Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
DATE: November 18, 1997
SUBJECT: New York State Department of Health
Docket Nos. A-96-196, A-96-197, A-97-53
Control Nos. NY-96-012-ADM, NY-96-013-ADM, NY-97-003-ADM
Decision No. 1636
DECISION
New York State Department of Health (NYSDOH) appealed disallowances issued by the Health Care Financing Administration (HCFA) totaling $549,301 (later reduced by agreement of the parties to $506,846 that remains at issue) in federal financial participation (FFP) in administrative costs relating to outreach and promotion of insurance policies developed by the New York State Partnership for Long Term Care (Partnership). The goal of the Partnership was to develop and promote the purchase of policies in advance of need for long-term care (LTC) in order to reduce dependence on public funding. New York's approved Medicaid State Plan provided a special asset disregard for those who purchased such policies and became otherwise eligible after exhausting their benefits. HCFA argued that, since the outreach efforts were, by definition, entirely targeted at persons whose income and assets made them ineligible for Medicaid, the administrative costs of such outreach could not properly be charged to Medicaid funds. NYSDOH argued that the costs met requirements for allowability, were appropriate under the State plan, and would ultimately generate cost savings for Medicaid.
For the reasons discussed below, we uphold the disallowance. We find that promoting the sale of Partnership LTC insurance policies is not an authorized or mandated form of Medicaid outreach under either the State plan or HCFA's regulations or policy issuances. Further, we find that HCFA properly determined that the promotional activities are not necessary and reasonable costs of administering the Medicaid program, since they benefit no eligible recipients and offer only remote and speculative benefits to the program.
Factual Background
This decision resolves three consolidated appeals by NYSDOH as the single State agency for Medicaid (replacing the New York State Department of Social Services in that function).
In making the disallowed claims, NYSDOH sought FFP for personnel costs of the State Medicaid agency employees and other administrative costs relating to promotion of the Partnership and development and dissemination of "outreach and educational materials" about the Partnership. NYSDOH Br. at 3. The total amount at issue of $506,846 reflects claims for three periods as follows: $465,432 for September 1, 1994 through December 31, 1995 (A-96-197); $4,571 for January 1, 1996 through March 31, 1996 (A-96-196); and $36,843 for April 1, 1996 through June 30, 1996 (A-97-53).
The Partnership was developed in 1988 under a grant to the State from the Robert Wood Johnson (RWJ) Foundation and implemented as a public-private partnership beginning in February 1993. See generally, id. at 6-12. Non-federal funding for Partnership activities came from the State, commercial insurance carriers and the RWJ and Ford Foundations. Id. The principal goal was to encourage private financing of long-term care (LTC) through insurance with certain required coverages and benefits, and to avoid impoverishment and divesture by permitting those who have used their benefits to qualify for Medicaid while preserving their assets. Id.
The outreach efforts targeted people aged 60-80 who exceeded certain minimum levels of income and assets. See id. at 5; HCFA Br. at 7. The State plan was amended to offer an incentive for the purchase of LTC insurance policies. Under the State plan as amended, purchasers who exhaust the benefits would be treated as a class of medically-needy eligible persons. For this purpose, their assets were exempted from the otherwise-applicable recovery rules, although their income was still subject to normal eligibility and contribution requirements. The premise of adding this asset disregard was that providing an incentive to purchase Partnership LTC insurance would ultimately be cost-effective in reducing Medicaid expenditures for nursing home stays. See, e.g., NYSDOH Br. at 6-10; NYSDOH Exs. S-9 through S-17, S-20 through S-23. The costs at issue were incurred to disseminate information to likely purchasers (those who had income adequate to buy policies and assets sufficient to benefit from protection) about the benefits of such insurance.
Legal Authority
Statute and regulations
The Social Security Act (Act) provides for FFP at a 50% rate in amounts expended "as found necessary by the Secretary for the proper and efficient administration of the State [Medicaid] plan." Act, . 1903(a)(7). The regulations provide that FFP is "available in the necessary administrative costs the State incurs in determining and redetermining Medicaid eligibility and in providing Medicaid to eligible individuals." 42 C.F.R. . 435.1001(a).
State Plan Amendments 91-49 and 92-22
NYSDOH referenced two amendments to the State Medicaid plan as authority for claiming FFP for the costs at issue. New York State Medicaid Plan Amendment (SPA) 91-49 provided a disregard (with no cap) for resources of otherwise-eligible Medicaid applicants who participated in LTC policies under the Partnership plan. NYSDOH Ex. S-3, at 3. The Amendment noted that purchasers who have exhausted their benefits will "be enrolled in a special State Medicaid program," under which they "will not be subject to a resource test as usually required . . ." Id. HCFA approved SPA 91-49 on February 20, 1992, effective July 1, 1991. Id. at 1.
SPA 92-22 amended the provisions for recovering Medicaid payments from recipients' resources and placing liens against their property to exempt those recipients eligible for Medicaid as a result of participating in the Partnership insurance program. HCFA approved SPA 92-22 on August 12, 1992, effective April 2, 1992. NYSDOH Ex. S-5.
Summary of Parties' Arguments
NYSDOH's essential argument was that, since Medicaid costs (both federal and State) will be reduced if people buy insurance likely to cover the typical stay so that they do not ultimately go on Medicaid, Medicaid should participate in the costs of promoting such insurance. The approved State plan recognizes this, according to New York, by providing incentives in the form of the asset disregard and lien protection to allow those who have exhausted insurance benefits to retain assets. NYSDOH viewed this as an endorsement of the Partnership by HCFA and argued that the intended benefits of the Partnership initiative could only be realized by outreach directed at those not yet eligible for Medicaid who are therefore able to purchase such insurance. From that reasoning, NYSDOH concluded that the expenditures were an appropriate use of Medicaid administrative funds.
HCFA, on the other hand, argued that the promotion of Partnership policies was directed entirely at individuals who were by definition not eligible for Medicaid and who might well never be eligible. HCFA Br. at 8-9. Hence, HCFA concluded that, even if the project was a good thing generally, the associated costs were not reasonable and necessary to operate the Medicaid program. Further, HCFA contended that, in permitting NYSDOH to use a more liberal resource disregard in determining eligibility, it was merely recognizing the NYSDOH's right to select resource disregard limits, not undertaking to fund a program of insurance sales to middle-class persons.
The issue is thus whether NYSDOH can properly claim FFP in administrative costs incurred in promoting the Partnership insurance policies for purchase by persons not presently eligible for Medicaid.
Analysis
The State Plan does not authorize the activities at issue. NYSDOH argued that the above-cited State Plan amendments, which HCFA approved, authorized "the activities for which the disallowed claims were made." NYSDOH Br. at 4; see also NYSDOH Br. at 18-22. Citing the Act at section 1903(a)(7) and regulations at 42 C.F.R. . 435.1000, NYSDOH argued that it was entitled to claim FFP for the outreach activities at issue as costs of administering the State Plan because NYSDOH viewed the outreach as part of administering these State Plan amendments.
HCFA has not questioned the allowability of the costs of medical assistance provided to recipients eligible on the basis of these amendments nor the costs of eligibility determinations. However, HCFA argued that its approval of these amendments reflected only NYSDOH's right under the Act to use more liberal methods to determine resource disregards, and did not imply approval for funding an outreach program for the sale of long-term care insurance. HCFA Br. at 17-18. HCFA argued that individuals could purchase such insurance privately or the State could choose to underwrite the costs, if it wished, but that the outreach program is nowhere authorized in the State Plan and is not a necessary cost of administering Medicaid. The fact that use of a Partnership insurance plan is relevant to determining an individual's eligibility does not make promotion of the plans an administrative cost of Medicaid, HCFA argued, any more than the fact that other medical insurance coverage must be determined in assessing eligibility makes the administration of various medical insurance plans a Medicaid administrative cost.
We agree with HCFA that the costs described as outreach here are not costs of a type necessary to administer the State plan amendments cited by NYSDOH. Contrary to NYSDOH's characterization, HCFA has not here approved a SPA and then disallowed the costs of implementing it. HCFA could reasonably approve a State plan including an incentive for those who have made some provision for their future needs by having purchased LTC insurance plans without assuming that such approval extended to participating directly in the costs of the promotion of the policies. The regulations state only that FFP is available "in the necessary administrative costs" of eligibility determinations and the provision of Medicaid to eligible individuals. 42 C.F.R. . 435.1001(a). This language does not expand funding to administrative costs not connected to determining eligibility or providing Medicaid under the State plan, nor does it extend to any services directed at ineligible individuals (with the possible exception of determining their ineligibility).
In this case, the costs at issue were unrelated to eligibility determinations and did not involve provision of services to any eligible individuals. We therefore find that these activities do not meet the requirements to be necessary costs of administering the State plan amendments. We address next NYSDOH's argument that it was nevertheless entitled, or even obliged, to conduct outreach as part of administering this aspect of the Medicaid program under the authority of other HCFA policy issuances.
Prior policy issuances on funding outreach to potentially eligible persons neither mandate nor authorize FFP for these outreach activities.
As a preliminary matter, we observe here that although both parties loosely referred to the activities here as "outreach," the term is something of a misnomer in this context. Medicaid outreach as commonly understood involves seeking out persons or groups who may be eligible for Medicaid to inform them of that possibility in order that they may come in for eligibility determination or may be made aware of Medicaid services available to them. The "outreach" here was directed instead at precisely those known not to be eligible to inform them how best to avoid needing Medicaid services at some future date by purchasing insurance. NYSDOH has not pointed to any other example of the use of the term outreach in this kind of context. A better characterization of the activities described by NYSDOH might be marketing or, as was also used by the parties, "promotion," since the goal of the information disseminated was the sale of the insurance plans, not participation in the Medicaid program. In any case, we turn next to the examples to which NYSDOH did cite of activities involving permissible or mandated educational or promotional activities to determine if they justify by analogy the costs claimed here.
NYSDOH contended that the administrative costs of outreach were not only allowable but actually mandated, because it stated that states are required to do outreach to "potentially eligible" persons to inform them of the availability of "the benefit." NYSDOH Br. at 20; NYSDOH Reply Br. 7-10. NYSDOH argued that, even though the population to which the outreach and educational activities for which it sought FFP were directed was "technically not now eligible for Medicaid," nevertheless "this status is temporary, as everyone is potentially 'medically needy' in the face of a long term stay in a nursing home." NYSDOH Br. at 5. Further, New York contended that HCFA had recognized outreach costs to "potentially eligible" persons in other situations.
However, all of the examples which NYSDOH cited in which the term "potentially eligible" is used employ it in the context of seeking out persons likely to be eligible for benefits, not of intentionally directing efforts at persons known to be ineligible. For example, the cited regulations have to do with provider-related donations to pay direct costs for agency personnel stationed at the donor hospital or facility to do eligibility determinations or "to provide outreach services to eligible (or potentially eligible) Medicaid individuals." 42 C.F.R. .. 433.58(d)(2) and 433.66(b)(2). The persons to which this outreach is directed are those who are presenting at a hospital or facility with immediate medical needs who are being provided with information and/or screening to determine if they may benefit from program services or not. Obviously, a net spread widely enough to inform as many eligible and not presently enrolled persons as possible will also incidentally provide information to many persons who are ultimately determined not to be eligible. The distinction between potential eligibility in this sense and the intentional targeting of persons who are not presently eligible for any services is clear. By contrast with the activities involved here, the sort of outreach that might be analogous to potential eligibility as used in these regulations would be a campaign directed at those who have exhausted insurance benefits to inform them that they may qualify for Medicaid under special resource disregard provisions and encouraging them to seek eligibility determinations.
Similarly, New York cited a Medicaid Regional Memorandum which responded to an inquiry about the availability of FFP for outreach activities directed at pregnant women, using mass media to promote early prenatal care and targeting potentially eligible, as opposed to strictly Medicaid eligible, pregnant women. NYSDOH Ex. S-39. The memorandum confirmed that FFP was available in outreach programs promoting prenatal care because such campaigns (particularly when targeted to high-risk groups) are "more effective than a Medicaid-only campaign," so long as they provide a hotline "or other means to identify the potentially Medicaid eligible women, and assist them in navigating the Medicaid prenatal care system." Id. The context indicates that such a campaign is more effective in expanding prenatal care to poor pregnant women by bringing them into the Medicaid system, as opposed to a campaign targeting only women already receiving Medicaid. "Potentially eligible" again does not refer to middle-class women who might be eligible someday, if they suffered reverses, but to high-risk groups likely to include many women who would prove presently eligible once screened. Of course, a mass media campaign may also reach middle-class women or other ineligible persons but the target is a group that may potentially be eligible, not a group that is by definition ineligible.
In summary, both the cited programs that authorized forms of "outreach" were directed at fairly specific groups likely to include many persons who either were receiving Medicaid, were eligible for but were not yet receiving Medicaid, or were likely to become eligible imminently (i.e., persons already in a hospital or facility and high-risk pregnant women). By contrast, the Partnership effort was intended to avoid present recipients and those currently eligible for Medicaid and to seek out possible purchasers "years in advance of the need for long term care." NYSDOH Br. at 6. And, since those likely to need care and spend down or transfer assets cannot be identified so far ahead, the target audience, in NYSDOH's own terms, "must include every State resident with sufficient resources" to be able to buy the insurance. Id.; NYSDOH Ex. S-22 (a study of spenddown by residents in New York State nursing homes). In other words, the target audience is almost everyone but the eligible or potentially eligible.
Finally, New York contended that no prior HCFA ruling or Board case held administrative costs unallowable simply "because they could not be related to a specific eligible person who received one or medical assistance services authorized under the state plan." NYSDOH Reply Br. at 10-11. Specifically, New York ridiculed such a limitation in the outreach area because any effective outreach through public media will reach many persons not presently eligible for Medicaid. Id. at 8-10. This argument sets up a straw man, since HCFA never contended that the audience for an outreach program should be limited to present recipients nor that the basis for this disallowance was the inability of NYSDOH to identify a specific eligible recipient. HCFA's position consistently in its brief and in the regulations and in the guidance cited above has been that allowable outreach costs must be for the purpose of promoting services provided by Medicaid to persons who may be eligible for them. Obviously, many other persons may have access to the message, but the message must be that this assistance is available to those who are eligible. The content of the Partnership promotion was not that services were available for eligible persons through the Medicaid program but rather that by availing themselves of the insurance policies, potential purchasers might forestall participation in Medicaid for several years and protect their assets if they ever did require LTC care through Medicaid. Thus, the costs are not unallowable simply because NYSDOH could not identify a specific eligible recipient that benefitted from them, but rather because the outreach was not directed at benefitting the program or potentially-eligible recipients.
HCFA further pointed to two issuances showing that HCFA had given states notice that it interpreted the statute and regulations on FFP for administrative costs to permit only expenditures that both relate to services under the State Medicaid plan and are attributable to Medicaid-eligible individuals. HCFA Br. at 9-11. The first issuance was a letter, dated December 20, 1994, to state Medicaid directors which stated that section 1903(a) of the Act limits FFP to costs "found necessary" by the Secretary and that the Secretary, not the state, is therefore "the final arbiter" of which administrative activities are necessary. The letter goes on to state that --
HCFA Ex. 1, at 1. The letter included Medicaid eligibility determinations and "Medicaid outreach" among allowable administrative costs in some circumstances, but distinguished outreach activities that could only be reimbursable if they qualified as medical services under the provisions allowing certain targeted case management services from those that could be reimbursed as administrative costs. The outreach activities that qualified as administrative costs were those designed "to inform or persuade beneficiaries or potential beneficiaries to enter into care through the Medicaid system." Id. at 2. The letter explains that allowable administrative costs must be "directly related to the Medicaid state plan or waiver services" and not just related to coordinating or accessing non-Medicaid services, and must not include "operating costs of an agency whose purpose is other than the administration of the Medicaid program." Id. at 3-4 (emphasis in original). HCFA concluded from this discussion that a partnership with private insurers to sell LTC policies fails the test because it is essentially a financial service not directly related to the delivery of medical services under the State plan.
We agree that this letter reinforces our interpretation that, while outreach to Medicaid beneficiaries is an appropriate type of administrative cost, the activities here are not in the nature of outreach related to Medicaid services. We note that the letter also states that allowable administrative costs "may not include funding for a portion of general public health initiatives that are made available to all persons . . . unless the campaign is explicitly directed at assisting Medicaid eligible individuals to access the Medicaid program" and must be incorporated in an approved cost allocation plan (CAP). Id. at 4. The Partnership outreach was essentially a general public health initiative to manage financing of long-term care in the State by encouraging all persons to make prospective private arrangement to assume a greater share of the costs in exchange for improved asset protection in the event of catastrophic costs. NYSDOH did not point to any way in which the campaign would assist program access by eligible individuals or to any reference to the campaign in an approved CAP. This portion of the letter further supports our conclusion that these are not the type of administrative activities for which FFP is available.
The second issuance cited by HCFA was a Medicaid State Operations Letter from February 6, 1989 (well before the costs involved here were incurred) on FFP availability for outreach activities generally. HCFA Ex. 2. The Operations Letter acknowledged that outreach was historically allowed as an administrative cost, but also defines outreach as "activities in which a State agency or a provider seeks out Medicaid eligibles and informs them about available services and programs." Id. at 1. Those outreach costs incurred by state agency staff would be treated as administrative and those incurred by a provider as part of another medical service would be medical assistance. Id. The Operations Letter concluded that --
NYSDOH's response characterized these issuances as relevant only to a narrow range of administrative costs identifiable as "administrative case management" and argued that outreach may be but need not be and is not here a part of administrative case management. NYSDOH Reply Br. at 7-8, n.9. However, the letter to the state Medicaid directors indicated that it was intended to "reiterate [a] long-standing policy on allowable administrative costs." HCFA Ex. 1, at 1. The letter did state that it resulted from an examination of claims which included activities identified as "administrative case management . . . , as well as other administrative functions performed by State and local governments." Id. However, while the letter stated that it amplifies policy "with specific reference to such situations," nothing in the letter suggests that it should be read as narrowly as NYSDOH argued. The examples discussed are drawn from beyond the area of administrative case management and the principles discussed are described as general Medicaid policy. Although there is guidance on the application of these principles to case management, the discussion of the nature of allowable administrative costs appears generally applicable. NYSDOH also argued that the letter should be considered as related only to a proposed rule on targeted case management waivers which was never finally adopted. NYSDOH Reply Br. at 8; see 58 Fed. Reg. 53,481 (Oct. 15, 1993). This rulemaking may have been the "context" for the letter, as NYSDOH argued, or they may both have been triggered by similar concerns about improper claiming of case management services. However, the letter makes no reference to the rulemaking nor is it a "further interpretation" of the rulemaking, but rather represents HCFA's interpretation of the administrative costs provisions of the Act.
These costs are not allowable under applicable OMB Circular provisions.
HCFA also argued that the outreach costs were not allowable under applicable cost principles. During the time period covered by these disallowances, Office of Management and Budget (OMB) Circular A-87 was amended on May 17, 1995, effective September 1, 1995. 60 Fed. Reg. 26,484. The "original" version provided that, in order to be allowable, a cost must, inter alia, be "necessary and reasonable for proper and efficient performance and administration" of the program. OMB Circular A-87, Att. A, section C.1.a; see 42 C.F.R. . 430.2 (incorporating by reference as applicable to State Medicaid programs the provisions of 45 C.F.R. Part 74, including 45 C.F.R. . 74.27(a), which provides that allowability of costs for State governments is determined under OMB Circular A-87). The Circular was amended to state that, in determining the reasonableness of a cost, "consideration should be given to . . . whether the cost is of a type generally recognized as ordinary and necessary for the operation of the governmental unit or the performance of the Federal award." OMB Circular A-87 (amended), Att. A, section C.2.a.
HCFA acknowledged that the new version only covered costs incurred after its effective date (September 1, 1995) but argued that the costs were not allowable under either version. HCFA Br. at 6, n.4. NYSDOH argued that the costs met the requirements of both versions. NYSDOH Br. at 17.
NYSDOH argued that it would be irrational to treat the Partnership program as not "ordinary" solely because it was a new idea adopted in only a few other states. NYSDOH Br. 26. While the language need not be read as deterring federal participation in any innovation, it seems reasonable to view novelties in governmental operations with some caution in weighing whether costs meet the test of general acceptance and recognition before requiring federal participation. However, as discussed below, we find that the costs at issue would not meet the pre-existing standard of being "necessary and reasonable" for program administration, so that we need not determine the precise impact of addition of the phrase "ordinary and necessary" to the amended version of the Circular.
In arguing that the Partnership did not meet the test of the original OMB Circular language, HCFA cited to New Jersey Dept. of Human Services, DAB No. 899 (1987), in which the Board considered whether costs for state units which reviewed hospital architectural plans and certificates of need were "necessary" for the administration of the State Medicaid program and found from the "functional description of these units" that they were not "essential to the effective administration" of Medicaid. DAB No. 899, at 8; HCFA Br. at 13-14. The Board there stated:
In State of Oregon Mass Transit Assessment, Decision No. 402-Supplementary Decision, August 31, 1983, we referred to the "`necessary' in the cost principles as meaning something `essential,' so that the grant programs could not be run properly and efficiently without it." (P.4). This does not mean that it would be impossible to run the grant program without the cost item, but that the grant program would not run well without it. We indicated that the words "necessary and reasonable" relate to whether a cost item is reasonably required to achieve a program objective. See Wisconsin Department of Health and Social Services, Decision No. 696, October 16, 1985.
Id. HCFA reasoned that, under a similar analysis, selling long-term care insurance to the middle class is not essential to administering a program to provide medical assistance to the poor and that the purposes of the Partnership program (addressing the long term care needs of New York's elderly and decreasing the future burden on Medicaid for their care) are "not essential to achieving [Medicaid's] specific program objective of providing medical assistance to the poor." HCFA Br. at 14.
It is clear that the Board has not, in its prior decisions, interpreted the term "necessary" to mean that the costs must be "specifically required by regulation" nor to require a showing that a "program could not survive without the expense, for few cost items, examined in a vacuum, would meet that test." New York State Dept. of Social Services, DAB No. 1072, at 9 (1989). Rather, the standard is that the costs "fairly can be said to be integral to overall efficient program operation." Id. Thus, "necessary" costs of administration are those that make the program run efficiently in accomplishing what it was intended to accomplish. They need not be indispensable or be the only possible way to reach the objectives, but costs that are tangential or unrelated to the specific goals of the program are not "necessary." While increasing the percentage of the elderly covered by LTC insurance may someday reduce the demand for Medicaid funding of all or some part of their LTC needs in some future years, such benefits are remote and speculative. We find that NYSDOH did not demonstrate any benefits to the efficient operation of the present program or to the effective attainment of present program objectives.
Prior Board decisions have placed the burden of demonstrating the necessity of an administrative cost on the grantee.
To be allowable, costs must be necessary and reasonable for the proper and efficient administration of the grant program. OMB Circular A-87, Att. A, C.1.a. The Board has repeatedly held that a grantee bears the burden of documenting the existence and allowability of its costs. Nisqually Indian Tribe, DAB No. 1210 (1990); Lac Courte Oreilles Tribe, DAB No. 1132 (1990); West Central Wisconsin Community Action Agency, Inc., DAB No. 861 (1987).
Alabama Comm'n on Aging, DAB No. 1411, at 4 (1993). In the context of a cost allocation case which addressed claims for interest costs on a lease affecting New York's costs under several federal programs under the Act, the Board held that the authorizing statutes all require that "only those costs specifically deemed necessary are determined to be allowable." New York State Department of Social Services, DAB No. 1590, at 5 (1996). The Board concluded that "a state is entitled to federal funding only for those administrative costs which HHS deems necessary for the proper and efficient administration of the programs in question." Id. The Board further stated:
[T]he allowability of a particular administrative cost is a matter within the federal government's discretion. As New York itself pointed out, the Social Security Act programs under which some of the costs in question here were claimed typically vest the Secretary of HHS with the authority to determine what costs are "necessary" for the proper and efficient administration of the program. . . . DAB No. 1537, at 6. Thus, a state is entitled to federal funding only for those administrative costs which HHS deems necessary for the proper and efficient administration of the programs in question. Noting that the authorizing statutes for all of the programs at issue here contained similar provisions, NYSDSS argued that "in the absence of any determination by the Secretary finding that the State's interest costs are unnecessary, the interest costs are allowable." NYSDSS Reply Br. at 2. However, this reverses the process required by the statutes, under which only those costs specifically deemed necessary are determined to be allowable. Id.
The term "reasonable" has sometimes been treated as distinct from "necessary" and as having reference to the magnitude of the costs, as opposed to their nature. See New York State Department of Social Services, DAB No. 1102, at 7 (1989)("[A]lthough necessity and reasonableness are coupled in the cost principles, they can be viewed as discrete concepts, with necessity referring to the purpose for which a cost is incurred and reasonableness referring to the amount."). NYSDOH argued that the costs here were reasonable in that studies suggested that "only four people would have to exhaust benefits" under the insurance scheme to save the amount at issue in the disallowance. NYSDOH Br. 21-22 (emphasis in original). HCFA responded that this standard was not appropriate, essentially because the costs would not be reasonable in any amount when they are not necessary for operation of the program. HCFA Br. 21.
The relation of the amount spent to the benefit received by the program is a logical factor to consider in weighing whether a cost which by its nature facilitates program administration is, in fact, reasonable in practice. However, we agree with HCFA that, where costs are categorically unallowable because they are of a nature that is not necessary to program administration, it cannot be a separate basis for allowability that, after all, they are relatively low in amount.
Cooperative federalism does not require federal funding of the Partnership initiative.
New York argued lastly that principles of cooperative federalism demanded that the federal government participate in the costs of the outreach program. NYSDOH Br. at 28-30 (citing Harris v. McRae, 488 U.S. 297 (1980), and related cases). NYSDOH suggested that the federal government had demonstrated an intention to support the program from its inception based on positive comments made by the Public Health Service about the general concept in 1985 and 1986, by HCFA's approval of the SPAs (discussed above), and by the Ford Foundation's receipt of an award for governmental innovations. See NYSDOH Exs. S-35, 36, and 37. Further, NYSDOH argued that the federal government would share in the benefits of any savings ultimately realized and that such benefits could only materialize if the policies were promoted to the public. Hence, it would be inequitable, NYSDOH asserted, for the federal government to refuse to share in the costs.
NYSDOH contended that the test for this purpose should be whether the costs benefit the Medicaid program rather than whether they benefit Medicaid recipients. NYSDOH Reply Br. at 3. NYSDOH compared these costs to the costs of negative eligibility determinations, which have been previously held to be allowable as necessary costs of running the program, even though the costs do not benefit any recipients. Here, however, the benefits do not accrue to the program but largely to those ineligible persons who purchase the policies in order to protect their assets in the future. The only benefit to the Medicaid program would be the possibility that in some future years the net cost to Medicaid may prove lower for purchasers of policies than if those individuals had not purchased insurance. We do not find that this hope constitutes a present benefit either to the program or to recipients.
Further, general approbation for a State initiative cannot suffice to bind the federal government to participate financially in its promotion, particularly absent any explicit agreement or statement in the State plan or approved CAP. NYSDOH contended that the costs were "not excluded" under the State plan, and that the definition of administrative costs was not a matter for the State plan, but rather governed by OMB Circular A-87. This is a somewhat circular argument, however, since HCFA originally based its disallowance on the ground that the costs were unallowable under OMB Circular A-87 and New York argued that they were approved by virtue of the SPA approvals. We need not address this point here, since we have already concluded above that the costs are neither allowable under the OMB Circular nor approved as part of the State plan.
Conclusion
For the reasons explained above, we conclude that the costs of promoting the sale of LTC insurance through the Partnership are not eligible for FFP as administrative costs of operating the Medicaid program. We uphold the disallowance.
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M. Terry Johnson
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Norval D. (John) Settle
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Donald F. Garrett
Presiding Board
Member