Oregon Department of Human Resources, DAB No. 1298 (1992)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT:  Oregon Department of  Human Resources

DATE:  January 31, 1992
Docket No. 91-92
Decision No. 1298

DECISION

The Oregon Department of Human Resources (State) appealed the
disallowance by the Health Care Financing Administration (HCFA) of
$1,220,718 in Federal financial participation (FFP) claimed under Title
XIX of the Social Security Act (Medicaid) for the period September, 1983
through February, 1990.  HCFA disallowed the federal share of $2,012,706
transferred from the Oregon Motor Vehicle Accident Fund (MVAF) to the
State Medicaid agency on the basis that the funds were applicable
credits that reduced the costs of the State's Medicaid program. 1/

We reverse the disallowance in full.  We conclude both that the MVAF
funds qualified as the State's share to be used in claiming FFP under
HCFA's Medicaid-specific rule  and that the funds were not applicable
credits as described in Office of Management and Budget Circular A-87
(OMB A-87).

Background

The MVAF reimburses certain medical providers for some of the costs of
treating eligible indigent patients who are injured in motor vehicle
accidents.  It is funded by a fee imposed on each Oregon driver's
license issued or renewed.  The fee was fifty cents at the time the MVAF
was established in 1941 and was raised to four dollars in 1981, its
level at the time this appeal was filed.  Payment from the MVAF is made
directly to specified providers of services to indigent patients. 2/

Prior to the time period at issue in this appeal, the MVAF was treated
as a prior resource for Medicaid eligible individuals injured in motor
vehicle accidents.  Medical providers billed the MVAF prior to billing
Medicaid, and the amount of MVAF funds received on behalf of a Medicaid
recipient were deducted from Medicaid's payment on the claim.  In 1983,
Oregon changed the operation of the MVAF and its relation to the
Medicaid program.  Legislation governing the MVAF, Oregon Revised
Statutes (Or. Rev. Stat.) Ch. 445, was amended to preclude the MVAF from
paying claims on behalf of individuals who are eligible for Medicaid.
1983 Or. Laws Ch. 126, Sec. 3, codified at Or. Rev. Stat. 445.270.  The
MVAF was no longer available as a prior resource, and the amounts that
it had paid on behalf of Medicaid recipients were now paid by Medicaid.
To cover the State's share of the costs of treating Medicaid recipients
injured in motor vehicle accidents who were no longer eligible for MVAF
benefits, the 1983 amendments authorized the quarterly transfer of funds
from the MVAF to AFSD.  1983 Or. Laws Ch. 126, Secs. 3(2) and 5.  The
monies transferred from the MVAF to AFSD were used as part of the
State's share of the costs of medical assistance provided under its
State Medicaid plan.  These changes resulted in the disallowance at
issue here.

Initially, $495,675 was appropriated to AFSD out of the MVAF as an
estimate of the State's share of the costs for treating Medicaid
recipients injured in motor vehicle accidents for the 1983-1985
biennium.  This amount was determined by applying the State's share of
the Medicaid match rate to the percent of claims that had previously
been paid by the MVAF for the care of Medicaid recipients.  Beginning in
1985, administration of the MVAF was transferred to AFSD, and the amount
of money transferred from the MVAF was determined based on the percent
of Medicaid hospital and physician trauma claims that were attributable
to automobile accidents.  Affidavit of Hersh Crawford, State Brief
(Br.), Exhibit (Ex.) 3.

The State admitted that an aim of the change in the MVAF program was
that State dollars would be "stretched" by the receipt of FFP in the
costs of care of Medicaid recipients injured in motor vehicle accidents.
State Br., p. 10.  The State legislature had estimated that the initial
transfer of funds from the MVAF to the Medicaid program and the
subsequent receipt of federal funds would improve the MVAF by
approximately $660,000, based on the applicable federal matching rate.
State Br., Ex. 4C.

A HCFA review determined that DHR had received $2,012,706 from the MVAF
for the period September, 1983 through February, 1990. In a letter dated
May 20, 1991, HCFA disallowed $1,220,718, on the grounds that this
amount was the federal share of the applicable credits represented by
the MVAF payments to the State's Medicaid program.

Applicable law

Title XIX of the Social Security Act (Act) (42 U.S.C. 1396 et seq.)
authorizes federal grants to states to aid in financing state programs
which provide medical assistance and related services to needy
individuals.  Any state that wishes to participate in the Medicaid
program must develop and submit a plan that meets certain requirements
set forth by the Secretary for the Department of Health and Human
Services (HHS).  Section 1902(a)(2) of the Act requires financial
participation by states in the cost of authorized services.  A state's
financial contribution, which it uses to claim FFP, is referred to as
the state's share.

The state's share regulation in effect for the most of the time period
at issue in this appeal is found at 42 C.F.R. 433.45 (1990), "Source of
State share of financial participation," added November 12, 1985, 50
Fed. Reg. 46,652.  The regulation provides in relevant portion as
follows:

 (a)  Public funds as the State's share.  (1)  Public funds may
 be considered as the State's share in claiming FFP if they meet
 the conditions specified in paragraphs (a)(2) and (3) of this
 section.  (2)  The public funds are appropriated directly to the
 State or local Medicaid agency, or transferred from other public
 agencies (including Indian tribes) to the State or local agency
 and under its administrative control, or certified by the
 contributing public agency as representing expenditures eligible
 for FFP under this section.  (3)  The public funds are not
 Federal funds, or are Federal funds authorized by Federal law to
 be used to match other Federal funds.

The cost principles of OMB A-87, made applicable to state governments by
45 C.F.R. 74.171, require that allowable costs claimed under a grant
program, such as Medicaid, must "(b)e net of all applicable credits"
Att. A, C.1.g.  A state that has received an applicable credit but not
reduced its allowable costs claimed under Medicaid has received an
overpayment of FFP.  North Carolina Dept. of Human Resources, DAB No.
361 (1982).  Applicable credits are defined at OMB A-87, Att. A, C.3.a:

 Applicable credits refer to those receipts or reduction of
 expenditure-type transactions which offset or reduce expense
 items allocable to grants as direct or indirect costs.  Examples
 of such transactions are:  purchase discounts; rebates or
 allowances, recoveries or indemnities on losses; sale of
 publications, equipment, and scrap; income from personal or
 incidental services; and adjustments of overpayments or
 erroneous charges.

Analysis

HCFA contended that the funds received by AFSD from the MVAF decreased
Oregon's cost of its Medicaid program and were applicable credits as
defined in OMB A-87.  HCFA reasoned that as applicable credits, they
reduced the expenditures of Oregon's Medicaid program, and that HCFA is
entitled to the federal share of that reduction.  HCFA also argued that
excluding Medicaid recipients from receiving MVAF payments violated the
Medicaid program's right to third party recoveries, as well as the
principle that Medicaid is the payor of last resort.  It characterized
the exclusion as unauthorized discrimination against Medicaid
recipients.

Oregon argued that the MVAF funds were not recoveries of Medicaid
program costs or applicable credits, but rather State funds that
qualified as its share of Medicaid expenditures under 42 C.F.R. 433.45.

We address each of HCFA's arguments below.

MVAF funds as the State's share

HCFA did not dispute Oregon's position that the funds transferred from
MVAF to AFSD, the State Medicaid agency, were public funds which met the
conditions for use as the State's share specified at 42 C.F.R.
433.45(a)(2) and (3).  Instead, HCFA contended that since the regulation
states that public funds may be considered as a state's share, it is
left to HCFA's discretion to determine whether funds in a given case
will be so counted.  HCFA asserted that the Board has upheld a
disallowance of FFP in a state's claim for medical assistance, even
though the state met the technical requirements of 42 C.F.R. 433.45,
where abusive and unauthorized practices were found.  West Virginia
Dept. of Human Services, DAB No. 956 (1988).  Here, HCFA contended that
the funds' status as applicable credits and the State's discriminatory
practice of excluding Medicaid recipients from receiving MVAF benefits
supported its exercise of discretion in declining to recognize the MVAF
funds as part of Oregon's share.

HCFA's argument that the word "may" in 42 C.F.R. 433.45(a)(1) confers
the degree of discretion claimed here is not compelling.  It appears
inconsistent with the fact that HCFA set forth specific and rather
inclusive criteria in 433.45(a)(2) and (3).  A reasonable reading of the
regulation as a whole is that HCFA's discretion lies in determining
compliance with those criteria.  Furthermore, in reviewing the preamble
to section 433.45, we find no mention of any intent to establish such
sweeping discretion.  On the contrary, the preamble, which primarily
addresses the use of donations as the state's share, suggests no
conditions on the use of public funds beyond those in (a)(2) and (3).
50 Fed. Reg. 46,652, 46,657 (1985).  While we do not reject in toto
HCFA's argument that the word "may" in the regulation implies some
discretion, we note that even if the argument were accepted at face
value, it would merely beg the question of what criteria HCFA would use
in exercising its discretion.  Here, HCFA has offered as criteria only
the circumstances found in West Virginia.  As explained below, that case
is simply inapposite.

West Virginia involved application of 42 C.F.R. 433.45(b), which
addresses the use of funds donated from private sources as the state's
share; like 42 C.F.R. 433.45(a), the regulation provides that private
donations may be considered as the state's share in claiming FFP.
However, contrary to HCFA's assertion, the Board's decision upholding
the disallowance in West Virginia was not predicated on deference to any
HCFA discretion implied by the use of the word "may."  Rather, the Board
found that the funds in question, which were contributed by provider
hospitals, were not donated because they were not given voluntarily but
were coerced or resulted from inducements by the State.  The Board also
found that the transfers resulted from abusive and unauthorized
practices, including reimbursements in violation of the State Medicaid
plan.  As the funds were not "donated," they did not qualify as the
State's share under the language of the regulation. 3/  Other factors
distinguish West Virginia.  As noted above, the Board found in West
Virginia that the State's reimbursement practices applied as part of its
donation scheme violated the state plan; here, no such violation is
alleged.  The Board also noted that West Virginia, by its donation
program, effectively substituted the hospitals for itself as the federal
government's partner in the Medicaid program.  As explained more fully
in our subsequent discussion of applicable credits and third-party
recoveries, Oregon uses what are unquestionably State funds for its
share of Medicaid expenditures and has not substituted any third party.

We do not agree that our holding in West Virginia stands for the
proposition that HCFA may look behind the receipt of funds by a state to
disallow them as the state's share when they meet the plain language of
42 C.F.R. 433.45.  However, we need not address further HCFA's position
that it may decline to credit funds as a state's share where there are
unauthorized or abusive practices, as we find no evidence of such
practices by Oregon in this appeal.

We are also not persuaded by HCFA's assertion, in an affidavit from the
Branch Chief of its Region X Division of Medicaid Financial Management,
that Oregon's practice of using MVAF funds as part of its share of
Medicaid expenditures is not related to 42 C.F.R. 433.45 because it
predated the regulation, published in November, 1985.  HCFA Br., Ex. B.
The affidavit notes that prior to 42 C.F.R. 433.45, there was no
regulation to allow transfers of funds to the State Medicaid agency.

Prior to the promulgation of 42 C.F.R. 433.45, the only provision
governing the state's share was section 1902(a)(2) of the Act, which
requires state Medicaid plans to provide for state financial
participation in the non-federal share of Medicaid expenditures, in such
amounts as to assure that lack of funds from local government sources
will not adversely affect the provision of services.  This section
contains no limitations or restrictions that would have barred Oregon
from using as its share the MVAF funds, which are raised through a fee
applied to all driver's licenses.

When HCFA adopted the current state share regulation, it acknowledged
that "(t)he definition of "State funds" generally used by States means
funds over which the State legislature has an unrestricted power of
appropriations."  50 Fed. Reg. 46,657 (1985).  This interpretation of
"state funds" as those over which the state legislature has an
unrestricted power of appropriation is the same as that advanced by HCFA
in Texas Dept. of Human Services, Amended DAB No. 381 (1986), where HCFA
cited nearly identical language in a 1974 opinion from its General
Counsel.  Texas, p. 5.

It is not contested that the MVAF was established by Oregon statute, and
that the transfer of MVAF monies to the Medicaid program was authorized
by an act of the State legislature.  State Br., Ex. 5, 6.  HCFA did not
take issue with Oregon's assertion that its legislature could instead
have transferred money from the MVAF to its general fund, and then
increased the Medicaid program's appropriation by the same amount.
State Br., Ex. 3, p. 3.  It is reasonable to conclude that the Oregon
legislature had unrestricted power of appropriation over the MVAF funds,
and that they qualify as State funds eligible to be used as Oregon's
share of its Medicaid expenditures under section 1902(a)(2) of the Act
and the longstanding interpretation of state funds presented by HCFA in
Texas and in the preamble to 42 C.F.R. 433.45.

In Texas, the Board also noted that prior to the promulgation of 42
C.F.R. 433.45, HCFA had never articulated a policy on the use of public
or private donations as the state's share of Medicaid expenditures, and
there was thus a "policy vacuum" on this question.  Texas, pp. 4-6.
That Oregon's funding system predates 42 C.F.R. 433.45 does not limit
its ability to utilize the MVAF funds to claim FFP, as HCFA has shown no
prior policy limiting a state's use of its own funds as its matching
share.  If anything, 42 C.F.R. 433.45 is more restrictive than section
1902(a)(2) of the Act and its general provisions on state funding, as it
imposed specific criteria which funds must meet to qualify as the
state's share.

We thus conclude that the transfer of the MVAF funds to AFSD complied
with the plain language of 42 C.F.R. 433.45(a) and the prior
interpretation of state's share under section 1902(a)(2) of the Act, and
that these funds qualified as Oregon's share for claiming FFP.  These
monies were clearly state or public funds transferred from another state
agency within the meaning of the regulation.  The character of the MVAF
funds as state funds was not destroyed by the fact that the amount
transferred from the MVAF to the Medicaid program was an "estimate of
medical costs related to motor vehicle accidents" (HCFA Br., Att. B, p.
3), or that "the transfers were definitely made in contemplation of
receiving payment on claims."  HCFA Br., p. 6.  Any state's annual
appropriation to its Medicaid agency may be said to be an estimate of
medical costs, made in contemplation of receiving payment on the state's
claim for FFP.  What HCFA assailed appears to be nothing more than a
state's normal process of appropriating to its Medicaid program
sufficient state funds to cover the non-federal share of costs related
to the provision of medical assistance under Medicaid.

Applicable credits

HCFA also contended that the MVAF funds transferred to the State
Medicaid agency and used as part of the State's share for claiming FFP
in medical assistance payments were applicable credits because they
effectively reduced the State's but not the federal share of Medicaid
expenditures.  HCFA reasoned that since the net effect of the transfers
was to decrease the cost to the State for its Medicaid program, the
federal government is entitled to share in the savings.

HCFA argued that Oregon's legislation and its brief in this appeal
described the MVAF with terminology consistent with OMB A-87's
definition and examples of applicable credits.  Or. Rev. Stat. 445.270
describes the MVAF funds as "reimbursing" AFSD, the State Medicaid
agency, for the costs of patient care, and the State admitted that the
purpose of the transfer of MVAF monies was to cover the State match of
the costs of treating Medicaid recipients injured in motor vehicle
accidents. 4/  State Br., Ex. 3.  HCFA asserted that as the State has
taken funds from one source to repay costs paid out of its Medicaid
fund, the MVAF funds are a "recovery" as used in the list of examples of
applicable credits provided in OMB A-87, Att. A, C.1.a.  HCFA further
maintained that even accepting the State's argument that the MVAF funds
were not truly recoveries and thus not included in the examples, they
still constituted applicable credits, as the Board has held that the
examples provided in OMB A-87 are not an exclusive list of applicable
credits, but merely examples.  Pennsylvania Office of the Budget, DAB
No. 1234 (1991).

The determination of whether funds received by a grantee constitute
applicable credits should not turn on whether the grantee, in describing
the funds, has or has not utilized words in the list of examples of
applicable credits provided at OMB A-87, Att. A, C.3.a.  Instead, the
inquiry must focus on whether the questioned payments have the
characteristics of applicable credits as given in OMB A-87's definition
and examples. 5/  The Board has held to be applicable credits payments
which were not explicitly cited in the list of examples, but were within
the "broad categories" created by the other examples.  North Carolina,
supra.

Sources of funds that the Board has found to be applicable credits
comprise several general categories.  They include:

o       Interest received by a state on federal funds (e.g., North
Carolina, supra, and New York State Department of Social Services, DAB
No. 588 (1984), interest on recoveries of overpayments to Medicaid
providers; Utah Dept. of Social Services, DAB No. 750 (1986), and
Tennessee Dept. of Human Services, DAB No. 1054 (1989), interest earned
on child support collections; and Pennsylvania, supra, interest on
federal funds provided for self-insurance accounts).

o       Fees or income generated by federally-funded activities (e.g.,
Maryland Dept. of Human Resources, DAB No. 412 (1983), and Tennessee
Dept. of Human Services, DAB No. 689 (1985), court fees imposed for
processing child support orders).

o       Discounts and refunds received by a grantee as a result of the
expenditure of federal funds (e.g., Maryland Dept. of Health and Mental
Hygiene, DAB No. 400 (1983), discounts on claims from hospitals to which
the state had provided working-capital advances; Area IX Oakland-Macomb
PSRO, DAB No. 528 (1984), and Area IV PSRO of Michigan, DAB No. 651
(1985), refunds of FICA taxes).

o       Unused or excessive federal funds received by a grantee (e.g.,
Montana Dept. of Social and Rehabilitative Services, DAB No. 309 (1982),
uncashed and canceled warrants).

o       Reimbursement for one cost received from two federal programs.
(Louisiana Dept. of Health and Human Resources, DAB No. 327 (1982)).

A common theme in the applicable credit cases (and in the examples of
applicable credits in OMB A-87) is the receipt of monies (or reductions
of expenditures) by a state related to its federally funded program
which, if unaccounted for in the program, would result in a savings or
gain to the state alone.  This characteristic springs from the
description of applicable credits in OMB A-87 as funds or savings which
"offset or reduce expense items allocable to grants. . ."  If a state
has receipts or reductions in expense items allocable to a
federally-funded grant but fails to credit the grant for the receipts or
reductions accordingly, then the state experiences savings which it does
not pass on to the federal funding source as well.

In determining whether there is a nexus between the questioned receipts
and the federally funded program, the applicable credits provision
requires that the character of the receipts must be assessed at the
point that they are received by the state, and not when eventually
credited to the state Medicaid agency, as receipts by a state may be
applicable credits even if never credited to the state Medicaid agency.
North Carolina, supra. 6/

The Board discussed OMB A-87's examples of applicable credits in Hawaii
Dept. of Social Services and Housing, DAB No. 779 (1986), where HCFA
disallowed FFP in the cost of State excise taxes paid by Medicaid
providers; among other arguments, HCFA maintained that the tax receipts
from the providers should have been considered applicable credits
against Hawaii's reimbursements to them.  The Board noted that in the
examples of applicable credits:

     There is a direct link, or nexus, between the credit in those
     situations and the amount to which it must be applied.  For
     example, if the State received a discount or rebate on the purchase
     of a desk for its Medicaid program it could not seek FFP on the
     full retail price.  Similarly, the State would have to subtract
     from its Medicaid expenditures amounts it recovered from a provider
     where it originally paid the provider in error.  Hawaii, p. 6.

The relationship between the credits (the tax receipts) and the amounts
to which they were to be applied (Hawaii's payments to providers and
claim for FFP) was more remote than in the examples in OMB A-87.  The
Board noted that the taxes were not claimed directly by providers but
were included in calculating their Medicaid reimbursement rates, as were
other payments the providers made to the State as costs of doing
business, irrespective of whether they were rendering any services to
Medicaid recipients.  Unlike the examples in the applicable credits
provision, the right of the State to receive excise taxes from providers
did not arise out of the transaction of the State paying the providers.
The Board held that the applicable credits provision of OMB A-87 did not
clearly inform Hawaii that it had to treat the excise tax as an
applicable credit. 7/

The MVAF funds that HCFA claims were applicable credits were raised by
the imposition of a flat fee on all driver's licenses issued or renewed
by the State.  They did not result from the receipt of federal funds by
the State, nor did they arise out of the operation of the Medicaid
program.  As in Hawaii, the right of Oregon to receive fees from its
citizens who apply for and renew driver's licenses did not arise out of
the transaction of the State paying Medicaid providers or claiming FFP
in those payments.  Thus, as in Hawaii, the relationship between the
revenues raised by this fee and the amounts to which HCFA seeks to apply
the revenues is simply too remote. 8/

Even if the MVAF funds are examined not when initially received by the
State, but when transferred to AFSD, the relationship between the funds
and Oregon's claim for FFP (or payments to providers) is no different
than that which generally exists between a state's appropriation to its
Medicaid program and its claim for FFP.  The appropriation must be
sufficient to cover the state's share of program expenditures in
compliance with section 1902(a)(2) of the Act.  As Oregon's MVAF funds
were not attributable to, did not arise out of, and were not generated
by the Medicaid program, they do not qualify as applicable credits.

HCFA stated that Oregon received applicable credits because it had taken
funds from one source to recover or repay costs paid out of its Medicaid
fund for Medicaid clients injured in motor vehicle accidents.  HCFA Br.,
pp. 7-8.  We do not agree with this analysis.  The "source" that Oregon
has taken these funds from is nothing other than the State itself.  The
ensuing analysis of third-party recoveries further reinforces our
conclusion that the MVAF monies were state funds.

As in Hawaii, we conclude that OMB A-87 is simply not definitive and
does not compel the treatment of the MVAF funds as applicable credits,
particularly in light of the more specifically relevant state's share
regulation, the provisions of section 1902(a)(2) of the Act, and HCFA's
prior interpretation of state funds.  Indeed, HCFA has conceded in prior
Board cases that if funds qualify as the state's share, then they are
not subject to the applicable credit cost principle requirements.  See,
e.g., Texas, supra, p. 4. 9/

The MVAF funds as third party recoveries

HCFA also argued that Oregon, "acting as a third party itself," (HCFA
Br., p. 11) is denying Medicaid recipients their right to receive MVAF
benefits directly under section 1912 of the Act, which requires Medicaid
recipients to assign to the state any right they may have to payment or
recovery by third parties.

However, the MVAF, as a component of the State, cannot be a third party
to the State, as the Board has confirmed that a state as a whole must be
viewed as a single unit responsible for the administration of grant
funds.  Louisiana Dept. of Health and Hospitals, DAB No. 1176 (1990), p.
10.  This is apparent from the use of the word "State" in Section
1903(a)(1) of the Act, and from the definition of "grantee" at 45 C.F.R.
74.3. 10/  This position is supported by the holding of the First
Circuit in Massachusetts v. Secretary of HHS, 816 F.2d 796, (1st Cir.
1987), aff'd in part and rev'd in part, Bowen v. Massachusetts, 487 U.S.
879, 108 S.Ct. 2722 (1988), cited by Oregon in its Brief, that a
component of the State, its Department of Education, was not a "third
party" to the State Medicaid agency.  The Court stated that the fact
that the two departments appeared to be third parties to each other was
an artifact of the State's internal organization, which the State could
have altered to place both components in one agency. 11/  The portion of
the decision quoted by Oregon, that Medicaid reimbursement decisions
should not turn on how a state subdivides its social welfare functions
and authority, is particularly applicable here.

As the MVAF is not a third party but a component of the State, the
"third party" that contributes the MVAF funds can only be the residents
of Oregon who receive and renew driver's licenses.  The notion that
state funds raised through a fee or tax of general applicability are
third party recoveries and applicable credits contravenes the state's
share regulation at 42 C.F.R. 433.45 and would render meaningless a
state's ability to raise revenues, as all monies received by a state
from its populace through the power of taxation would potentially be
"applicable credits."

Since the MVAF is not a third party for the purposes of Medicaid
reimbursement, HCFA's argument that Oregon's funding mechanism violated
section 1912 of the Act is unavailing.  Additionally, section 1912 of
the Act requires the assignment to the state of any "rights" to payment
for medical care; here, Medicaid eligible individuals were excluded from
receiving MVAF benefits by Or. Rev. Stat. 445.270 and had no right to
payment from the MVAF.

HCFA also asserted that the net effect of Oregon's action was to
decrease the cost to the State for its Medicaid program.  HCFA Br., p.
7.  Simple logic points to the opposite conclusion.  If the State's
Medicaid program now pays for medical services that were previously paid
for by the State-funded MVAF, then the total costs paid by the Medicaid
program have increased.  HCFA's contention that the cost to Oregon for
its Medicaid program has decreased is untenable as the MVAF is not a
third party, and the monies transferred to AFSD did not constitute a net
gain to the State.

Finally, this Board has recently held that the definition of "resources"
which must be considered in determining the amount of Medicaid benefits
to be awarded an eligible individual does not encompass the receipt of
state-funded services.  California Dept. of Health Services, DAB No.
1285 (1991), pp. 29-33. 12/

Accordingly, we conclude that the MVAF funds were not a third party
recovery by Oregon's Medicaid program.

Section 1903(o) of the Act, Medicaid as the payor of last resort, and
discrimination against Medicaid recipients

HCFA also compared Oregon's exclusion of Medicaid recipients from the
MVAF program to behavior prohibited by section 1903(o) of the Act, which
bars Medicaid payments for services that would have been covered by a
private insurer but for a provision in the insurance contract excluding
coverage for services provided by Medicaid.  The short answer to this
comparison, as Oregon noted, is that the State is not a private insurer
as defined at 42 C.F.R. 433.136(1).  More importantly, private insurance
companies, unlike components of a state, may be third parties from which
payment for medical services may be sought pursuant to section 1912 of
the Act and regulations governing third party liability at 42 C.F.R.
Part 433, Subpart D.

While apparently conceding that Oregon might not have committed a de
facto violation of section 1903(o) of the Act, HCFA asserted that the
State was in violation of the "spirit" of section 1903(o), the principle
of Medicaid as the payor of last resort.  It quoted statements in the
legislative history of section 1903(o) that states are required to
ensure that third parties legally liable to pay for medical care meet
their obligations.  HCFA Br., pp. 12-13.  HCFA also characterized
Oregon's statutory prohibition on paying MVAF benefits to Medicaid
recipients as unauthorized discrimination.

We find little merit in these arguments.  Rather than discriminate
against Medicaid recipients, Oregon's MVAF as it is currently structured
ensures that persons who are needy but fall outside the reach of the
Medicaid program will receive a limited degree of medical care when
injured in motor vehicle accidents.  The effect of HCFA's position would
be to preclude states from instituting any state-funded programs to
provide services to indigents who are not eligible for Medicaid.  We
believe that this is an illogical result not required by the principle
of Medicaid as the payor of last resort.

HCFA misconstrues the Board's holding in Utah Dept. of Health, DAB No.
893 (1987), as supporting its contention that Oregon must first bill
MVAF for medical services to Medicaid recipients before Medicaid can pay
for those services.  In Utah the Board upheld a portion of the
disallowance essentially on the grounds that FFP had been claimed in
services which were not "medical assistance" under the Title XIX of the
Act but were educational activities for which reimbursement was
prohibited.  Additionally, the State had claimed Title XIX FFP for
services which it was required to provide and for which federal funding
was available under other federal legislation.  The State was thus
improperly claiming FFP for one service under two federal programs.
Here, by contrast, there is no statutory requirement that Oregon provide
benefits from its MVAF to Medicaid recipients, and no third party
liability which must be exhausted before Medicaid benefits may be
provided.  The decision in Utah was not based on any rejection of the
First Circuit's holding in Massachusetts v. Secretary, supra, that a
state agency is not a liable third party under the Act.  Utah, p. 11.

HCFA characterized the exclusion of Medicaid recipients from receiving
MVAF benefits as especially egregious in light of the fact that they are
required to pay the same $4.00 driver's license fee as every other
person in the State.  However, persons who are ineligible for both
Medicaid and MVAF benefits must also pay the same fee; in fact, these
persons must pay income and other taxes which fund Medicaid services
even though they do not receive those services.  The notion that
taxpayers must fund assistance or service programs that they may never
have to use is hardly egregious.

Conclusion

Based on the foregoing analysis, we conclude that the funds transferred
from the MVAF to AFSD qualified as Oregon's share of its Medicaid
expenditures and were not applicable credits.  Accordingly, the
disallowance is reversed.

       Donald F. Garrett

       Norval D. (John) Settle

       Cecilia Sparks Ford Presiding Board Member

1.  The State's brief and exhibits indicate that on February 1, 1990,
responsibility for administration of the Medicaid program was shifted
from the Department of Human Resources Adult and Family Services
Division (AFSD), to the Office of Medical Assistance Programs (OMAP),
the successor agency to the AFSD Health Services Section.  For the
purposes of this decision we will refer to AFSD as the State Medicaid
Agency, as it was responsible for administering the Medicaid program for
all but one month of the time period covered by this disallowance.

2.  For the period of July 1, 1981 to December 31, 1982, the MVAF paid
4,525 claims to doctors, hospitals, nurses, pharmacists, physical
therapists, and for ambulances and prosthetic appliances.  The average
cost per claim was $516.37.  State Br., Ex. 4B.

3.  The Board's decision in West Virginia upholding HCFA's refusal to
accept the hospital donations as the State's share was reversed by the
United States District Court for the Southern District of West Virginia
in Lipscomb v. Bowen, 750 F.Supp. 197 (S.D. W. Va. 1989), aff'd sub nom.
Miller v. Hartman, 911 F.2d 723 (4th Cir. 1990).  The court disagreed
with the Board's finding of coercion, and also noted that 433.45 did not
require unconditional donations.  The court held that by requiring that
the donations be voluntary, the Board essentially added new requirements
to the regulation (the court also determined that these requirements had
been contemplated but not adopted when the regulation was drafted).

4.  HCFA assailed Oregon's citation of its legislative history to show
that the MVAF was to be used as a source of the State's share, as the
statute in question is unambiguous in its use of the term "reimbursing"
in describing the purpose of the MVAF payments.  HCFA argued that
"reimbursement" must be viewed in its common meaning, and that it was
clear that the funds were to reimburse the Medicaid agency for the costs
of care of accident victims and were never intended as the State's
matching share of Medicaid monies.  The Agency also characterized the
legislative history cited by Oregon as isolated floor statements, rather
than official committee reports, and noted that these remarks do not
squarely address the issue of the State's share, but rather focus on the
high cost of medical care and lack of resources.

5.  Among other arguments, the State compared the punctuation in the
lists of examples of applicable credits provided in OMB A-87, Att. A,
C.3.a and in OMB Circular A-21, "Costs Principles for Educational
Institutions."  State Reply Br., Affidavit of Brian K. Evans, p. 5.  We
believe that the better inquiry is to determine the essential nature of
applicable credits and apply that determination to the particular funds
at issue.

6.  In North Carolina, the State argued that interest earned on
recoveries from Medicaid providers did not offset or reduce expenditures
because it was part of the State's general fund and beyond the reach of
the State Medicaid agency.  The State also maintained that the interest
resulted from its investment activities and was not attributable to the
Medicaid program.  The Board found the interest to be an applicable
credit as it directly resulted from Medicaid recoveries.  That the State
credited the interest to its general fund instead of the Medicaid
program did not relieve it of the obligation to credit this income to
the program that generated it.

7.  The analysis of applicable credits was only one aspect of the Hawaii
decision.  The Board also found that Hawaii's approved State Medicaid
plan provided for payment of excise taxes by its adoption of Medicare
reimbursement principles, and that HCFA had never articulated a policy
that payment of the excise taxes was improper.  The Board subsequently
upheld HCFA's ability to disallow FFP in the cost of certain taxes paid
by Medicaid providers and recipients where HCFA had promulgated a
specific policy concerning such taxes.  Louisiana Dept. of Health and
Hospitals, DAB No. 1109 (1989), and Louisiana Dept. of Health and
Hospitals, DAB No. 1176 (1990).  "Provider specific" taxes have also
been the subject of considerable HCFA and Congressional attention.  See
"Medicaid Program; State Share of Financial Participation;" Proposed
rule, 55 Fed. Reg. 4,626 (1990); Interim final rule with comment, 56
Fed. Reg. 46,380 (1991); Interim final rule with comment canceling
interim final rule with comment, 56 Fed. Reg. 56,132 (1991); and the
"Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of
1991," Pub.L. 102-234, 105 Stat. 1793 (December 12, 1991), nullifying
the interim final rule promulgated at 56 Fed. Reg. 56,132 (1991).

8.  The remoteness of the relationship with federal Medicaid funds
distinguishes Oregon's fee on driver's licenses from the court fees for
processing child support orders found to be program income and
applicable credits in Maryland Dept. of Human Resources, DAB No. 412
(1983), and Maryland Dept. of Human Resources,  DAB No. 639 (1985).  In
those cases the fees derived from the very activities for which federal
funds were claimed, and there was too great a nexus between the
federally funded services and the fees which they generated; the fees
clearly were associated closely with the precise activities for which
scarce federal funds were provided.

9.  Moreover, under 45 C.F.R. 74.4(a), which provides that the cost
principles of 45 C.F.R. Part 74 apply except where inconsistent with
federal regulations, OMB A-87's general, program-wide guidelines on the
treatment of applicable credits must yield to the more specific
regulation that allows the use of these funds as the State's share.

10.  In Louisiana the Board upheld the disallowance of FFP in a sales
tax on pharmaceuticals and durable medical equipment imposed on Medicaid
recipients but paid by the State Medicaid agency directly to the State
department of revenue.  Among other points, the Board noted that the
State was in effect paying a tax to itself.  Here, by contrast, the
State is in effect receiving money from itself.  If a state cannot have
an expenditure in monies it pays to itself, then there cannot be a gain
from monies it receives from itself.

11.  We note that in 1985, administration of the MVAF was transferred to
AFSD, which also administers the Medicaid program.  Affidavit of Hersh
Crawford, State Br., Ex. 3.  It could thus be argued that Oregon has
restructured its internal organization to eliminate any appearance that
MVAF and AFSD are third parties to each other.

12.  The Board noted that since there were no post-eligibility
definitions of resources in effect, the definition included in
regulations for determining eligibility for the different categories of
Medicaid must be examined.  These regulations did not define "resources"
as including state-funded medical services.  HCFA identified no credible
source in which the Secretary had defined the receipt of state-funded
services as a resource, and such a definition was contrary to the only
existing definitions of resources