California Department of Health Services, DAB No. 158 (1981)

GAB Decision 158

March 31, 1981 California Department of Health Services; Docket Nos.
79-220-CA-HC, 80-169-CA-HC Ford, Cecelia; Teitz, Alexander Garrett,
Donald

This decision concerns two appeals by the State of California
Department of Health Services (State) from disallowances made by the
Health Care Financing Administration (Agency) of Federal financial
participation (FFP) claimed under Title XIX (Medicaid) of the Social
Security Act (the Act). The two appeals have been considered jointly
without objection by the parties. The disallowed amounts were claimed
for administrative costs of providing medical care and services to
persons eligible for such services under certain State programs but
ineligible under Title XIX. The Agency amended its regulation (45 CFR
248.10(d)(1)) so that FFP for such administrative costs could no longer
be claimed. The amendment of the regulation was made retroactively
effective based on the Agency's contention that the legislative repeal
of Section 1903(e) of the Act eliminated the Agency's authority to allow
FFP for such administrative costs. The principal issue is whether the
repeal of Section 1903(e) requires that the Agency apply this
retroactively effective regulation. For reasons stated below, we find
that the disallowances must be upheld.

We have determined that there are no material facts in dispute and
that a conference or hearing would not be helpful. This decision is
based on the State's applications for review, the Agency's responses to
the applications and both parties' responses to questions posed in the
Board's request for a stipulation of facts. The State's response to the
Board's Order to Show Cause regarding an issue raised by the State about
certain disallowed monies already repaid is also briefly addressed in
this decision.

Procedural background of the Appeals

Board Docket No. 79-229-CA-HC involves a disallowance in the amount
of $1,962,414 for the period October 30, 1972 through June 30, 1974,
claimed as administrative costs of providing medical assistance to
persons eligible for the state's Medical Indigents Only (MIO) program.
The amount in dispute is $1,254,317 because the State admits that it
should repay the money for the period January 3 through June 30, 1974.
Board Docket No. 80-169-CA-HC involves a disallowance of $183,360 for
the period October 30, 1972 through December 31, 1973 for administrative
costs of providing medical assistance to certain recipients of Aid to
Families with Dependent Children (AFDC). The persons in both groups
were ineligible for medical assistance under Title XIX of the Act.

With respect to Docket No. 80-169-CA-HC, the Agency originally
requested, by letter dated June 26, 1979, a refund in the amount of
$872,721 for the period October 30, 1972 through December 31, 1978. The
State agreed, by letter dated July 13, 1979, to make an adjustment for
the period December 3, 1973 through December 31, 1978, and actually
refunded $689,361 for that period by means of a decreasing adjustment
during the quarter ending September 30, 1979. When the State later
appealed from the October 15, 1980 letter of disallowance that involved
only $183,360 (the unrefunded portion of the larger amount originally
involved), the State also attempted to appeal the already-refunded
portion, on the ground that the regulation upon which the Agency based
its request did not apply to the State.

On December 12, 1980 the Board issued an Order to Show Cause
expressing its tentative opinion that the Board lacked jurisdiction over
the $689,361 FFP already refunded because there did not appear to have
ever been a final disallowance of that amount or of the $872,721
originally requested as a refund. Moreover, the Board stated that even
if there were a final disallowance over which the Board had
jurisdiction, the State's appeal was untimely, the refund having been
made over a year prior to this appeal, with no good cause shown by the
State for such a delay in appealing. Finally, the Board expressed its
tentative opinion that if it heard the appeal, it would have to uphold
the disallowance on the basis that the State's claim was untenable
because it appears that there was a regulation limiting FFP to
administrative costs for eligible persons that applied to the State
during the period in question (45 CFR 248.10, recodified effective March
11, 1974 as 45 CFR 248.4).

The State's response to the Order to Show Cause, dated February 10,
1981, withdrew the request for review of the amount already refunded and
stated an intent to limit the appeal to the $183,360 disallowed through
retroactive application of the amended regulation.

Factual Background

Section 1903(e) of the Act was enacted in 1965. It read:

(e) The Secretary shall not make payments under the preceding
provisions of this section to any State unless the State makes a
satisfactory showing that it is making efforts in the direction of
broadening the scope of the care and services made available under the
plan and in the direction of liberalizing the eligiblity requirements
for medical assistance, with a view toward furnishing by July 1, 1975
comprehensive care and services to substantially all individuals who
meet the plan's eligibility standards with respect to income and
resources, including services to enable such individuals to attain or
retain independence or self-care.

The Handbook of Public Assistance Administration, Supplement D,
Medical Assistance Programs, dated June 17, 1966, Section D-4050,
stated:

Federal financial participation may be claimed in the administrative
costs of providing medical care and services to all persons included in
the plan, including those in the cost of whose medical care and services
the Federal Government will not now share, provided all other provisions
of the approved State plan are applicable to them.

Another section, D-4010.C., listed and quoted the provisions of the
Act, including Section 1903(e).

In mid-1970 the Social and Rehabilitation Service (SRS) proposed that
the Handbook requirements be codified (35 FR 8780, June 5, 1970). The
regulations were published on February 27, 1971 (36 FR 3871), including
a regulation implementing Section D-4050 of the Handbook (45 CFR
248.10(d)(1)). No reference was made to the statutory authority for
that regulation. The codified regulations indicate that the authority
for 45 CFR Part 248 was Section 1102 of the Act, 42 USC 1302.

Congress repealed Section 1903(e) of the Act, effective October 30,
1972 (P.L. 92-603, Section 230, Social Security Amendments of 1972).
/1/ On November 21, 1972, SRS Memorandum MSA-IM-73-5 informed state
agencies administering medical assistance plans that Sections 1903(d)
and (e) were repealed. The Memorandum explained and discussed the
repeal of Section 1903(d) but not Section 1903(e). On April 2, 1973 a
memorandum to Regional Commissioners (Field Staff Information &
Instruction Series #136) stated that the repeal of Section 1903(e) took
away the "legal base" for 45 CFR 248.10(d)(1) and terminated FFP in the
administrative costs of persons not eligible for services under Title
XIX.

On June 21, 1973 the Agency published a Notice of Proposed Rulemaking
(38 FR 16308), implementing P.L. 92-603. The preamble stated that FFP
in the administrative costs of providing medical assistance to persons
not eligible for such assistance under Medicaid had been made available
on the basis of Section 1903(e), and that its repeal removed the
justification for 45 CFR 248.10(d)(1). It also stated that the new
provision would be effective as of the date of repeal, October 30, 1972.
Section 1102 is cited as rulemaking authority. The proposed regulation
read:

Federal financial participation is available in the administrative
costs of providing medical care and services to all persons covered
under the plan, in the cost of whose medical care and services the
Federal Government shares.

The Agency sent SRS Identical Memorandum #73-32 to state agencies on
July 11, 1973. This memorandum contained an explanation of the
relationship between the repeal of Section 1903(e) and the change in the
availability of FFP for certain administrative costs. It informed the
states of the proposed rulemaking and of the effective date of the
proposed regulations.

On December 3, 1973 the final regulations were published at 38 FR
33380. /2/ Again, the preamble stated that FFP for these administrative
costs had been terminated by the repeal of Section 1903(e) and that the
proposed regulation was amended to clarify the fact that it was
retroactively effective. Thus, the final regulation differed from that
proposed in June by the fact that it read "Effective October 30, 1972.
. . ." The preamble stated that comments were received from eight
respondents about the proposed regulation. The preamble's discussion of
those comments included:

A county official objected to the termination of federal matching for
certain administrative costs, while another comment predicted that
termination of such matching would force on the States "a massive
accounting problem from which any potential savings will most probably
be more than offset by increasing administrative costs." Such
termination is required, however, since the statutory support for such
matching has been removed. (38 FR 33380, December 3, 1973)

Discussion

Both of these appeals challenge the disallowance of FFP claimed by
the State for administrative costs of providing medical assistance to
persons ineligible for medical assistance under Title XIX during the
period October 30, 1972 to December 3, 1973, or alternatively, January
3, 1974. /3/ The State asserts that retroactive application of the
amended version of Sec. 248.10(d)(1) to this period of time denies the
State due process, impairs the contractual relations existing between
the State and the Federal Government with respect to the sharing of
Medicaid costs, and places an undue burden on the State and its
counties. Furthermore, the State asserts that the amendment is a
retroactive change of settled law and is therefore impermissible.

The Agency maintains that retroactive application of a regulation is
valid where the regulation and the action of making it retroactively
applicable are reasonable and that, in this case, the Agency's actions
in amending the regulation and retroactively applying it were mandated
by the statutory design of Medicaid, manifested by the repeal of Section
1903(e). The Agency interprets the repeal of Section 1903(e) as
removing the sole authority to allow FFP for the administrative costs
claimed in these cases.

The Supreme Court has set out a principle to be considered when faced
with a choice between applying preenactment and post-enactment law:
where the result of applying the original regulation in force at the
time, rather than the amended regulation, is one contrary to the intent
of the statute, the amended regulation should be used. "A regulation
out of harmony with the statute is a nullity . . . ." Manhattan General
Equipment Co. v. Commissioner of Internal Revenue, 297 U.S. 129, 134
(1936); accord, United States v. Larionoff, 431 U.S. 864, 873 (1977).

Applying this principle to the facts in these appeals, we have
concluded that the disallowance must be upheld. The Agency has
consistently claimed since 1973 that the repeal of Section 1903(e)
removed the statutory authority for the original Sec. 248.10(d)(1) and
mandated its amendment effective as of the date of repeal. The Agency
argues that the mandate in Section 1903(e) that the states broaden the
scope of care and services available under the plan and make an effort
to liberalize the eligibility requirements for medical assistance
provided a legal basis for the Secretary's determination that certain
administrative costs were necessary as an incentive to enable the states
to liberalize their eligibility requirements. The Agency states that
when the repeal of Section 1903(e) eliminated the requirement that the
states expand their programs, the Secretary's authority to determine
such costs to be necessary was more narrowly limited to the general
principle set forth in the Medicaid scheme that reimbursement is
available for services to eligible persons. Since the statutory
provision authorizing payment for individuals who are eligible for
medical assistance, Section 1903(a)(1), does not authorize payment for
ineligible persons, the agency argues that it cannot provide
reimbursement through regulations when there is no statutory basis for
the reimbursement. Summit Nursing Home, Inc. v. United States, 572 F.
2d 737, 742 (Ct. Cl. 1978).

Although the Agency's assertion that there is a clear relationship
between the provision for administrative costs and Section 1903(e) is
not completely persuasive, there does not appear to be any other
statutory authority for allowing administrative costs for medical
assistance to ineligible persons. /4/

This Board gives deference to the interpretation given a statute by
the Agency, in accordance with principles established by the courts.
New York Department of Social Services, Decision No. 101, May 23, 1980,
p. 6. The primary rationale for this practice is the deference accorded
agency expertise. Southern Mutual Help Assoc., Inc. v. Califano, 574
F.2d 518, 526 (D.C. Cir. 1977). Where the Agency has interpreted the
statute by promulgating a regulation, based upon the Agency's expertise
and policy-making authority, and that interpretation is a reasonable
one, even though it may not be the only possible interpretation, the
Board will generally accept the Agency's interpretation. This is
particularly so where the Agency manifested that interpretation
contemporaneously with the promulgation of the regulation, and
substantially contemporaneously with the statutory enactment. National
Muffler Dealers Ass'n v. United States, 470 U.S. 472, 477 (1979).

Following this Board's practice to give deference to a reasonable
Agency interpretation of a statute, we accept the Agency's position that
retroactive application of the amended regulation was required by the
repeal of Section 1903(e). By accepting this position under the rule
set out in Manhattan General Equipment Co., supra, the Board must uphold
the disallowances. We realize that there are circumstances here that
favor the State, such as: the retroactive application of the regulation
abruptly changes a previous rule, the existence of justifiable reliance
by the State on the old rule (Sec. 248.10(d)(1) as originally
promulgated), and the substantial financial and administrative burden
imposed on the State. /5/ Under the above analysis, all these factors
are irrelevant.

Even if our conclusion were not mandated by the repeal of Section
1903(e), the Board would arrive at the same conclusion, using a
balancing process developed by the courts. This process is based on
principles of due process and is used to determine when administrative
rules and regulations may be applied retroactively. This balancing
consists primarily of weighing the public interest manifested by the
regulation against the burden placed on the party against whom the
regulation will be applied. Which side weighs heavier depends on
several factors. The Supreme Court established a standard for deciding
whether to allow administrative rules to have retroactive application in
SEC v. Chenery, 332 U.S. 194 (1947).

. . . (Retroactivy) must be balanced against the mischief of
producing a result which is contrary to a statutory design or to legal
and equitable principles. If that mischief is greater than the ill
effect of the retroactive application of a new standard, it is not the
type of retroactivity which is condemned by law. At 203.

In Retail, Wholesale & Dept. Store Union, AFL-CIO v. NLRB, 466 F.2d
380 (D.C. Cir. 1972), Judge McGowan applied this standard and
articulated some specific considerations that enter into such a
balancing process. Factors applicable to the appeals before the Board
are: (a) whether the new rule represents an abrupt departure from
well-established practice or merely attempts to fill a void in settled
law; (b) the extent of reliance on the former rule by the party against
whom the new rule is applied; (c) the degree of burden the retroactive
rule places on a party; (d) the statutory interest in applying the new
rule despite reliance by a party on an old rule. Judge McGowan explained
how these factors were to be balanced:

Unless the burden of imposing the new standard is de minimis, or the
. . . statutory design compels its retroactive application, the
principles which underlie the very notion of an ordered society, in
which authoritatively established rules of conduct may fairly be relied
upon, must preclude its retroactive effect, . . . .

Thus, statutory design is given great weight in the balancing
process. Accord, Runnells v. Andrus, 484 F. Supp. 1234 (D. Utah 1980).
See also Addison v. Holly Hill Fruit Products Inc., 322 U.S. 607 (1944).

If the circumstances favoring a prospective application existed when
there was no strong statutory interest in retroactive applicability,
even if the rule itself were reasonable, retroactive application might
be justifiable only to the point where actual notice of the rule was
given because the practical operation of the change in Agency
regulations would be to "work hardship . . . altogether out of
proportion to the public ends to be accomplished." Retail, Wholesale &
Dept. Store Union, AFL-CIO v. NLRB, supra, at 393. However, weighing
the factors that favor the State against the statutory intent, as
interpreted by the Agency, leads this Board to a balance that favors the
statutory interest over the burden the State may bear. SEC v. Chenery,
supra; Addison v. Holly Hill Fruit Products, Inc., supra. Thus, using
the balancing analysis, we would also conclude that the regulation may
be applied retroactively as of the date of the repeal of Section
11903(e). /6/

In considering the State's impaired contractual relations argument,
the same basic analysis applies. The contract clause of the U.S.
Constitution, art. I, Sec. 10, does not apply to contracts between the
Federal Government and the states. Either a due process analysis under
the Fifth Amendment or a contract analysis must start with a contract
right or vested property interest that has been abridged. Although the
courts have held generally that retroactively effective regulations may
not impair contractual obligations, Satterlee v. Mathewson, 27 U.S.
380, 413 (1829); Lynch v. United States, 292 U.S. 571, 577 (1934),
there are many exceptions to that language, particularly with regard to
the restriction that contracts made or property rights acquired in an
area subject to the regulatory powers of the legislature are subject to
the future exercise of those powers. Home Building & Loan Assoc. v.
Blaisdell, 290 U.S. 398 (1934); Veix v. Sixth Ward Building & Loan
Assoc., 310 U.S. 32 (1940). Where a contract calls for a series of
performances over a long period of time, retroactive application of new
legislation must be possible, subject to the restrictions of the
balancing analysis discussed above, or else there is a genuine
possibility of serious interference with legislative power. C. B.
Hochman, The Supreme Court and the Constitutionality of Retroactive
Legislation, 73 Harv. L. Rev. 692, 700 (1960).

Conclusion

We conclude that the Agency's interpretations of Section 1903(e) of
the Act, and of its subsequent repeal, are reasonable; we also conclude
that the retroactive application of the amended regulation is proper
when the statutory intent, as interpreted by the Agency, is weighed
against the burden on the State of this retroactively effective
regulation, and that such application may begin as of the date of the
repeal of Section 1903(e). We therefore conclude that the disallowances
should be upheld. /1/ There does not appear to be any legislative
history for either the enactment or repeal of this provision
that bears directly on the issue before the Board. /2/ A Notice
of Proposed Rulemaking (NPRM), published at 35 FR 32216, November 21,
1973, concerned new regulations implementing Title XVI of the Act and
also included a proposed reorganization and recodification of Part 248.
It included "for the convenience of reviewers . . . changes in elibility
provisions required by P.L. 92-603, which were contained in a notice of
proposed rulemaking published June 21, 1973 . . . . The existing
sections on coverage and general and financial eligibility conditions
Secs. 248.10 and 248.21) are being revoked and their content reorganized
into four new sections in order to simplify and clarify . . . In
general, the proposed regulations would become effective January 1,
1974." This publication reprinted the language of the amended Sec.
248.10(d)(1) as proposed in June 1973 and designated the proposed
amended Sec. 248.10( d)(1) as Sec. 248.4(a). Neither the preamble nor
the regulation itself contained any language concerning the effective
date. On March 11, 1974 (39 FR 9512), the Notice of these final
regulations was published. That Notice included Sec. 248.4 with no
indication of its effective date. It also shows Sec. 248.10 amended so
that effective January 1, 1974 it applied only to Guam, Puerto Rico and
the Virgin Islands.It refers to Sec. 248.4 as applicable to other
jurisdictions. The State asserts that the publication of this version of
the regulation, together with the conflicting versions published in June
and December, was, at a minimum, sufficiently confusing to both Agency
and State so as to provide inadequate notice of any firm intent to deny
FFP retroactively. Furthermore, the State asserts that the publication
provides evidence that the Agency had changed its mind about application
of the regulation retroactively. The Agency alleges that the published
notices of reorganization and recodification were not intended to be
viewed as substantive rulemakings, and furthermore, that the language of
the June 21, 1973 NPRM, which did not contain a statement of the
effective date within the proposed regulation, was inadvertently used in
the recodification notices rather than the language of the final
regulation. We note that the recodified regulation as it appears in the
Code of Federal Regulations does not contain the effective date language
either. /3/ The State raised the question, in the event that
retroactive application of the regulation was found not to be proper,
whether the regulation could take effect immediately upon publication or
could only be effective 30 days later. We do not reach this issue
because of our conclusion that retroactive application must be upheld in
this case. /4/ The only authority for the regulations that is
cited in the Code of Federal Regulations is the statutory delegation in
Section 1102 of the Act, which gives general authority to promulgate
substantive rules and regulations "not inconsistent with this Act, as
may be necessary to the efficient administration of the functions . . .
under this Act." Although such delegations should be construed to
include authority to promulgate any regulation reasonably related to the
purposes of the enabling legislation, Mourning v. Family Publications
Service, 411 U.S. 356, 369 (1973); Maryland v. Mathews, 415 F. Supp.
1206, 1212 (D.D.C. 1976), that authority is limited in that a regulation
may not be inconsistent with another, more specific, portion of the Act.
Green v. Philbrook, 576 F.2d 440, 442 (2d Cir. 1978); National Welfare
Rights Organization v. Mathews, 533 F.2d 637, 640 (D.C. Cir. 1976).
Furthermore, a similar analysis seems applicable to the State's
allegation in its application for review (Docket No. 80-169-CA-HC,
November 14, 1981, p. 4) that 45 CFR 248.10(d)(1) as originally
promulgated was authorized by 42 USC 1396b(a)(3) (this citation appears
to be erroneous and probably should be 42 USC 1396b(a)(6), now (a)(7)).
The power to pay FFP for amounts "necessary . . . for the proper and
efficient administration of the State plan" is limited to costs for
which there is a statutory basis. Summit Nursing Home, Inc. v. United
States, supra. /5/ The State, under the original regulation, had
allowed its counties to use a modified billing system in which they were
relieved of the burden of performing a complete FFP-eligibility check on
every applicant for medical aid before providing services. The county
could qualify an applicant for services under a State program and retain
the possibility of finding Medicaid eligibility at a later date. This
system allowed the State to partially defray administrative costs by
claiming them under 45 CFR 248.10(d)(1) as originally promulgated. If
this regulation had not been in existence, the State may have performed
eligibility checks in a different manner so as to be certain at an
earlier stage whether an applicant was eligible for Medicaid.
Presumably some of those applicants would have been found eligible under
Title XIX, thus allowing the State to claim FFP for associated
administrative costs. /6/ The conclusion reached by the Board
means that we do not need to reach the issue of when the State had
notice of the Agency's interpretation.Because the Board does not reach
the issue of notice, there is no reason to consider the State's motion
to strike one document submitted by the Agency, since it applies to the
question of notice.

OCTOBER 04, 1983