SUBJECT: New York State Department of Health

DECISION

By letter dated June 7, 2005, the New York State Department of Health (NYSDOH) appealed a disallowance by the Centers for Medicare & Medicaid Services (CMS) of $2,710,131 in federal financial participation (FFP) claimed under title XIX (Medicaid) of the Social Security Act (Act). The disallowance represents the federal share of a disproportionate share hospital (DSH) payment adjustment reflecting the costs of hospital services provided to State prison inmates for the quarter ended June 30, 2004. Three more disallowances were issued for the same reasons covering later time periods and were subsequently appealed by NYSDOH. In the appeal docketed as A-05-93, NYSDOH appealed a disallowance of $3,057,037 for the quarter ended December 31, 2004. In the appeal docketed as A-06-01, NYSDOH appealed a disallowance of $3,255,026 for the quarter ended March 31, 2005. In the appeal docketed as A-06-45, NYSDOH appealed a disallowance of $3,410,386 for the quarter ended June 30, 2005. The Board, without objection from the parties, consolidated all the appeals since the issues are identical.

The disputed costs involve hospital services provided to State prison inmates whose costs were paid for by the New York Department of Correctional Services and then claimed as part of the uncompensated care for which the hospital(s) received DSH payment adjustments. Only uncompensated care received by Medicaid eligibles and those without insurance or another source of third party coverage may be considered in determining DSH adjustment amounts. State payments on behalf of "indigent patients" are not treated as third party coverage, however.

We conclude that CMS policy consistently and reasonably treated state payments for the care of inmates in state custody as a [Page 2] source of third party coverage. We reject NYSDOH's contentions that the State's payments on behalf of inmates should not be treated as third party coverage but rather should be considered as payments on behalf of indigent patients. CMS's interpretation that prison inmates are not per se equivalent to indigent patients conforms to the meaning and purpose of the relevant provisions of the Act. The disallowances here all occurred after CMS expressly notified NYSDOH that the statute and regulations do not permit costs for inmate care that are paid by a state to be included in a DSH adjustment. We therefore defer to CMS's interpretation of the applicable statute and regulations. For these and other reasons explained below, the Board upholds all the disallowances in full.

Legal Authorities

In accordance with section 1903(a) of the Act, ⁽¹⁾ a state with an approved Medicaid state plan may receive FFP in expenditures for "medical assistance," which specifically includes inpatient hospital services. Section 1905(a)(1) of the Act. In setting Medicaid payment rates for hospital services, states must "take into account the situation of hospitals which serve a disproportionate number of low income patients with special needs." Section 1902(a)(13)(A)(iv) of the Act. The Act provides detailed requirements for calculating "an appropriate increase in the rate or amount of payment," referred to as a "payment adjustment," for inpatient hospital services provided by such hospitals. Sections 1923(a)(1)(B) and 1923(c) of the Act. The Act limits total DSH payment adjustments by each state to the amount of a state allotment. Section 1923(f) of the Act.

The Act was amended in 1993 to impose hospital-specific limits on DSH payments, in addition to the statewide allotments. Thus, the total payment adjustment for a hospital may not exceed its costs for --

furnishing hospital services (as determined by the Secretary and net of payments under this title, other than under this section, and by uninsured patients) to individuals who either are eligible for medical [Page 3] assistance under the State plan or have no health insurance (or other sources of third party coverage) for services provided during the year. For purposes of the preceding sentence, payments made to a hospital for services provided to indigent patients made by a State or a unit of local government within a State shall not be considered to be a source of third party payment.

Section 1923(g)(1)(A) of the Act (emphasis added).

Issue

The core question is whether payments made by a state to hospitals for the care of prison inmates may be considered in calculating the hospital-specific DSH payment adjustment under Medicaid. NYSDOH contends that these payments may not be treated as a source of third party payment because the inmates are effectively indigents for whom the state is making payments, and hence the costs of the services to them qualify as DSH costs. CMS asserts that inmate status is not equivalent to indigence and that CMS's longstanding interpretation of the Act is that the states' duty to provide medical care for prison inmates constitutes a source of third party coverage. Further, CMS asserts that it provided express notice of this position by issuance of State Medicaid Director Letter #02-012 (2002 SMDL) to all states, including New York, as well as providing direct guidance to NYSDOH during a 2002 special financial management review. The 2002 SMDL explained that state payments for prison inmates are not considered to be payments for indigent patients because the states are obligated to provide for the inmates' needs and the inmates are not therefore without means of support. NYSDOH argues, however, that the failure to publish the 2002 SMDL violated the Administrative Procedure Act, 5 U.S.C. � 551 et seq. (APA), and that CMS's policy was arbitrary, capricious and an abuse of discretion that directly contradicted the intent of the statute.

The Board has repeatedly held that a federal agency's interpretation of the statute which it is responsible for implementing and of the regulations which that agency issues under that statute is "entitled to deference as long as the interpretation is reasonable and the grantee had adequate notice of that interpretation." New York State Dept. of Health, DAB No. 1867, at 15 (2003), quoting New Jersey Dept. of Human Services, DAB No. 1773, at 6 (2001). We therefore consider below whether the interpretation put forward by CMS is a reasonable and [Page 4] permissible one. We then address the question of notice. Finally, we turn to NYSDOH's arguments under the APA.

1. CMS's interpretation is reasonable and permissible.

CMS asserts that CMS's interpretation that inmates in state custody are not indigent patients conforms to the plain language of the statute and to the history and intent of Congress in enacting the provision. NYSDOH contends that a plain reading of the statute instead supports its position that the term "indigent patients" includes any persons without health insurance or third party coverage and that any state payments for such persons cannot be considered insurance or third party coverage.

CMS argues that NYSDOH's claims on their face fail both prongs of the statutory framework which requires that DSH payments be limited to the cost of hospital services provided to individuals who are either (1) eligible for Medicaid or (2) have no health insurance or other source of third party payment. NYSDOH expressly conceded that it had not established Medicaid eligibility for the inmates involved. ⁽²⁾ NYSDOH Ex. 5, at 3. CMS asserts that the inmates have third party coverage for their medical costs in that the State has an obligation to provide for the inmates' needs, including the provision of medical care to them. CMS points to the Eighth Amendment of the Constitution of the United States, which prohibits "cruel and unusual punishment," as the ultimate source of the State's duty to provide care to those in its custody. NYSDOH does not deny that the State is obliged to provide for the inmates' medical care, but contends that such State payments do not constitute third party coverage for this purpose, citing the exception for payments made by a state on behalf of "indigent patients." NYSDOH Br. at 5-6. Since NYSDOH has made no individualized [Page 5] determination of indigence, the question then becomes whether the inmates qualify per se as "indigent patients." ⁽³⁾

CMS contends that the plain meaning of the word "indigent" is "destitute or needy" or "lacking the means of subsistence, impoverished," or poor. CMS Br. at 15, citing CMS Ex. 1 (entry from an unidentified dictionary). This common understanding of the word is generally consistent with definitions in other dictionaries that we reviewed. For example, Webster's II New Riverside (1984) defines "indigent" as "without the means of subsistence: impoverished," or as a "destitute or needy person." Blacks Law Dictionary (8^th Edition) simply explains that an "indigent" is a "poor person." The sense of the word thus seems to focus on the financial poverty of the individual. NYSDOH made no effort to demonstrate the financial status or absence of other financial resources on the part of any of the inmates here.

NYSDOH's proffered alternative reading of the statutory language is problematic. NYSDOH would have us read "indigent patients" as the equivalent of "individuals who either are eligible for medical assistance under the State plan or have no health insurance (or other sources of third party coverage)" in the preceding sentence. NYSDOH Br. at 6. In support of this argument, NYSDOH underlines the introductory phrase to the second sentence of section 1923(g)(1)(A), i.e., "[f]or purposes of the preceding sentence." NYSDOH Br. at 6. It appears that NYSDOH believes that the reference to the preceding sentence somehow supports its claim of equivalence between the groups named in the first sentence and the indigent patients mentioned in the second sentence. The effect, according to NYSDOH, is to treat as excluded by definition as a source of third party coverage any state payments for uninsured persons and Medicaid eligibles, instead of only state payments for indigent persons. Thus, NYSDOH concludes that the "second sentence very clearly and unambiguously states that when the State makes payments to DSH hospitals for individuals who are Medicaid eligible or have no insurance and no third party coverage, those payments are not third party payments." Id. (emphasis in original).

[Page 6] As a matter of drafting, it is difficult to see why, if Congress wished the second sentence to refer only to the two classes of persons mentioned in the preceding sentence, it would do so by introducing a new term ("indigent") which is not identical in scope. Surely, it would be much clearer and more effective to refer to "such individuals" or to repeat the phrases specifying the intended categories or to simply provide that any state payments are not included in third party coverage. The antecedent for the reference to the "purposes of the preceding sentence" is best understood to be the overall purpose of that sentence, which is setting limits on DSH payment adjustments based on the costs of uncompensated care, rather than to the two groups mentioned in the sentence. Uncompensated care is treated under the first sentence of the section as only that care received by persons eligible for Medicaid or lacking any insurance or other source of coverage, and then only after subtracting any payments made on their behalf by Medicaid or by the individuals themselves out of pocket. In that context, the second sentence is best read narrowly to include in the "uncompensated" care calculation services for which a state makes a payment only when they are provided to poor patients, rather than reading the sentence expansively to include all persons for whom the state makes payments, regardless of their financial condition.

NYSDOH also suggests that the words "indigent patients" are effectively synonymous with "Medicaid recipients." NYSDOH Br. at 6. Yet, NYSDOH offers no explanation for how this meaning could be reconciled with NYSDOH's other proposition that the "indigent patients" being referenced here are Medicaid eligibles and others without health insurance (i.e., clearly including those who are not receiving Medicaid or any other coverage for the services provided to them). A clear difference exists between Medicaid eligibles and Medicaid recipients. Cabell Huntington Hospital v. Shalala, 101 F.3d 984, at 985-987 (4^th Cir. 1996) (The court concluded, in interpreting a similar DSH provision under Medicare law which considers the percentage of a hospital's patient days used by "Medicaid eligible" patients, that patient days counted as used by "Medicaid eligible" persons need not be only days for which those persons were entitled to Medicaid payment for the cost of the services, because "there is a clear difference between eligibility for Medicaid payments under state plans and entitlement to them." Id. at 987.). In any case, NYSDOH has not established, or sought to establish, that the inmates were Medicaid recipients, were Medicaid eligibles, or had no alternative sources of insurance or [Page 7] coverage. The State paid for their care simply because they were in State custody. ⁽⁴⁾

Furthermore, NYSDOH's interpretation would conflict with the basic goals of the DSH provisions. This is evident from the legislative history. The House Report from which NYSDOH itself quotes selectively, without acknowledging its impact, explains the reasoning behind the 1993 amendment codified as section 1923(g)(1)(A) of the Act, as follows:

The Committee is concerned by reports that some States are making DSH payment adjustments to hospitals that do not provide inpatient services to Medicaid beneficiaries. The purpose of the Medicaid DSH payment adjustment is to assist those facilities with high volumes of Medicaid patients in meeting the cost of providing care to the uninsured patients that they serve, since these facilities are unlikely to have large numbers of privately insured patients through which to offset their operating losses on the uninsured. It is difficult for the Committee to understand how the payment of a Medicaid DSH payment adjustment to a facility that has no Medicaid inpatients can be justified on statutory or policy grounds. The Committee bill therefore prohibits States from designating a hospital as a Medicaid disproportionate share hospital unless at least 1 percent of the facility's inpatient days are attributable to Medicaid patients.

The Committee is also concerned by reports that some States have made DSH payment adjustments to State psychiatric or university hospitals in amounts that exceed the net costs, and in some instances the total [Page 8] costs, of operating the facilities. . . . The Medicaid program is intended to assist States in paying for covered acute and long-term care services for the poor. In the view of the Committee, use of Federal Medicaid funds for unrelated purposes, such as building roads, operating correctional facilities, balancing State budgets, is a clear abuse of the program.

The Committee bill limits the amount of payment adjustments to State or locally-owned or operated DSH hospitals to the costs (as determined by the Secretary) these facilities incur in furnishing inpatient or outpatient services to Medicaid-eligible patients and uninsured patients, net of any payments received by the facility under Medicaid (other than the DSH payment adjustment) and any out-of-pocket payments received from uninsured individuals. For this purpose, payments made by a State or locality to a hospital for services provided to indigent patients are not treated as a source of third party payment.

H.R. Rep. No. 111, 103^rd Cong., 1^st Sess., at 211-12 (1993) (emphases added); quoted in part at NYSDOH Br. at 7. This statement makes clear that the purpose of the amendment was to constrain the use of federal DSH funding to replace expenditures that the states were obliged to incur apart from providing Medicaid services. ⁽⁵⁾ This supports CMS's argument that the 1993 amendment sought to address perceived abuses of DSH and should be construed to effectuate and not undermine that goal. CMS Br. at 4-6.

The basic scheme described for DSH payments is to assist those hospitals that are serving Medicaid patients and that are also serving a substantial number of other poor patients who lack insurance or other third party assistance. In order that the uncompensated care not drain the hospital's ability to provide quality care to Medicaid patients, Congress provided the DSH payment adjustments up to the limit of the costs of such uncompensated care (for the Medicaid-eligible and uninsured) minus any amounts the hospital received from Medicaid or from the individuals themselves. It is clear from this context that the [Page 9] last sentence of section 1923(g)(1)(A) is intended to provide a narrow exception to the provision in the first sentence excluding costs covered by a third party from the definition of uncompensated care. That exception is only for state payments for services to indigent patients, not for any other state payments for medical services on behalf of persons not shown to be indigent. ⁽⁶⁾

The reasonableness of CMS's interpretation is reinforced by a federal court case addressing the DSH hospital provisions under the Medicare (as opposed to Medicaid) law. The provision involved is not identical, but the court's discussion of the meaning of indigence is instructive. Under one part of the Medicare law, a DSH hospital must show that a specified percentage of its revenues is derived from "indigent care from State and local government sources," excluding payments under Medicare or Medicaid. Section 1886(d)(5)(F)(i)(II) of the Act (emphasis added). The dispute centered on whether state payments for hospital care of prison inmates should be treated as included in this calculation as "indigent care." The court held as follows:

These payments are provided to St. Francis based upon the fact that the patients are inmates, and not based upon the patient's indigent status. Thus, as the plain language of the statute requires that the revenue be provided by State and local government sources to cover indigent patient care, and the funds at issue are not provided for the payment of indigent care, the Secretary properly excluded these funds when evaluating St. Francis' request for DSH status.

St. Francis Medical Center v. Shalala, 1998 WL 230233, at *6 (D.N.J. 1998) (unreported decision). The court noted that the agency reasonably found that prisoners "are not indigent as their basic needs for shelter, food and clothing are provided by the [Page 10] State, not by virtue of their status as indigent, but because of their being in state custody as a result of a criminal conviction." Id. at *7. The court also pointed out that Congress could have chosen to draft language that included the costs of hospitals providing patient care for prison inmates regardless of their financial condition and instead chose to limit the calculation to revenue used for indigent care. Id. We find the court's reasoning persuasive and applicable to the analogous use of "indigent patient" in the Medicaid DSH provision.

Nevertheless, NYSDOH seeks to extrapolate from various references to Medicaid recipients as indigent or low income, that the statute's use of "indigent patients" is equivalent to a reference to those eligible for or receiving Medicaid, who are mentioned in the preceding sentence of section 1923(g)(1)(A). This extrapolation is ill-founded. The term "indigent" refers to an individual's lack of income or financial resources, as we have found. Medicaid eligibility determinations do include financial tests, and that program is intended to serve those who are understood to be needy. See Connecticut Hospital Assn. v. Weiker, 46 F.3d 211, at 213 (2d Cir. 1995) (Medicaid is a "joint federal and state cost-sharing system to finance medical services to indigent persons"); New Jersey Dept. of Human Services, DAB No. 899 (1987)("The purpose of the Medicaid program is to make medical assistance available to the indigent."). We do not agree with NYSDOH, however, that "indigent" is a "synonym for Medicaid recipients" or that the Board has used the term in that way. Cf. NYSDOH Br. at 6. It does not follow from the fact that Medicaid was intended to help certain indigent persons that the categories of Medicaid recipients and indigent persons are coextensive. On the contrary, it is obvious that many indigent persons do not receive Medicaid benefits, since states have flexibility to determine which persons to serve apart from those made categorically eligible by federal law and not every eligible person actually receives benefits. Further, some persons are eligible for Medicaid for reasons apart from poverty, such as the medically needy. The Board cases on which NYSDOH relies for its extrapolation nowhere treat "indigent" as synonymous with Medicaid recipients. In South Carolina Dept. of Health and Human Services, DAB No. 1602, at 3 (1996), for example, the phrase "low income utilization percentage or indigent day utilization percentage" came from that State's Medicaid plan discussion of its treatment of DSH hospital payments and was used by the Board to discuss that plan provision. If anything, the use of the term "indigent" by the Board in context reinforces the conclusion that [Page 11] "indigent" is generally equivalent to low income or poor, not to Medicaid eligibles or recipients. See also Massachusetts Dept. of Public Welfare, DAB No. 867, at 13 (1982); New York State Dept. of Social Services, DAB No. 1036, at 4 (1989). ⁽⁷⁾

The same conclusion applies to the relationship between the indigent and the uninsured, the other category mentioned in the first sentence of section 1923(g)(1)(A) to which NYSDOH tries to equate "indigent patients." NYSDOH offers no basis to conclude that these categories are coextensive, either. Common experience suggests that many persons who lack medical insurance lack adequate financial means to obtain it. Nevertheless, others may choose not to obtain insurance or be otherwise unable to do so, due to unemployment, medical history or other reasons, despite having sufficient resources to rise above indigence. Thus, NYSDOH's efforts to equate the reference to "indigent patients" to the two categories mentioned in the preceding sentence of the statutory provision are unavailing.

Furthermore, canons of statutory construction favor the inference that when legislators choose different words in the same provision the two words are intended to refer to different things. See, e.g., Doe v. Chao, 540 U.S. 614 (2004). We see no reason to construe the reference to "indigent patients" in the strained ways that NYSDOH proposes in an attempt to equate it with Medicaid eligibles or Medicaid recipients or uninsured persons.

NYSDOH also suggests, however, that its reading is the preferable interpretation because Congress might have chosen more specific language if it intended to treat state payments on behalf of inmates as third party coverage. For example, NYSDOH proffers, the statute might have stated that DSH payment adjustments are not available for "payments by states for individuals for whom the state was responsible for food, shelter and/or medical care" or for "payments made by states for their prison inmate population." NYSDOH Br. at 8. Almost any statutory provision could have been framed in a different way, but the existence of alternative formulations does not persuade us that the actual [Page 12] language used does not accomplish the same result. Furthermore, the speculation about alternative language choices cuts both ways. Had Congress meant to exclude state payments for the care of prison inmates from third party coverage, it could certainly have done so by using the term "inmates of public institutions," which is used in another part of the Act (section 1905), rather than excepting only "indigent patients," as it chose for this subsection of section 1923.

Finally, CMS points out that the effect of permitting states to claim DSH payments for hospital services provided to all inmates would be to undermine the statutory restriction on federal payments even for those inmates who are Medicaid recipients. FFP is prohibited in medical services for inmates except for services that they receive as "patients in medical institutions," which CMS has long interpreted to mean inpatient services. CMS Br. at 20-23. In effect, the State's approach would allow it to use federal funds to pay for services received by non-Medicaid-eligible inmates and for services received by Medicaid-eligible inmates for outpatient services. CMS's interpretation reconciles the inmate services and eligibility provisions with the DSH provisions. We find persuasive an interpretation that reads all parts of the Act in manner consistent with each other and with the purposes of the Act. On the other hand, the State's interpretation unreasonably reads one part of the Act in a way that undermines another provision of the same Act.

We conclude that CMS's policy treating "indigent patients" as limited to persons lacking financial resources and not equivalent to prison inmates as a category is, at a minimum, a reasonable and permissible interpretation of the statute, if not compelled by its plain meaning.

2. NYSDOH had ample notice of CMS's policy.

CMS argues that its policy of how to calculate the DSH limit is a longstanding interpretation of which NYSDOH was well aware. Further, CMS argues that it gave NYSDOH specific notice that this policy applies to claims of the kind here and time to come into compliance before CMS enforced the policy through the disallowances at issue here. NYSDOH argues that the basis for CMS's position has not been consistent over time and that the communications to NYSDOH in the course of reviews of claims by New York State ought not to be considered actual notice of a policy which CMS asserts applies to all states.

In support of the claim that its policy is longstanding, CMS points to its disapproval in 2000 of a state plan amendment [Page 13] proposed by Rhode Island which would have made DSH payments based on the costs of hospital care provided to inmates. CMS Br. at 6-7. The rationale for the disapproval was that inmates were "wards of the State" which is obliged to cover their medical and other economic needs. CMS Ex. A, at 1. The disapproval letter concludes that "because these individuals have a source of third party coverage, they are neither eligible for medical assistance nor are they uninsured, and the State cannot make DSH payments to cover the costs of their care." Id.

CMS followed up with the 2002 SMDL, ⁽⁸⁾ which advised as follows:

Section 1923(g) of the Social Security Act establishes a hospital-specific DSH limit. It limits Medicaid payments to the costs incurred during the year of furnishing hospital services by the hospital to individuals who are either eligible for medical assistance under the State plan or have no health insurance or source of third party coverage . . . . Inmates of correctional facilities are wards of the State. As such, the State is obligated to cover their basic economic needs (food, housing, and medical care) because failure to do so would be in violation of the eighth amendment of the Constitution. Therefore, because these individuals have a source of third party coverage, they are not uninsured, and the State cannot make DSH payments to cover the costs of their care.

Further, this conclusion is consistent with Section 1905(a) of the Social Security Act and the regulations at 42 C.F.R. � 435.1008 and 435.1009, which prohibit [FFP] for services, provided to inmates of public institutions. To read 1923(g) to permit additional DSH payments for the costs of prisoner care would directly conflict with this statutory prohibition, and effectively render the statutory prohibition meaningless.

NYSDOH Ex. 7, at 1-2 (2002 SMDL).

NYSDOH argues that the Rhode Island letter does not provide an "analysis of what constitutes insurance or third party coverage" nor any mention of the word "indigent." NYSDOH Reply Br. at 1. NYSDOH further contends that the 2002 SMDL is merely conclusory, [Page 14] again lacking analysis of the terms "insurance," "third party coverage," or "indigent." NYSDOH Reply Br. at 2. In our view, the 2002 SMDL does provide a reason to support its conclusions that a state is a source of third party payments for prison inmates and cannot make DSH payments to cover the costs of inmates' care. The reason given is that the state is obligated to meet the inmates' basic needs. This implies a reading of the statute to mean that, if the purpose of state payments to a hospital is to meet the state's obligation to care for inmates, rather than because they are "indigent," the payments do not fall with the statutory exception for "payments . . . for services provided to indigent patients." Moreover, the second paragraph of the SMDL provides support for this reading by referring to the statutory prohibition on federal funding for services to inmates of public institutions. We do not believe that any brevity in the analysis detracts from the clarity of the 2002 SMDL in communicating that NYSDOH was not entitled to include payment of prison inmate costs in its DSH payment adjustments. If NYSDOH had any uncertainty about the meaning of the terms cited, it could certainly have inquired to CMS. In any case, as we discuss later, NYSDOH received an opportunity to express its concerns and questions and was given direct guidance in response during the special financial management review.

NYSDOH does not identify a single instance in which CMS permitted any state to treat payments for prison inmates as part of the uncompensated costs allowed for DSH calculations. Instead, the only other source of purportedly conflicting CMS policy to which NYSDOH points is a single page from an undated SMDL letter marked "draft." NYSDOH Ex. 10. NYSDOH relies on the following language from that draft letter:

When calculating each hospital's uncompensated care costs in accordance with section 1923(g) of the Act, [CMS] . . . does not recognize prisoners as uninsured, because the prisoners are considered the responsibility of the State.

NYSDOH Ex. 10. NYSDOH suggests that the reference to insurance as the basis for excluding prison inmate costs, rather than indigence, is somehow inconsistent with CMS's other statements and its actions in this case. NYSDOH concludes that an "inadequately analyzed policy with an ever-shifting rationale . . . clearly cannot act as notice to the State of CMS's policy." NYSDOH Br. at 5.

NYSDOH does not explain how or when it obtained this draft document, so there is no basis to find that it caused any [Page 15] confusion at the time these costs were incurred. In any case, we see no material distinction between the explanation that prison inmates are covered by a source of third party coverage and the explanation that they cannot be recognized as uninsured. Both statements merely set out that the state's duty to pay for their care means that inmates cannot be treated as without a source of coverage for their medical care for purposes of determining whether the costs of their care are uncompensated and properly included in DSH calculations.

NYSDOH also asserts that the direct communications from CMS to NYSDOH were unclear or inconsistent. CMS performed a special financial review of NYSDOH's claims for the period from October 1, 2000 through September 30, 2001, and advised New York that DSH payment adjustments could not properly be claimed for care of inmates. NYSDOH Ex. 6. CMS explained that "[b]ecause States are financially liable for their care, inmates are not eligible for Medicaid when receiving services in prison or in the outpatient departments of acute care facilities, do not qualify as uninsured, and have a source of third party coverage." NYSDOH Ex. 6, at 4-5. CMS also stated in an appendix to the report that it does not "consider the inmate population to be indigent." Id. at App. B.

NYSDOH portrays CMS as having shifted the basis for its position in this direct communication from that set out in the Rhode Island letter and the 2002 SMDL. NYSDOH asserts that the latter documents referred only to the role of the state as insurer or third party payor for the inmates without mentioning whether inmates were considered "indigent." This argument overlooks the point that the meaning of "indigent" became an issue only after NYSDOH itself claimed that all of the prison inmates should be deemed to be indigent. In its response to CMS's draft report from the special financial review, NYSDOH asserted that payments by the State Department of Corrections are by definition state payments which NYSDOH reads the statute to preclude from consideration as a source of third party coverage. NYSDOH Ex. 5, at 2. It was in responding to this novel claim in evaluating in the final report of the special financial review the State's comments to the draft report that CMS stated that it did "not agree with the State's interpretation of the statute because it does not consider the inmate population to be indigent." NYSDOH Ex. 6, at App. B. In the same response, CMS announced its decision not to disallow the State's claims for periods prior to issuance of the 2002 SMDL, but warned that after September 30, 2002, "New York will be expected to comply with this policy."

[Page 16] We find CMS's statements about inmates not being per se indigent to be responsive to NYSDOH's comments, but not inconsistent with the underlying basis for the interpretation in the 2002 SMDL, i.e., that the State is a source of third party payments and is obligated to meet the inmates' basic economic needs. While NYSDOH may have continued to disagree with CMS's policy, it cannot credibly claim to have been ignorant of the policy after it recieved the final report of the special financial review.

There is, thus, no question that NYSDOH had actual notice of CMS's interpretation. Even if that interpretation is not the only permissible one, it is, as we have found, certainly a reasonable one. Accordingly, NYSDOH could not reasonably have relied on any alternative interpretation after 2002. We therefore defer to CMS's interpretation and conclude that the disallowances at issue must be upheld.

3. NYSDOH's arguments under the APA are without merit.

NYSDOH makes two arguments challenging the validity of CMS's interpretation of section 1923(g)(1)(A) as set out in the 2002 SMDL under the APA. Neither is persuasive.

First, NYSDOH argues that the APA required that CMS publish the policy as a proposed rule for notice and public comment before enforcing it against any state. NYSDOH Br. at 13-14. NYSDOH acknowledges that interpretative rules and general statements of policy are not covered by the APA notice and comment requirements. Id. at 12. Nevertheless, NYSDOH contends that exceptions to the APA requirements should be construed narrowly and should not be applied to CMS's policy here. Id. NYSDOH reasons that the 2002 SMDL conflicted with prior CMS statements indicating that FFP is available for Medicaid payments for inpatient services on behalf of inmates. Id. at 13, citing NYSDOH Exs. 8 and 9. Hence, according to NYSDOH, the interpretation set out in the 2002 SMDL is such a "dramatic shift in a substantive rule" as to require notice and comment. Id. at 13-14.

NYSDOH's reference to the statutory exception for inpatient services to the general prohibition of any FFP for medical care to inmates of public institutions is a non sequitur here. In no way is this exception in conflict with CMS's interpretation here of the DSH payment provisions in section 1923(g)(1)(A). Section 1905(a)(28)(A) applies to inmates who are Medicaid recipients; section 1923(g)(1)(A) applies to inmates in state custody who have not been determined to be Medicaid eligible. In fact, both provisions were simultaneously applied without conflict in the [Page 17] special financial review that preceded the disallowances here. We therefore disagree that NYSDOH has shown any inconsistency, much less a "dramatic shift." The policy set out in the 2002 SMDL falls squarely within the category of interpretative rules, setting out the agency's understanding of the meaning of the statute which it is charged with implementing without creating any new rights or obligations. See generally Maryland Dept. of Human Resources, DAB No. 1667 (1997) and cases cited therein.

Second, NYSDOH argues that CMS's interpretation is "arbitrary, capricious, and an abuse of discretion." NYSDOH Br. at 15. According to NYSDOH, CMS ignored the plain meaning of the language in the Act simply to achieve its desired result. Id. Given our conclusion above that CMS's interpretation is a reasonable and permissible reading of the statutory language, we conclude that interpretation is not arbitrary or capricious.

Conclusion

For the reasons explained above, the disallowances are upheld in their entirety.

Judith A. Ballard

Sheila Ann Hegy

Donald F. Garrett
Presiding Board Member

1. The current version of the Social Security Act can be found at www.ssa.gov/OP_Home/ssact/comp-ssa.htm. Each section of the Act on that website contains a reference to the corresponding United States Code chapter and section. Also, a cross reference table for the Act and the United States Code can be found at 42 U.S.C.A. Ch. 7, Disp Table.

2. NYSDOH also submitted claims to Medicaid for reimbursement of payments made by the State for inpatient hospital services provided to other inmates whose eligibility had been established. Section 1905(a)(21)(A) of the Act excludes reimbursement for medical services to inmates of public institutions, except when they are admitted as inpatients of medical facilities. See also NYSDOH Ex. 4, at 9. CMS found that $635,787 of the FFP total of $2,988,816 was unallowable because the claims involved outpatient services and NYSDOH processed a voluntary adjustment for the unallowable amount. NYSDOH Ex. 6, at 7. Those claims are not before the Board in this appeal.

3. We note that NYSDOH did not deny that the State is a "third party" to the relationship between the hospitals and their patients. The exception for those state payments made on behalf of indigent patients would be unnecessary, in fact, were the State not otherwise considered a potential source of third party payments. Hence, our discussion is limited to the issue of whether the exception applies to the payments at issue here.

4. CMS reads NYSDOH's arguments as asserting that the term "indigent" is equivalent to "inmate of public institution" and correctly points out that the latter term is defined in the regulations in a manner inconsistent with the meaning of "indigent." CMS Br. at 14, 19-20. The regulatory definition of an inmate focuses on whether the person is living in a public institution, with exceptions for those residing there only for educational or vocational training or while awaiting appropriate placement. 42 C.F.R. � 435.1009; see also CMS policy statements on FFP in inmate medical costs at NYSDOH Exs. 8 and 9. Nothing in the definition or policy statements suggests that financial need is an element of the definition of an inmate of a public institution.

5. NYSDOH agrees that Congress was seeking to limit DSH payments by states to hospitals not serving Medicaid patients, for amounts greater than hospitals' operating costs, and for purposes not related to Medicaid. NYSDOH Reply Br. at 5.

6. NYSDOH questions whether any such persons exist, arguing that even homeless persons in State shelters do not entirely lack the means of subsistence. NYSDOH Br. at 7. Interpreting "indigent" to require a showing of financial need or poverty does not imply that a person must lack any means of subsistence at all in order to be considered indigent. As noted, NYSDOH makes no showing here as to the inmates' financial status. Instead, and without any basis for doing so, NYSDOH relies on the categorical status of prison inmate as a substitute for financial need.

7. Other Board cases cited by NYSDOH merely refer to the "medically indigent" as a subset of Medicaid recipients. See, e.g., Pennsylvania Dept. of Public Welfare, DAB No. 777 (1987). Again, these references by the Board reinforce the conclusion that the categories of "indigent patients" and "Medicaid recipients" may overlap but are not coextensive terms.

8. NYSDOH does not deny that it received the 2002 SMDL prior to the periods involved in the disallowances.