DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: New Jersey Department of DATE: July 19, 1989 Human Services
Docket No. 88-212 Decision No. 1071
DECISION
The New Jersey Department of Human Services (State or New Jersey)
appealed a determination by the Health Care Financing Administration
(HCFA or Agency) disallowing $71,014 in federal financial participation
(FFP) claimed for the period August 1, 1986 through September 30, 1987.
HCFA determined that the State had claimed at an enhanced FFP rate of 75
percent indirect administrative costs that were properly claimed at the
50 percent FFP rate available generally for administrative costs under
Title XIX (Medicaid) of the Social Security Act (Act). HCFA disallowed
the amount of New Jersey's claim that exceeded FFP at the 50 percent
rate.
The HCFA determination was based on a review of New Jersey's FFP claims
for indirect costs allocated to the operation of the State's Medicaid
Management Information System (MMIS). HCFA disallowed $64,028 in FFP
for statewide and department-wide overhead costs and $6,986 in FFP for
department-wide and Division of Medical Assistance and Health Services
(DMAHS) training costs. The disallowed costs had been allocated to MMIS
cost centers based on staff count or salary costs. This dispute
concerns a new HCFA policy applying the 75 percent FFP rate to direct
overhead costs of MMIS operation and the 50 percent FFP rate to
statewide and department-wide overhead costs of MMIS operation.
The disallowance of statewide and department-wide overhead costs was
recently considered in New York State Dept. of Social Services, DAB No.
1023 (1989). In New York, the Board held that it was within the
Agency's discretion to establish a policy that distinguishes between
indirect costs of a state's Medicaid agency (here, DMAHS) that would
qualify for enhanced reimbursement and statewide and department-wide
costs (A-87 costs) which would qualify only for the 50 percent rate.
Accord, Georgia Dept. of Medical Assistance, DAB No. 1055 (1989).
Based on the discussion below, after consideration of the arguments
advanced here by New Jersey, we affirm our decision in New York and
apply it to this case. Accordingly, we uphold the $64,028 FFP
disallowed for statewide and department-wide overhead costs allocated to
the operation of the MMIS.
However, a new matter is presented here with regard to the disallowance
of department-wide and DMAHS training costs. In light of the express
availability by regulation of 75 percent FFP for training costs, we
conclude that this record does not support a conclusion that the general
proscription in HCFA's policy concerning FFP rates for overhead costs
applies. Accordingly, we reverse the $6,986 FFP disallowed for training
costs.
Background
In 1972, Congress amended Title XIX to include enhanced rates of
reimbursement for administrative costs for, inter alia, the operation of
an MMIS. Section 1903(a)(3)(B) of the Act provides for reimbursement
of:
75 per centum of so much of the sums expended during such
quarter as are attributable to the operation of [MMIS] systems .
. . .
Section 1903(a)(7) of the Act provides for reimbursement of:
an amount equal to 50 per centum of the remainder of the amounts
expended . . . as found necessary by the Secretary for the proper
and efficient operation of the State plan.
Section 433.15 of 42 C.F.R. implements the various FFP rates for
expenditures for administration. Section 433.15(b)(4) provides simply:
Operation of mechanized claims processing and information
retrieval systems: 75 percent. . . .
In the subpart of the regulations implementing the MMIS requirements,
MMIS is defined as:
a system of software and hardware used to process Medicaid
claims, and to retrieve and produce utilization and management
information about services that is required by the Medicaid
agency or Federal Government for administrative and audit
purposes. 45 C.F.R. 433.111.
"Operation" is defined as:
the automated processing of claims, payments, and reports.
"Operation" includes the use of supplies, software, hardware,
and personnel directly associated with the operation of the
mechanized system. 45 C.F.R. 433.111.
In New Jersey Dept. of Human Services, DAB No. 648 (1985), the Agency
had disallowed the same costs that are at issue here, namely statewide
and department-wide indirect costs allocated to New Jersey's MMIS. In
that decision, the Board rejected the Agency's argument that some
indirect costs were "directly attributable" to the operation of New
Jersey's MMIS while others were not. The Board found that the Agency
had not clearly established and notified New Jersey of a policy that
limited the enhanced funding rate only to indirect costs that originated
from a state's Medicaid agency. In the Board's Ruling on Request for
Reconsideration of New Jersey, issued on November 22, 1985, the Board
denied the Agency's request for reversal of the Board's decision; the
Board stated, however:
[T]he question in [New Jersey] was not whether the Agency was
precluded from stating such a distinction as a matter of policy but
whether the Agency had, in fact, stated such a distinction.
Ruling on Request for Reconsideration (1985), p. 14, n. 8.
On July 11, 1986, the Agency issued Revision 8, effective on July 31,
1986. Revision 8 to Part 11 of the State Medicaid Manual at sections
11275.30 and 11275.32 (Revision 8), New Jersey Appeal File, Exhibit
(Ex.) 10. In relevant part, Revision 8 provides:
11275.30 Attributable Costs Under 90-Percent and 75-Percent FFP
for FFP for Overhead Costs
Only the direct overhead costs resulting from the operation or
development of an MMIS are eligible for the enhanced FFP rates.
Such costs are usually the non-personnel costs such as electricity,
rent, shared facilities, caused by the operation or development of
the MMIS.
Overhead costs not directly resulting from the MMIS cost center are
reimbursed at the 50-percent FFP rate. Such costs are the
statewide overhead (A-87) costs and the costs associated with the
State agency's overhead functions (personnel staff, budget staff,
legal staff, commissioner's office, etc.) assigned to the MMIS cost
center through the State agency's cost allocation plan. This
applies also with respect to a fiscal agent's costs.
11275.32 List of Reimbursable Costs for State Systems
Although the functions of the Medicaid Program are addressed by the
MMIS, some Medicaid operations are not part of the automated claims
processing and information retrieval system. In deciding whether
costs should be applied to MMIS, certain issues impinge on the
decision. For the most part, the higher FFP will be granted for
costs directly incurred by the approved MMIS. Regulations at 45
C.F.R. 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.
Summary of the Board's determinations in New York State Dept. of Social
Services, DAB No. 1023 (1989)
The Board first determined in New York that the result there was not
controlled by the decision reached earlier in New Jersey. The Board
stated:
. . . the result in this case is not controlled by the decision
reached in [New Jersey]. In that case, we found that the Agency's
long-standing policy, during the relevant time period, was to pay
75 percent for all statewide and department-wide indirect costs
allocated to the MMIS. Thus, having determined to allow 75 percent
FFP for all of these indirect costs, we found no basis to conclude,
in the absence of a public reversal of that policy, that some
statewide and department-wide indirect costs were less equal, i.e.,
more remote, than others and therefore not eligible for 75 percent
FFP.
After the issuance of [New Jersey], however, the Agency implemented
a policy, in Revision No. 8, as a "NEW POLICY" that does expressly
preclude 75 percent FFP for indirect costs which do not originate
in the State's Medicaid agency. The holding in [New Jersey] did
not preclude the Agency from this subsequent action. Indeed, what
the Board found in [New Jersey] was only that the Agency could not
use a non-substantive "clarification" of its policies to create a
distinction between indirect costs, and then base a disallowance on
that distinction. New York, supra, p. 5.
The Board then determined that the Agency's new policy, Revision 8, was
not contrary to the plain meaning of the Act. The Board agreed with the
Agency that the statute does not define "attributable" costs or provide
any method for attribution that would mandate including indirect costs.
The statute provides only that reimbursement will be "75 per centum of
so much of the sums expended during such quarter as are attributable to
the operation of [MMIS] systems . . . ." The Board found that:
what the statute provides is the general standard to be applied,
i.e., that costs that are attributable are to be reimbursed at the
enhanced rate. What the Agency did, in Revision 8, was establish a
guide for determining which indirect costs qualified for enhanced
funding within the ambit of the statutory term "attributable." Why
the Agency succeeds in this case, and did not in [New Jersey], is
because the Agency affirmatively expressed its policy to the State
in Revision 8. . . . We see no basis for concluding that the
Agency cannot change its policy judgment by means of another, later
policy issuance. New York, supra, p. 8.
The Board also dismissed New York's arguments that because its cost
allocation plan was developed in accordance with the guidelines of
Office of Management and Budget (OMB) Circular A-87, the claims for
costs of the MMIS, both direct and allocable indirect costs, should be
entitled to 75 percent FFP. The Board indicated that OMB Circular A-87
is a guide for state and local government agencies and contains cost
principles and procedures for establishing cost allocation plans and
indirect cost rates for grants and contracts with the Federal
Government, but the Circular does not set FFP rates or govern an
Agency's implementation of its statutory authorities. New York p. 8, n.
5; see OMB Circular A-87, Att. A, A. 1.
The Board found that the Agency's policy to limit indirect cost
reimbursement was consistent with the Agency's overall policy of
regarding a narrow and circumscribed group of costs as being
attributable to the operation of the MMIS. The Board further determined
that where a state had actual notice of the Agency's reasonable policy
interpretation, the Board will not substitute its judgment for the
Agency's.
Analysis of New Jersey's Arguments
Upon examination of New Jersey's arguments, we conclude that there is no
reason to disturb our holding in the recent New York case. In general,
New Jersey's arguments are refinements of those raised by New York. Our
New York decision found specifically that the policy adopted in Revision
8 was consistent with the statute and that, while Revision 8 may be
different from the Agency's prior policy, the Agency could change that
policy with notice to the state. Below, we address New Jersey's
arguments and explain why we are not persuaded that our New York
decision was wrong.
Whether HCFA's Revision 8 policy is contrary to OMB Circular A-87 and
operates to deprive the State of reimbursement it is entitled to by
statute
New Jersey argued that the Revision 8 policy is contrary to the express
availability of an FFP rate mandated by statute. While we addressed
this in our recent New York case, New Jersey articulated its point
somewhat differently so that we again address it here.
New Jersey objected to the terminology employed by the Agency, asserting
that the language of the Manual provision is imprecise from an
accounting standpoint. New Jersey referred specifically to the Agency's
use of an "absurd cost classification," i.e., "indirect costs
directly
attributable to the operation" of MMIS. New Jersey Brief, p. 12. While
the Agency's terminology may be flawed in a strict accounting sense,
this alone does not defeat the policy restricting the reimbursement at
enhanced rates for certain indirect costs. The fact that from an
accounting standpoint all indirect costs properly allocated to a
particular cost objective are considered to benefit that objective is
not in and of itself enough to support the payment of an enhanced
reimbursement rate. Essentially, the Agency is interpreting
"attributable" to mean something different from allocable. Any possible
confusion in what the Agency meant is overcome by the Agency's specific
identification of what types of costs it would consider not to be
"directly attributable" to an MMIS. In our earlier New Jersey case,
we
concluded that the distinction that the Agency drew was neither stated
nor implied on the face of the regulations. We affirm that conclusion.
Nevertheless, there is now an express distinction drawn by the
applicable policy, however unartfully stated.
New Jersey cited one of the Board's conclusions from the earlier New
Jersey case:
Development of a cost allocation plan causes a certain portion
of the total allowable indirect costs to be "regarded as
resulting from" or "considered as caused by" each particular
cost objective. New Jersey Brief, p. 15.
Thus, concluded New Jersey, under the enhanced reimbursement provisions
of the Act, all indirect costs are subject to the enhanced rate as
attributable costs. We disagree. The statute speaks of "attributable
costs" when providing for enhanced reimbursement. Attributable connotes
a close association. This statutory language contrasts with the basic
reimbursement provision for 50 percent FFP, which speaks simply of "the
remainder of the amounts expended." Thus, the statute on its face
anticipates the exercise of discretion in the designation of those
"closely associated" costs considered subject to the enhanced
reimbursement provisions.
The Board soundly rejected the Agency's prior application of the type of
distinction that it drew here, since we found no basis in the Agency
regulations or existing policies for such a distinction. Now, we
similarly soundly reject the State's view that the Agency was not
empowered to establish such a distinction by means of the Manual
provision at issue here.
We regard Revision 8 as a permissible application of the provisions for
the payment of FFP stated in the Act and its implementing regulations.
While such a distinction is not stated on the face of the statute or of
the regulations, neither is it precluded. What we are dealing with here
is enhanced reimbursement, not the availability of reimbursement at all.
The State will receive at least the 50 percent rate for these costs. As
the Board has previously said, only the 50 percent rate is paid unless a
State can demonstrate that the enhanced rate is clearly available. See,
e.g., New York State Dept. of Social Services, DAB No. 1008 (1989).
While the Agency earlier made the choice to implement a policy providing
for 75 percent reimbursement for all indirect costs of MMIS operation,
it could certainly alter this policy, with timely notice, by means of a
comparable issuance. As we found in New York, such a distinction is
consistent with the Agency's long-standing view that only certain
narrowly circumscribed activities make up the "operation" of the MMIS.
MMIS "operation" encompasses, by regulation, only certain directly
associated activities. While the Agency previously applied that concept
only to direct costs, the Agency is not precluded from narrowing the
scope of those indirect costs regarded as attributable and thus eligible
for enhanced reimbursement. The enhanced reimbursement provision was
intended as an incentive to the states to use MMIS systems. Statewide
and department-wide costs are a type of cost which would be incurred
regardless of whether a state used an MMIS system so that the Agency
could reasonably find them too remote to qualify for 75 percent FFP.
The Agency's rationale for this conclusion was stated during the prior
Board proceedings in New Jersey. The Agency's intent to implement such
a distinction was clear from the Manual provisions at issue here. In
this regard then, we are not persuaded by New Jersey's arguments that
the Agency was acting improperly so that the Manual revision is invalid
as a statement of policy.
Whether HCFA lacked the authority to effect this change or was required
to use notice and comment rulemaking
New Jersey argued that the Agency was acting beyond the scope of its
authority "in attempting to modify, rather than clarify, sections of the
regulations through revisions to the Medicaid Manual." New Jersey
Brief, p. 23 (emphasis in original). We disagree. Such a distinction
need not be drawn on the face of the statute or its implementing
regulations to be proper. We regard this level of detail as subject to
the Agency's explanation of how it will apply the basic provisions of
the statute and regulations, so long as that explanation is consistent
with the wording of the statute and regulation.
New Jersey argued both that the Agency lacked the authority to effect
this policy and that, even if the Agency were so authorized, it could do
so only by means of notice and comment rulemaking. It is amply clear
from our recent New York decision that we have concluded that the Agency
had the authority to establish this policy; whether notice and comment
rulemaking procedures were necessary is, however, a new issue which we
discuss below.
It was a basic premise of our recent New York decision that a policy
interpretation established by informal means could be changed in the
same way. We concluded that neither the statute nor the regulations
mandated any particular FFP rate for indirect costs--leaving it to the
Agency's discretion to establish the appropriate treatment of the costs
at issue here.
New Jersey argued that the Manual provisions at issue here were a
substantive modification of the law, restricting entitlements, so that
notice and comment rulemaking procedures were required under the
Administrative Procedure Act (APA), 5 U.S.C. 551, et seq. Under section
553(b) of the APA, interpretative rules are excepted from notice and
comment rulemaking procedures. Although the courts have found the
distinction between legislative and interpretative rules to be
"tenuous," "fuzzy," or "baffling" and to require
a case-by-case
analysis, interpretative rules are generally regarded as explaining the
meaning given by an agency to a statute or rule it administers.
Community Nutrition Institute v. Young, 818 F.2d 943 (D.C. Cir. 1987).
Here, the Agency was explaining how it would apply the statutory and
regulatory provisions providing for enhanced reimbursement to a specific
type of administrative cost. We have determined previously that the
statutory and regulatory provisions here would permit either HCFA's
prior policy or its new policy. We conclude then that the Agency by
Revision 8 engaged in the classic interpretative function of filling in
details not otherwise specified by the statute or regulation. See Maine
Dept. of Health Services, DAB No. 712 (1985).
This case can be distinguished from Brow v. Secretary of Health and
Human Services, 627 F. Supp. 1467 (D. Vt. 1986) on which New Jersey
relied. In Brow, the manual directive in question changed the treatment
of resource limits in calculating the amount of an individual's SSI
(Title XVI of the Act) benefit. The court relied on the rule's effect
on "low income people like plaintiff who are financially dependent upon
SSI benefits" and concluded that the "directive is not in any way
merely
explanatory" of the statute but rather it changed "existing rights
and
obligations." 627 F. Supp. at 1471. The court found that the manual
provision was a substantive rule, invalid for failure to follow notice
and comment rulemaking procedures. Revision 8, however, explained
HCFA's interpretation of a statutory term; its only effect was to apply
the enhanced reimbursement provision to a narrower range of
administrative costs. Moreover, Revision 8 affects only a relatively
insignificant portion of the State's overall Medicaid grant. Thus, we
conclude that the case cited by New Jersey is not authority for a
conclusion that Revision 8 is a legislative rule requiring notice and
comment procedures.
Thus, we conclude that notice and comment rulemaking procedures were not
required for Revision 8, an interpretative rule. Furthermore, as we
stated in New York, the Board has held that it would uphold an Agency
interpretation so long as that interpretation is reasonable and the
State had timely notice.
Whether the Board Erred in New York
New Jersey argued that the Board erred in New York since it had
established in New Jersey and the reconsideration ruling certain
criteria applicable to a change in policy which the Agency failed to
meet in issuing Revision 8. Specifically, New Jersey alleged that the
Board required both that there must be a "basis" for such a distinction
and that the policy must on its face explain "that some indirect costs
are directly attributable while others are not." New Jersey Reply
Brief, p. 2, citing p. 6 of New Jersey and p. 17 of the reconsideration
ruling. While we do not accept New Jersey's assertion that we set
criteria which were, in essence, pre-conditions to the valid issuance of
Revision 8, we will address New Jersey's argument.
We find that Revision 8 itself provides the basis for such a
distinction. The point that we made in the reconsideration ruling was
that the applicable policy did not establish the distinction that the
Agency sought to apply; now it does. Moreover, the language of Revision
8 states that "[o]nly direct overhead costs resulting from the
operation" of the MMIS qualify for enhanced reimbursement, in contrast
to "statewide overhead (A-87) costs and the costs associated with the
State agency's overhead functions" which qualify for 50 percent FFP.
This language is sufficient explanation to apprise the State that the
Agency was in fact applying the enhanced reimbursement provisions only
to certain indirect costs and to constitute notice that the Agency
regarded some indirect costs, but not others, as closely associated with
MMIS operation.
The State also objected that the language of the revision made a
functional distinction while the Board had affirmed a distinction stated
in terms of where the indirect costs originate, i.e., that statewide and
department-wide indirect costs do not qualify for enhanced reimbursement
while indirect costs which originate in the state Medicaid agency will
qualify. New Jersey asserted that it could not tell from the language
in Revision 8 which costs the Agency intended to cover. This
disallowance, however, covers statewide and department-wide indirect
costs, the same costs that were at issue in the prior New Jersey case.
The Agency thus applied the same distinction it had before. So, the
Agency's use of a functional description in the Manual made no practical
difference for purposes of this case. Moreover, since the Manual also
applies to states with different organizational structures, the
functional description helps assure that like costs are treated the same
from state to state. See Georgia, supra.
Accordingly, the points made by New Jersey are not a basis for
concluding that the Board erred in its recent New York decision.
Training costs
The Agency also disallowed the difference between 75 percent and 50
percent reimbursement, $6,986, for department-wide and DMAHS training
costs allocated to MMIS operation. The Agency review report did not
separately discuss these training costs. The Agency report relied only
on a general principle that "[o]verhead costs not directly resulting
from the MMIS cost center should be reimbursed at the 50 percent rate."
"Special Review" of June 1988, New Jersey Appeal File, Ex. 3, p. 15a.
Section 432.50 of 42 C.F.R. provides:
(a) Availability of FFP. FFP is available in
expenditures for salary or other compensation, fringe
benefits, travel, per diem, and training, at rates
determined on the basis of the individual's position, as
specified in paragraph (b) of this section.
(b) Rates of FFP. . . . (2) For personnel engaged
directly in the operation of mechanized claims
processing and information retrieval systems, the rate
is 75 percent. (Emphasis added.)
HCFA's disallowance letter described the training costs at issue as not
directly resulting from the MMIS cost centers. New Jersey Appeal File,
Ex. 4. HCFA argued that the process of allocating training costs--
is the same type of broad attribution of Departmental overhead
which the definitions found in Revision 8 to the State Medicaid
Manual preclude as indirect costs not directly related to the
operation of the MMIS center. These costs are applied to the
MMIS center only in the proportion which the training hours for
the entire Medical Assistance Division bear to the total
training for the Department. This is precisely the type of
broad Department wide overhead which the Board in [New York]
found that HCFA had properly disallowed. HCFA Brief, p. 20 and
21.
We conclude that the analogy HCFA drew between training costs and
statewide and department-wide (A-87) costs is unsound and, therefore,
not a sufficient basis for upholding this portion of the disallowance.
Training is not identified in Revision 8 as an overhead function for
which only 50 percent FFP is available. Apparently, the basis for the
Agency's determination was only that training costs and statewide and
department-wide overhead costs are allocated to MMIS operation in a
similar fashion. However, a state may allocate via an approved CAP a
variety of different types of costs. Here, the CAP provides for the
allocation of training costs (including costs which originate in DMAHS)
based on staff count. This approved allocation established a specific
relationship between these training costs and MMIS operational
personnel. Moreover, there is no finding here that there were other
training costs which the Agency found to be directly related while these
costs were more remote. The Agency did not find that the costs were for
training unrelated to the employees' MMIS operational duties or that
somehow the allocation did not equitably reflect the costs of training
actually received.
While the Agency sought to apply to training costs the general
proscription against 75 percent FFP for statewide and department-wide
overhead costs properly allocated to MMIS operation but considered too
remote from the MMIS cost centers, it stated an insufficient rationale
for doing this. In light of the express provision in the regulation for
75 percent FFP for training costs for personnel engaged directly in MMIS
operation, the Agency cannot base a disallowance on a conclusory finding
that training costs are allocated in a fashion similar to statewide and
department-wide (A-87) costs.
Conclusion
Based on the foregoing, we uphold the disallowance of $64,028 FFP for
statewide and department-wide overhead costs, and reverse the
disallowance of $6,986 FFP for training costs.
_____________________________ Judith A. Ballard
_____________________________ Norval D. (John) Settle
_____________________________ Cecilia Sparks Ford Presiding
Board