DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: New York State Department DATE: March 13, 1989 of Social
Services Docket Nos. 88-112 88-178 89-37
Decision No. 1023
DECISION
The New York State Department of Social Services (State) appealed three
determinations by the Health Care Financing Administration (HCFA/Agency)
disallowing a total of $1,105,451 in federal financial participation
(FFP) for the period August 1, 1986 through June 30, 1988. The
disallowance represented the difference between the 75 percent enhanced
funding rate for administrative costs attributable to the operation of
the State's Medicaid Management Information System (MMIS) under Title
XIX of the Social Security Act (Act), and the 50 percent FFP rate
generally available for Medicaid administrative costs.
As discussed below, we find that it was within the Agency's discretion
to establish a policy that distinguishes between indirect costs that
originate from the State's Medicaid agency, and would thereby qualify
for the enhanced funding rate, and statewide and department-wide
indirect costs that originate from other sources, which would thereby
qualify only for the normal 50 percent rate. The State had notice of
this policy and is therefore bound by it. Consequently, we uphold the
Agency's disallowance subject to recalculation of the disallowance
amount. See n. 1.
I. Background
In 1972, Congress amended Title XIX of the Act to include enhanced rates
of FFP for administrative costs for, inter alia, the operation of a
MMIS. Section 1903(a)(3)(B) of the Act provides for reimbursement of:
75 per centum of so much of the sums expended during such quarter
as are attributable to the operation of [MMIS] systems . . .
Section 433.15 of 42 C.F.R. implements the various FFP rates for
administrative costs. Section 433.15(b)(4) provides simply:
Operation of mechanized claims processing and information retrieval
systems: 75 percent. . . .
A MMIS is a mechanized claims processing and information retrieval
system, and is defined as:
a system of software and hardware used to process Medicaid claims,
and to retrieve and produce utilization and management information
about services that is required by the Medicaid agency or Federal
Government for administrative and audit purposes. 45 CFR 433.111.
In New Jersey Dept. of Human Services, DAB No. 648 (1985), the Agency
disallowed the same types of costs that are at issue here, i.e.,
statewide and department-wide indirect costs allocated to New Jersey's
MMIS. The Board, in DAB No. 648, rejected the Agency's argument that
some indirect costs were "directly attributable" to the operation
of New
Jersey's MMIS while others were not. In reversing the Agency's
disallowance, the Board concluded, at page 1:
There is no dispute that the statewide and Department-wide indirect
costs in question here are allowable and properly allocated to the
State's MMIS. The only issue is whether FFP in these costs is
available at the enhanced 75% rate for costs "attributable to the
operation" of the MMIS or at the normal 50% administrative rate
under Title XIX of the Act. The Agency relied on a policy
clarification which is not an adequate statement of a policy to
preclude 75% FFP for such costs, in light of prior policy
statements and the applicable cost principles. In essence, if the
Agency intended such a policy, it neglected to clearly inform the
State. . . . [W]e determine that these costs are properly
"attributable to the operation" of the MMIS and thus subject to
enhanced FFP.
In other words, the Board, in DAB No. 648, found that the Agency had not
clearly established, and notified New Jersey of, a policy that limited
the enhanced funding rate only to indirect costs that originated from
the State's Medicaid agency. In addition, in the Board's Ruling on
Request for Reconsideration of DAB No. 648, issued on November 22, 1985,
the Board denied the Agency's request for reversal of the Board's
decision. However, the Board stated:
[T]he question in Decision No. 648 was not whether the Agency was
precluded from stating such a distinction as a matter of policy but
whether the Agency had, in fact, stated such a distinction.
p. 14,
n. 8.
On July 11, 1986, the Agency issued Revision 8 to Part 11 of the State
Medicaid Manual (Revision 8), which became effective on July 31, 1986.
See Agency appeal file, Ex. 1, p. 2. In relevant part, Revision 8
provided:
11275.30 Attributable Costs Under 90-Percent and 75-Percent FFP
for Overhead Costs
Only the direct overhead costs resulting from the operation or
development of an MMIS are eligible for the enhanced FFP rates.
Such costs are usually the non-personnel costs such as electricity,
rent, shared facilities, caused by the operation or development of
the MMIS.
Overhead costs not directly resulting from the MMIS cost center are
reimbursed at the 50-percent FFP rate. Such costs are the statewide
overhead (A-87) costs and the costs associated with the State
agency's overhead functions (personnel staff, budget staff, legal
staff, commissioner's office, etc.) assigned to the MMIS cost
center through the State Agency's cost allocation plan. This
applies also with respect to a fiscal agent's costs.
11275.32 List of Reimbursable Costs for State Systems
Although the functions of the Medicaid Program are addressed by the
MMIS, some Medicaid operations are not part of the automated claims
processing and information retrieval system. In deciding whether
costs should be applied to MMIS, certain issues impinge on the
decision. For the most part, the higher FFP will be granted for
costs directly incurred by the approved MMIS. Regulations at 45
CFR Part 74, Appendix E define direct costs as "those that can be
identified with a specific cost center" such as MMIS. "Indirect
costs are those that have been incurred for common or joint
objectives, and thus are not readily subject to treatment as direct
costs." Costs of shared facilities (which include common computer
hardware, common terminals, buildings, etc. used by the MMIS and
other components) are apportioned by an approved cost allocation
plan. These indirect costs, when directly attributable to the
MMIS, are funded at the higher FFP from 1903(a)(3) funds.
II. Analysis
A. DAB No. 648 Did Not Prohibit The Agency From Denying
Enhanced Funding For The Costs at Issue
The Agency has expressly adopted as its policy in Revision 8 the
position that it took in the New Jersey case. Consequently, the issue
in this case is whether that subsequently announced policy is
reasonable, and therefore within the Agency's authority, in light of the
statutory and regulatory provisions according 75 percent FFP to the
costs of operating an MMIS system. As discussed below, we find that the
Agency's Revision No. 8 policy was a reasonable exercise of the Agency's
authority. Preliminarily, however, we explain why the issue in this
case was not decided in DAB No. 648, as the State argued.
The State asserted, in a motion for summary judgment and in its brief,
that the issue in this case was decided in DAB No. 648. The State
acknowledged that after that decision, the Agency issued Revision No. 8.
The State contended, however, that the Agency's revision attempted not
to define attributable costs but, instead, to divide the attributable
costs into three categories--direct costs, indirect costs directly
attributable, and indirect costs indirectly attributable--and then to
arbitrarily limit reimbursement to 50 percent for the last category of
attributable costs. State's brief, pp. 6-7. The State maintained that
the "Agency's latest attempt to restrict the reimbursement rate set by
statute should once again be rejected by the Board." State's brief, p.
8.
We find that the result in this case is not controlled by the decision
reached in DAB No. 648. In that case, we found that the Agency's
long-standing policy, during the relevant time period, was to pay 75
percent for all statewide and department-wide indirect costs allocated
to the MMIS. Thus, having determined that the Agency had made a policy
choice to allow 75 percent FFP for all of these indirect costs, we found
no basis to conclude, in the absence of a public reversal of that
policy, that some statewide and department-wide indirect costs were less
equal, i.e., more remote, than others and therefore not eligible for 75
percent FFP.
After the issuance of DAB No. 648, however, the Agency implemented a
policy, in Revision No. 8, identified as a "NEW POLICY" that does
expressly preclude 75 percent FFP for indirect costs which do not
originate in the State's Medicaid agency. The holding in DAB No. 648
did not preclude the Agency from this subsequent action. Indeed, what
the Board found in DAB No. 648 was only that the Agency could not use a
non-substantive "clarification" of its policies to create a distinction
between indirect costs, and then base a disallowance on that
distinction. B. The Plain Language of The Act Does Not Contradict The
Agency's New Policy Issued in The State Medicaid Manual
In addition to the State's position that DAB No. 648 had decided the
issue in this case, the State argued that, in any event, Revision 8 was
unauthorized because it directly contradicts the plain language of the
Act by attempting to limit the State's right to reimbursement. It is
undisputed, however, that if Revision 8 is valid, it covers the costs at
issue in this case. The State maintained that the Agency has attempted,
through Revision 8, to limit FFP for MMIS overhead costs which are
clearly attributable to the operation of the MMIS and which thus meet
the statutory requirement for enhanced funding. State's brief, p. 6.
The Agency made several points to support its position that it was free
to develop policy in this area. First, the Agency maintained that the
statute provides only that costs must be attributable to MMIS functions,
without defining or explaining indirect costs or any method of
attributing costs. In other words, the Agency denied the State's
assertion that these costs were clearly recognized by the statute.
Second, the Agency argued that the regulations do not identify any
indirect MMIS operating costs which will be reimbursed at 75 percent.
Of the regulations that describe costs which will receive enhanced FFP,
the Agency asserted that 42 C.F.R. 432.50(b)(2) specifies only that
personnel engaged directly in the operation of mechanized claims
processing and information retrieval systems will receive 75 percent
FFP. That regulation does not, however, address the issue of what
indirect costs, if any, are eligible for the higher rate of FFP.
Agency's brief, pp. 10-11. More importantly, the Agency stated:
The expansion of the 75% FFP rate into reimbursement of some
indirect costs rests solely on the applicable sections of the State
Medicaid Manual. At the time of the disallowance in question the
operative issue of the Manual was Revision 8. This Manual
represents the final level of interpretation, by the Department, of
the specifics of the statute. P. 11.
The Agency asserted that under the statute and regulations enhanced FFP
is available only for those costs which are directly attributable to the
operation of the MMIS and that the final phase in implementing the
intent of Congress is found in the departmental manuals. In the present
case, the Agency argued that the State Medicaid Manual is the sole
authority enabling the State to receive an enhanced reimbursement rate
for any indirect costs, and that Revision 8, the applicable provision in
the manual, does not authorize 75 percent FFP in this case.
We agree with the Agency that the statute does not define "attributable"
costs or provide any method for attribution that would mandate including
indirect costs. Moreover, there is no indication that by using the term
"attributable", Congress intended to so foreclose the Agency's
discretion to implement the enhanced reimbursement authority that it is
required to provide for 75 percent FFP for each and every cost allocated
to the MMIS cost center using standard government cost principles.
Thus, we find that while the statute does not compel the distinction
made by the Agency, neither does it preclude this distinction by
creating, as the State contends, an absolute entitlement to enhanced
reimbursement for the expenditures in this case.
Indeed, a review of section 1903(a)(3)(B) of the Act shows that the
provision, on its face, does not support the State's position. The
provision states only that reimbursement will be "75 per centum of so
much of the sums expended during such quarter as are attributable to the
operation of [MMIS] systems . . . ." Contrary to the State's argument,
what the statute provides is the general standard to be applied, i.e.,
that costs that are attributable are to be reimbursed at the enhanced
rate. What the Agency did, in Revision 8, was establish a guide for
determining which indirect costs qualified for enhanced funding within
the ambit of the statutory term "attributable." Why the Agency succeeds
in this case, and did not in DAB No. 648, is because the Agency
affirmatively expressed its policy to the State in Revision 8. Indeed,
the Agency had initially stated the availability of 75 percent FFP for
all indirect costs in its policy guidance. We see no basis for
concluding that the Agency cannot change its policy judgment by means of
another, later policy issuance.
Contrary to the State's position, we find that the Agency's policy to
limit indirect cost reimbursement is, in fact, consistent with the
Agency's overall policy of regarding a relatively narrow and
circumscribed group of costs as being attributable to the operation of
the MMIS. Indeed, this type of policy decision, which requires a close
internal review, Congress generally leaves to the Agency. Moreover, the
Agency is not required to adopt only policies which maximize the amount
of FFP paid a state. The State would have us find against the Agency
here, in essence, because Revision 8 is less advantageous to it; this is
simply unpersuasive.
The Board has previously held that actual notice of an agency's
reasonable policy interpretation is sufficient to bind a state to its
terms. See New York State Dept. of Social Services, DAB No. 788 (1986),
and cases cited therein. Clearly, the State was aware of the Board's
previous ruling in DAB No. 648, and the Agency's subsequent issuance of
Revision No. 8. Moreover, we find no basis in the State's arguments to
conclude that the Agency has exceeded its authority. If the Agency's
exercise of authority is reasonable, the Board will not substitute its
judgment for the Agency that is designated to administer the program.
See, California Dept. of Social Services, DAB No. 742 (1986), at p. 2.
Therefore, we reject the State's arguments.
Conclusion
Based on the foregoing, we uphold the Agency's disallowance, subject to
the recalculation as discussed above.
______________________________
Norval D. (John)
Settle
______________________________
Alexander G.
Teitz
______________________________
Cecilia Sparks
Ford Presiding
Board