
should be considered "publications necessary for the operation of the
system" which the SMM lists as reimbursable at 75 percent. Section
11275.26 of the Manual, State's Appeal File, Ex. 6, p. 9a. Similarly,
the State agreed it was not entitled to enhanced funding for the
function of writing medical assistance bulletins to the extent those
bulletins are for general program purposes. The State, however,
contended that these bulletins should also be considered publications
necessary for the operation of the system and entitled to 75 percent
funding to the extent the bulletins provided detailed billing
instructions for providers. The State argued that the Agency intended
to distinguish in the Manual between what is entitled to enhanced
funding and what is not on the basis of whether the function is to tell
the provider how to get a bill paid (enhanced funding) rather than just
to tell the provider about general policy (non-enhanced funding).

As the Agency pointed out, the Manual expressly states that provider
handbooks and bulletins are reimbursable only at 50 percent. While
section 11275.26 of the SMM provided that "publications necessary for
the operation of a system (e.g., claims forms such as HCFA-1500, UB-16)"
are reimbursable at 75 percent, in context, this section cannot
reasonably be read to override the specific provisions regarding
provider handbooks and medical assistance bulletins. The examples given
have a more direct relationship with the computerized processing of
claims than mere instructions about billing procedures, which would be
necessary regardless of the nature of the billing system. In addition,
the State has not pointed to any evidence showing that the Agency has
made any distinction on whether something is entitled to enhanced
finding on the basis of whether the function pertains to billing
procedures.

Consequently, we find no basis for allowing costs of certain portions of
provider handbooks and medical assistance bulletins to be reimbursed at
the enhanced rate. Thus, we sustain the Agency's disallowance.

D. Division of Provider Inquiry's Functions

The State contended that the primary responsibility of the Division of
Provider Inquiry is to respond to individual provider inquiries
regarding particular billing problems. The State explained that this
involved checking the status of invoices on the computer, reviewing the
MMIS paid claims history files, checking the enrollment status of
clients on the computer, reviewing remittance advices and invoices on
microfiche, and making on-line inquiries to see if a service is covered.
Proposed Stipulation, Paragraph 4.a.

In addition, the State argued during the October 16, 1986 conference
call that these functions are equivalent to "exception claims processing
by claims type (correction of suspended claim)" which is listed under
section 11275.26 of the Manual as a function reimbursable at 75 percent.
The State conceded that the claims which this division responds to are
not suspended claims. Rather, a provider with a rejected claim might
call up this office to find out why its claim was rejected. The State
also contended that the personnel of this office should be considered
"Provider Representatives and Related Personnel" "directly related to
claims operations," which is listed in section 11275.26 of the SMM as a
function reimbursable at 75 percent. State's Appeal File, Ex. 6, p. 9a.
The State queried what kind of activity these representatives would be
performing that is directly related to claims operations if not
answering questions for providers on the claims being processed.

The State also indicated that another function of the Division of
Provider Inquiry is to process exceptions to the State's deadline for
submitting invoices. The State contended that this function involved
personnel reviewing particular claims documentation, reviewing rejected
invoices and remittance advices on microfiche, and checking the status
of clients on the computer system. Proposed Stipulation, Paragraph 4.b.

For the reasons explained below, we find that these functions are not
functions reimbursable at 75 percent for operation of a MMIS.

"Operation" in 42 CFR 433.111 is defined as the "automated processing of
claims, payments, and reports," and includes the use of personnel
"directly associated with the functioning of the mechanized system."
The State admitted in the October 16th conference call that neither of
these disputed functions involve making on-line computer changes or data
entry to the MMIS. The State here stated that these two functions
involve using the information in the system and, as a result, involve
operation of the system. The Agency pointed out that the Division of
Provider Inquiry obtains information from the MMIS to answer providers'
inquiries on the status of their claims. We agree with the Agency that
while the Division's staff is getting the benefit of the system, the
State has not shown that this staff was actually operating the MMIS.
Mere use of information from the system does not constitute "automated
processing of claims, payments, and reports". Consequently, under the
regulatory definition neither of the Division's functions is
attributable to the operation of the MMIS.

In addition, we find both that a function of this division is not
"exception claims processing by claim type" and that the personnel are
not "provider representatives and related personnel" "directly related
to claims operations" as defined in section 11275.26 of the Manual.
"[E]xception claims processing" involves correcting "on-line" in the
system a suspended claim. The Agency stated that this involves actually
effectuating a change in a claim by entering or changing data in the
system. The State admitted here, however, that the function of
responding to the provider's inquiries does not involve on-line data
entries or changes to the system.

Moreover, we find that the function of this office to respond to
provider inquiries on billings is not equivalent to provider
representatives directly related to claims operations. While the
Provider Inquiry staff resolves provider questions on billing problems
and processes exceptions to the deadline for submitting services, these
functions are not actually part of claims processing. Section 11275.23
of the Manual states that staff who perform follow-up investigations are
not considered part of the MMIS. The State has not shown that these
functions amount to anything other than this. As the Agency pointed
out, section 11275.21 of the Manual provides that 75 percent FFP may be
paid only for those functions attributable to a MMIS and cite, as an
example, that, with respect to provider enrollment, "only the costs of
entering data into the computer system and processing computer
exceptions would be reimbursed at 75 percent FFP. Other functions, even
if performed by the same unit or individuals, are reimbursable at 50
percent FFP." The State has failed to show that this provision is not
also applicable here.

While the State argued that section 11275.21 of the Manual is
inconsistent with the list of functions at section 11275.26 of the
Manual, we do not agree. The State contended that section 11275.21 of
the Manual states that the Agency will pay the enhanced operational rate
of 75 percent only if the function involves some direct interaction of
"inputting" data into the system, yet under section 11275.26 the Agency
will pay the operational rate under provider enrollment for training the
provider. The State argued that this activity does not involve
"inputting" data into the system; hence, the State contended that
section 11275.21 is inconsistent and section 11275.26, which was
published later, takes precedence.

We do not find that the Manual provisions are inconsistent. The Manual
does not refer to activities which involve inputting of data as being
the only activities for which enhanced funding at 75 percent is
available. Rather, the Manual refers simply to functions which are of
direct benefit to the MMIS. Consequently, functions which would occur
regardless of the MMIS, simply because providers submit claims, are not
functions which directly benefit the MMIS and, consequently, are not
functions which warrant the incentive of an enhanced rate of
reimbursement. It might always be necessary to have staff available to
answer provider inquiries about billing problems and to provide
exceptions to the deadline for submitting invoices whether or not the
MMIS existed. Therefore, we do not find that these provisions are
inconsistent where the purpose of the Manual, and, specifically, the
list at section 11275.26, is to state the direct costs considered to
directly benefit the MMIS.

Here, the State has not shown that the functions of answering provider
questions concerning billing problems and that processing exceptions to
the deadline for submitting invoices are functions which benefit the
ongoing operation of a mechanized information system. Thus, we conclude
that these functions are not reimbursable at the 75 percent for
operation of a MMIS and therefore, we uphold the disallowance.

IV. Postage Costs

The State argued that certain postage costs incurred by the contractor
carrying out some of the State claims processing functions were entitled
to the enhanced operational rate of 75 percent. Specifically, the
postage expenses incurred and claimed at 75 percent which were
disallowed by the Agency were for the following items:

a. Invoices that could not be processed. b. Tapes that could not
be processed. c. CHR forms that could not be processed. d.
Prior authorization notification forms. e. Reconciliation tapes
to service bureaus. f. Return of successfully processed tapes.

The Agency's disallowance was based on section 11275.26 of the Manual
which provides 75 percent operational FFP for only three types of
postage costs, i.e., postage for: (1) Issuance of Explanation of
Benefits (EOBs); (2) Issuance of receipt ID cards; and (3)
Issuance of remittance statements. State's Appeal File, Ex. 6, p.
12.a.

The State essentially argued that some, if not all, of the items for
which postage was incurred and claimed at 75 percent are equivalent to
remittance statements. The State and Agency agreed that a remittance
statement is a notification to a provider whether a claim submitted for
payment will be paid, rejected, or pended. The parties agreed that the
Agency has never specified in what form a remittance statement must be
made, nor has the Agency specified that a particular form be used.

During the October 16th conference call, the State described more
specifically the items for which postage was claimed. The State
indicated that "invoices which cannot be processed" are claims submitted
by a provider on hardcopy where a problem is found by the contractor
prior to entering the claim into the system. The State indicated that
it is a problem so severe that the claim should not even enter the
system and the claim is returned to the provider. A "tape which cannot
be processed" is the same thing, but for the fact that the provider
submits its claim on computer tape rather than by hardcopy. Again,
prior to even processing the tape, the tape is returned because of a
problem. A "CHR form that cannot be processed" is similar to a prior
authorization form. It is a form submitted by a hospital to get prior
approval of a hospital stay. This form is returned before it is
processed because a problem is found. A "prior authorization
notification form" is the State's answer on a provider's request for
prior authorization of a service. A "reconciliation tape sent to
service bureaus" is a magnetic or computer tape sent to those providers
who submit their claims by electronic media and request that
notification of the disposition of their claims, i.e., whether the claim
is paid, rejected or pended, be given back on tape. This allows the
provider to run the tape through its computer system to reconcile its
accounting system. A "return of successfully processed tape" is the
postage cost of returning the provider's tape which contained the
provider's claim.

As we explain below, we agree with the State that the postage costs for
reconciliation tapes were properly payable at the 75 percent rate. The
State Medicaid Manual indicates that costs of postage for remittance
statements are reimbursable at 75 percent. Section 11275.26 of the
Manual. The Manual, however, does not specify that the remittance
statement must be in hardcopy or by tape. The State pointed out that
when the Manual was written it was not contemplated that electronic
billing would be prevalent. Consequently, we agree with the State that
just because the notification of disposition of the provider's claim is
on tape rather than on hardcopy does not mean it is not a remittance
statement.

The Agency here has not shown any reason why the reconciliation tape is
not the equivalent of the remittance statement. The Agency instead
indicated that the State's argument here might be valid but that the
State was obligated, where it knew that such postage costs were not
listed in the Manual, to ask for the Agency's prior approval to claim
these costs at the enhanced rate. We do not agree that the State was
obligated to receive prior approval of these costs. The parties have
agreed that the Manual does not specify what form a remittance statement
must take. The Agency has not shown why the reconciliation tape is not
a remittance statement. We find that there is no reasonable basis for
making a distinction between a remittance statement submitted to the
provider on tape or one submitted to the provider on hardcopy. Thus, we
find that the cost of postage for reconciliation tapes are reimbursable
at 75 percent as postage for remittance statements and the disallowance
is overturned in part accordingly. Since we do not know how much of the
disallowance is attributable to these costs, this is left for the
parties' determination on remand.

We find that the Agency can reasonably disallow 75 percent reimbursement
for postage costs other than those specifically listed in the Manual as
reimbursable at that rate. As the Agency pointed out, these items are
not the same as a remittance statement. In the case of the invoices,
tapes, and CHR forms that cannot be processed, the claims here were
submitted in so incomplete a fashion that the claims were not entered
into the system and were rejected up front. As a result, the system is
not even used. We agree with the Agency that there is no direct
relation then to operation of the MMIS here. In the case of the prior
authorization forms, these are forms that must be filed in order for the
provider to even make a claim for reimbursement. Thus, this form, too,
is not directly related to the operation of the system. Consequently,
we find that the Agency correctly disallowed these costs as not properly
costs of operation of a MMIS reimbursable at 75 percent. As for the
costs of postage to return successfully processed tapes, we see no basis
for providing the operational rate for these costs. As the State
pointed out, it returns the tapes to the providers because of the cost
of these computer tapes and because they are the providers' property.
The State here has not shown that return of these processed tapes is
equivalent to a remittance statement. In fact, the State indicated that
the tapes are returned at the same time a reconciliation tape or
remittance statement is sent. Moreover, once a tape is processed the
cost of operation of the system has passed. The State has not shown
that the cost of postage for returning processed tapes should be
reimbursed at any higher rate than the general administrative rate. 8/

Conclusion

We uphold the disallowance for the disputed functions of the Bureau of
Provider Relations: specifically, the Division of Provider Education's
functions to develop and maintain provider handbooks and to write
medical assistance bulletins; and the Division of Provider Inquiry's
function to respond to provider questions regarding billing problems and
processing exceptions to the State's deadline for submitting invoices.
We overturn the disallowance for the postage costs for reconciliation
tapes, the amount to be determined by the parties on remand, and uphold
the disallowance for the remainder of the postage costs. In addition,
as explained earlier on pages 2 and 3, the parties have agreed to
discuss certain other matters on remand.

_________________________ Judith A. Ballard

_________________________ Norval D. (John)
Settle

_________________________ Cecilia Sparks
Ford Presiding Board Member

1. The Agency withdrew $3,510,624 FFP of its disallowance. The State
then conceded the disallowance of $369,755 FFP for 14 job
classifications and $34,680 for invoices submitted by its contractor
that were not covered by the approved contract. Of course, while the
amount the State conceded is no longer in dispute here, the State must
still return this amount to the Agency.

2. The disallowance in Docket No. 86-220 was issued October 28,
1986. Because the issues in this appeal were identical to the issues
before the Board in Docket Nos. 85-104, 86-70 and 86- 112, the State
requested that Docket No. 86-220 be consolidated with those cases. The
State indicated that it waived further filings in this later case.
Since the Agency had no objection, these cases were consolidated and the
record in the former cases also applies to Docket No. 86-220.

3. Prior to the October 16, 1986 conference call, the State
submitted a stipulation to the Agency. The Agency stipulated to some,
but not all, of the proposed stipulation during the October 16th
conference call.

4. The regulation at 42 CFR 433.110 (1980) made the provisions of
the Medical Assistance Manual applicable. The Medical Assistance Manual
was replaced by the State Medicaid Manual in July, 1981. Chapter 11 of
the Manual covers mechanized claims processing systems.

5. In the October 16, 1986 conference call, the State admitted that
there was no express provision in the CAP that a function of the
Division of Provider Education was to write provider handbooks.

6. The regulatory provision, 45 CFR 95.517, was not codified until
April 1982. Prior to this, however, 42 CFR 433.34(f)(1) (1980) also
provided that in order for Medicaid costs to be claimed, they must be
claimed in accordance with an approved CAP.

7. The State also contended that the Bureau of Provider Relations
costs are attributable to the "operation" of a MMIS based on the Board's
Ruling on Request for Reconsideration of New Jersey Department of Human
Services, Decision No. 648, November 22, 1985. However, the ruling on
reconsideration of Decision No. 648 simply does not apply here.
Decision No. 648 involved statewide and Department-wide indirect costs
which had been properly allocated under OMB Circular A-87 to the
operation of the MMIS and which the Agency had disallowed as too remote
from the actual operation of the MMIS. That case did not address, as we
must here, whether certain direct costs and associated indirect costs
were attributable to the operation of the MMIS.

8. Our decision is based on the fact that the State had notice of
the Agency's interpretation which is a reasonable one. Our decision does
not preclude the Agency from considering enhanced reimbursement for
other types of postage costs related to technological advances in the
way claims are