Rhode Island Department of Human Services

The Rhode Island Department of Human Services (Rhode Island) appealed a determination of the Health Care Financing Administration (HCFA) disallowing $2,471,628 in federal financial participation (FFP) claimed by Rhode Island under title XIX (Medicaid) of the Social Security Act (Act). HCFA determined that Rhode Island's collection of health care related taxes for the state fiscal year ending June 30, 1993 (SFY '93) exceeded the limit for that year established under section 1903(w)(5)(A) of the Act. Rhode Island acknowledged that it had exceeded the section 1903(w)(5)(A) limit and that FFP for SFY '93 should be reduced by $861,700.⁽¹⁾ Rhode Island alleged, however, that the remaining disallowance of $1,609,928 should be reversed since HCFA erred in calculating the amount of the reduction. Specifically, Rhode Island argued that HCFA had erred by: 1) failing to include Medicaid administrative costs in the amount multiplied by 25% to calculate the amount of the limit; and 2) incorrectly identifying certain licensing or registration fees as health care related taxes subject to the limit.

For the reasons stated below, we conclude that HCFA correctly calculated the amount of the limit. We further conclude that some fees may have been included in calculating the disallowance that are not "health care related taxes" as defined for purposes of the provider tax provisions in section 1903(w) of the Act. While we reject several of Rhode Island's general arguments about how "health care taxes" are defined, we also conclude that HCFA may not "deem" a tax to be health care related without examining whether applicable definitions apply. Applying those definitions to the specific fees at issue, we conclude that HCFA may not treat certain licensing fees imposed on drug wholesalers and distributors as health care related taxes, but that HCFA did correctly identify the remaining fees at issue as health care related taxes.

As explained below, we uphold the disallowance in part and reverse it in part, unless HCFA makes a further determination that the fees on drug wholesalers and distributors were not included in the disallowance calculation.

I. Whether HCFA correctly calculated the limit

A. Background

A state with an approved Medicaid state plan may receive FFP in accordance with section 1903 of the Act. Subsection 1903(a)(1) provides for FFP at the federal medical assistance percentage (FMAP) rate for amounts expended as "medical assistance" under the state plan. "Medical assistance" is defined in section 1905(a) of the Act to include payment for specified health care items or services provided to eligible individuals. A state may also receive FFP for administrative costs either at enhanced rates established in subsections 1903(a)(2)-(6) for specified costs, or at the 50% rate established in subsection 1903(a)(7) for other administrative costs. The expenditures covered by the state are called its non-federal share.

In order to enhance funds available to cover the non-federal share of Medicaid costs, some states began in the 1980's to accept donations from, or to impose taxes on, providers of Medicaid items or services. Often, the increased non-federal funds were then used to increase reimbursement to the providers and correspondingly to increase claims for FFP. HCFA's attempts to restrict use of provider donations and provider-specific taxes through regulations led to disputes with states. At the request of Congress, negotiations took place between the National Governors Association (NGA) and representatives of the Office of Management and Budget and HCFA (the Administration). The negotiations led to an agreement and, ultimately, to passage of section 1903(w) of the Act in the Medicaid Voluntary Contribution and Provider Specific Tax Amendments of 1991, Public Law No. 102-234 (1991 Amendments).⁽²⁾

Paragraph (1)(A) of section 1903(w) provides that "the total amount expended during such fiscal year as medical assistance under the State plan (as determined without regard to this subsection) shall be reduced by the sum" of the amounts of any revenues received by the state from any of four sources. Paragraphs (1)(A)(i) - (iii) provide for reductions for certain provider-related donations, for health care ! related taxes other than broad-based health care related taxes, and for broad-based health care related taxes that are subject to a hold harmless provision. Paragraph (1)(A)(iv) provides for a reduction for broad-based health care related taxes that exceed the limit in paragraph 1905(w)(5)(A) of the Act, during the period after a specified transition period and up to September 30, 1995 (the "phase-in period").

While broad-based health care related taxes not subject to a hold harmless were considered to be "permissible" taxes, the limit was put in place as a precautionary measure during the phase-in period so HCFA and Congress could observe whether the provisions of section 1903(w) would work as intended. RI Br. at 3; RI Ex. M at 412.

Paragraph 1903(w)(5)(A) of the Act provides for calculating the limit as follows:

For purposes of this subsection, the limit under this subparagraph with respect to a State is an amount equal to 25% (or, if greater, the State base percentage, as defined in subparagraph (B)) of the non-Federal share of the total amount expended under the State plan during a State fiscal year (or portion thereof), as it would be determined pursuant to paragraph (1)(A) without regard to paragraph (1)(A)(iv).

(Emphasis added.)

The "State base percentage" is defined as--

an amount (expressed as a percentage) equal to--
(I) the total of the amount of health care related taxes (whether or not broad-based) and the amount of provider-related donations (whether or not bona fide) projected to be collected . . . during State fiscal year 1992, divided by
(II) the non-Federal share of the total amount estimated to be expended under the State plan during such State fiscal year.

Paragraph 1903(w)(5)(B)(i).

HCFA regulations provide for calculating the limit on broad-based taxes by multiplying 25% (or the "State base percentage," if greater) by the "State's total medical assistance expenditures for the fiscal year" less impermissible health care related taxes. 42 C.F.R. � 433.70(a)(1)(ii). The denominator of the state base percentage as defined in the regulations is "the total non-federal share of medical assistance expenditures (including administrative costs) in that fiscal year based on the best available HCFA data." 42 C.F.R. � 433.60(b).

Rhode Island here argued that HCFA's regulation conflicts with the 1991 Amendments and their legislative history. According to Rhode Island, HCFA should have used total Medicaid expenditures, including administrative expenditures, in calculating the limit for SFY '93.⁽³⁾ Calculating the limit by including administrative expenditures in the multiplication factor would result in a limit of $99,126,823, rather than the $96,989,332 figure used by HCFA. RI Br. at 4-5.

The issue presented here was previously addressed in this Board's decision in Kentucky Dept. for Medicaid Services, DAB No. 1524 (1996), and the reconsideration of that decision. The Board's decision was affirmed in Kentucky Cabinet for Health Services v. Secretary, No. 96-607 (D.D.C. May 29, 1997). HCFA Ex. 12 (slip op.). Both the Board and the district court held that HCFA's regulation is a reasonable interpretation of the statute. The Board found support for the regulatory interpretation in the wording of paragraph 1903(w)(5)(A) of the Act. In that paragraph, the phrase "total amount expended under the State plan" is qualified by the phrase "as it would be determined pursuant to paragraph (1)(A)." Paragraph (1)(A) provides for determining amounts expended "as medical assistance." The district court concluded that the statute was ambiguous and therefore the administrative interpretation was entitled to deference. Both the Board and the district court also concluded that the legislative history relied on by Kentucky did not establish that Congress intended a result different from the regulatory interpretation. The district court further noted that, if Congress had intended a different result, it could have acted to change the regulatory interpretation, but had not done so.

Rhode Island nonetheless asked us to again consider the issue, based on what it said is evidence that HCFA's regulations conflict with Congressional intent in enacting the 1991 Amendments.

Rhode Island relied on the definition of "State base percentage," arguing that principles of statutory construction mean that the phrase "total amount expended under the State plan" should be interpreted the same way in paragraphs (A) and (B) of 1905(w)(5). Rhode Island argued that the result of HCFA's interpretation is like comparing "apples and oranges."

As the Board previously noted, this argument ignores the qualifying phrase "as it would be determined pursuant to paragraph (1)(A)" which qualifies the phrase "total amount expended" in 1903(w)(5)(A), but does not appear in 1903(w)(5)(B). HCFA could reasonably determine that Congress intended a difference by adding this qualifier in one place, but not the other. Moreover, Rhode Island's "apples and oranges" argument ignores the fact that, under HCFA's interpretation both percentages at issue (the 25% and the state base percentage) are multiplied by the same amount -- the total amount expended as medical assistance. This makes sense because the resulting amount is used to determine whether there is any excess amount that will reduce the amount of state expenditures for medical assistance to which the FMAP is applied. The result of the calculation is a limit on the use of revenues from broad based provider taxes for medical assistance expenditures.

Finally, Rhode Island's "apples and oranges" argument fails to consider the purpose of the state base percentage amount. That amount is merely a way of estimating the extent to which a state was relying on provider taxes and donations. Both the numerator and the denominator in the calculation are referred to as estimates. Subparagraph 1903(w)(5)(C)(ii) indicates that the best available data should be used. Congress may have determined that the proportion of total provider taxes plus provider donations to total spending for both administrative and medical assistance expenditures reasonably estimates the percentage that would be obtained if only medical assistance expenditures were used.

Rhode Island also raised several new arguments based on legislative history not considered in Kentucky. Specifically, Rhode Island relied on the fact that the provision in H.R. 3900 (legislation introduced in the House of Representatives) on how to calculate the limit referred to "medical assistance," whereas the legislation in the Senate that resulted in the 1991 Amendments did not.

As HCFA pointed out in response, the timing of the introduction of H.R. 3900 as compared with the enactment of the 1991 Amendments raises questions about the relationship of that bill to the Amendments. HCFA Br. at 18-19. Even if the 1991 Amendments are viewed as a modified version of H.R. 3900, however, that would not persuade us that Congress intended a result in conflict with HCFA's regulatory interpretation. Since paragraph 1903(w)(5)(A) as enacted refers to amounts expended as determined pursuant to paragraph 1903(w)(1)(A), the Senate may have deleted the reference to "medical assistance" as redundant, as HCFA argued. Thus, even assuming the Senate could be seen as having deliberately dropped the reference to "medical assistance" in the description of the multiplication factor, this would not demonstrate unambiguous congressional intent to use the total of both medical assistance and administrative expenditures.

Rhode Island responded, however, that its point was that H.R. 3900 is evidence that the intent was that the multiplication factor used in calculating the limit be parallel to the denominator used in calculating the state base percentage. Rhode Island pointed out that H.R. 3900 used "expended as medical assistance" in both formulas. Rhode Island clarified that it was using H.R. 3900 as support for its "apples and oranges" argument. This argument, however, ignores the fact that the two formulas are not exactly parallel even in the H.R. 3900 version. In that version, the multiplication factor in the formula for calculating the limit refers to the reductions pursuant to section 1903(w)(1)(A), whereas the state base percentage formula does not. Also, in H.R. 3900, the state base percentage formula refers to "estimated" expenditures, whereas the formula for calculating the limit does not. These differences undercut any inference of an intent to have the two formulas compare as "apples to apples," as Rhode Island contended they should.

Rhode Island also relied on the agreement between the NGA and the Administration as evidence of what Congress intended in the 1991 Amendments. Rhode Island submitted affidavits by a person who represented NGA in the negotiations, attaching a copy of the agreement. RI Ex. L. The relevant provision of the agreement (dated November 21, 1991) refers to "multiplying the 25 percent figure by the state share of Medicaid expenditures less any revenue derived from donations or provider-specific tax programs that do not meet the requirements of this proposal." Id., Attachment (Att.) at 2. One problem with Rhode Island's reliance on this language is that it is ambiguous with respect to whether it means expenditures for medical assistance only or also for administrative purposes. While it could mean all Medicaid program expenditures, the term "Medicaid" may have also been used as a shorthand for "medical assistance."

In a hearing before a House subcommittee several days after the agreement was reached, the then HCFA Administrator did use similar language, referring to the "State share of Medicaid funding," rather than to medical assistance expenditures. R.I. Ex. M at 391. Her explanation of how the 25% figure was chosen, however, refers to differences in states' match percentages. Id. at 412. Those differences relate to the FMAPs established separately for each state and applicable only to medical assistance expenditures.

Statements on the floor of the Senate discussing the agreement indicate, moreover, that after the agreement was reached on November 21, the parties continued to work together to draft legislative language and to flesh out the details of the agreement. RI Ex. N (see, e.g., statement at S18188). If, as Rhode Island argued, H.R. 3900 was the draft legislation directly related to the agreement between NGA and the Administration, the fact that H.R. 3900 included the phrase "as medical assistance" supports a conclusion that HCFA's interpretation is consistent with the agreement. Rhode Island failed to explain why, if the agreement intended to base the calculation on total expenditures for both medical assistance and administration, the legislation allegedly drafted from the agreement did not reflect such an intent. Rhode Island did not point to anything in the legislative history that would support a conclusion that Congress intended any substantive change by the language it ultimately adopted. In Kentucky, the District court noted that, while statements by Members of Congress on the floor support the view that Congress intended the statute to embody the compromise between the NGA and the Administration, they do not convincingly demonstrate what that intent was with respect to how to calculate the limit. HCFA Ex. 12, at 16-18 (slip op.).

Thus, we affirm the conclusion reached by the Board previously and upheld by the district court in Kentucky that HCFA's interpretation in its regulation is a reasonable one, not in conflict with the statute or its legislative history.

II. Whether certain taxes are health care related taxes

A. Background

The limit discussed above applies under 1903(w)(1)(A)(iv) to revenues received from any "broad-based health care related tax." Paragraph 1903(w)(3)(A) defines "health care related tax" as a tax that--

(i) is related to health care items or services, or to the provision of, the authority to provide, or payment for, such items or services, or
(ii) is not limited to such items or services but provides treatment of individuals or entities that are providing or paying for such items or services that is different from the treatment provided to other individuals or entities.

That paragraph further provides: "In applying clause (i), a tax is considered to relate to health care items or services if at least 85 percent of the burden of such tax falls on health care providers."

The term "broad-based health care related tax" is defined under

paragraph 1903(w)(3)(B) as--

a health care related tax which is imposed with respect to a class of health care items or services . . . or with respect to providers of such items or services and which, except as provided in subparagraphs (D) and (E)--
(i) is imposed at least with respect to all items or services in the class furnished by all non-Federal, non-public providers in the State . . . ; and (ii) is imposed uniformly in accordance with subparagraph (C).

Subparagraph D provides an exception related to whether a tax is imposed uniformly, and subparagraph E provides for the possibility of a waiver under which a tax not fitting the definition of a broad-based health care related tax could nonetheless be treated as one.

Paragraph 1903(w)(7)(B) defines a "health care provider" as "an individual or person that receives payments for the provision of health care items or services." Paragraph 1903(w)(7)(F) defines "tax" to include "any licensing fee, assessment, or other mandatory payment" but not to include "payment of a criminal or civil fine or penalty (other than a fine or penalty imposed in lieu of or instead of a fee, assessment or other mandatory payment)."

All of the fees at issue were identified by the Rhode Island State Auditor General as health care related taxes. Rhode Island nonetheless argued here that some of the fees included in the calculation are not health care related taxes. Rhode Island identified fees in the following categories as fees that should not have been included: (1) the pharmacy and narcotic drugs licensing fee; (2) the radiation sources and materials licensing fee; (3) the nursing service agency registration fee; (4) the professional regulation licensing fee; and (5) the board of respiratory care fee.

Rhode Island argued that the fees in these categories either were not collected from health care providers at all or do not meet the 85% test in paragraph 1903(w)(3)(A). Rhode Island asserted that HCFA had erred in treating some of the individuals or entities on which the fees are imposed as health care providers. Rhode Island also argued that HCFA's interpretation of how the 85% test applies is inconsistent with the statute. In arguing against HCFA's interpretation of the statute, Rhode Island argued generally that treating the licensing fees at issue as health care related taxes is inconsistent with the statutory purpose. We discuss the general legal issues first, then explain our conclusions related to individual categories of fees identified by Rhode Island.

B. Analysis of general legal issues

1. What is a "health care provider"

Rhode Island took the position that some of the individuals or entities paying the licensing fees at issue are not "health care providers" for purposes of the provider tax provisions. According to Rhode Island, the statutory definition of "health care provider" as "an individual or person that receives payments for the provision of health care items or services" refers to an individual or person receiving payment for providing such items or services to patients or other users of the services. Rhode Island asserted, for example, that wholesalers or distributors of drugs merely supply the items to health care providers such as hospitals, and that pharmacists are employees of the pharmacies that are paid for providing drugs to patients. Rhode Island also asserted that nursing service agencies are basically an employment service, providing temporary nurses to hospitals and nursing facilities, not providing nursing services to patients. Thus, Rhode Island argued, the wholesalers, distributors, pharmacists, and nursing service agencies are not themselves providers.

HCFA responded that "HCFA deems a drug distributor or wholesaler or a nursing service agency to be receiving payments for the provision of health care items or services within the meaning of Social Security Act � 1903(w)(7)(B)." HCFA Br. at 6, note 1. HCFA quoted from its regulations defining "health care provider" and an "entity related to a health care provider."⁽⁴⁾ HCFA asserted that the meaning of "provider" for purposes of the provider tax and donation provisions is "somewhat different" from the meaning of "provider" for Medicaid purposes in general, "where the term is used to identify an entity that has entered into an agreement to provide services in the Medicaid program." Id. HCFA argued:

The concerns about health care providers in the context of the donations and taxes law are not narrowly focused on those entities with Medicaid provider agreements. The concepts of health care related and provider related entities are needed to prevent circumvention of limits on use of donations and taxes to generate FFP. Id.

Rhode Island replied that, because a supplier or an employee is an "entity related to a health care provider" under HCFA's regulation, it follows that a supplier or employee is not a provider. This interpretation makes sense, Rhode Island asserted, because the "problem to which the tax/donation legislation was addressed was the payment of Medicaid reimbursement (which generated FFP) to entities that were subject to provider-specific taxes or which made donations to the State." RI reply at 10. Taxes imposed on entities that do not receive reimbursement were not of concern, Rhode Island argued. According to Rhode Island, the concern regarding related entities was limited to the donation area because of the possibility that donations would be channeled through related entities, but this concern does not exist in the tax context.

We agree with HCFA that the term "health care provider" for purposes of the provider tax provisions is clearly broader than the term as used for Medicaid purposes generally. On the other hand, we see no basis for HCFA to "deem" an individual or entity to be a "health care provider" without analyzing whether the statutory and regulatory definitions apply. The statute and regulations require an analysis of whether the taxed individual or person is receiving any payment or payments for health care items or services provided. Neither the statute nor the regulations directly addresses the question of whether this means provided to the health care patient, or could also mean supplied to an entity which then provides it to the patient. Nor do the statute or regulations directly address whether the payment could be in the form of a salary to an employee of an entity that receives payment from a patient or program for services provided. As Rhode Island pointed out, however, the fact that suppliers and employees are included in the regulatory definition of an "entity related to a health care provider" implies that they are not themselves health care providers for purposes of the regulation.

Moreover, under the statutory and regulatory definitions, what the individual or person provides must be a "health care item or service." Thus, a nursing service agency cannot properly be "deemed" to be a "health care provider" without examining whether such an agency is in fact providing (and receiving payment for) nursing services or is simply providing an employment service as Rhode Island alleged.

We examine these issues below in more detail with respect to the specific fees in dispute.

2. How does the 85% test apply

Rhode Island argued that less than 85% of the burden of the fees at issue falls on health care providers and that, therefore, paragraph 1903(w)(3)(A) exempts them from treatment as a health care related tax. HCFA in response took the position that the 85% test is relevant only in determining whether the fee is related to health care items or services. HCFA asserted that, even if the fees at issue are not related to health care items or services, they are health care related taxes because they are related to the authority to provide health care items or services. For example, HCFA asserted, a pharmacy does not have the authority to provide prescription drugs unless it has a licensed pharmacist.

HCFA relied on its regulation at 42 C.F.R. � 433.55(a), defining a "health care-related tax" as--

a licensing fee, assessment, or other mandatory payment that is related to--
(1) Health care items or services;
(2) The provision of, or the authority to provide, the health care items or services; or
(3) The payment for the health care items or services.

Subsection 433.55(b) states:

A tax will be considered to be related to health care items or services under paragraph (a)(1) of this section if at least 85 percent of the burden of the tax revenue falls on health care providers.

(Emphasis added.)

In response to a comment on this provision when it was first published, HCFA specifically rejected the position that the 85% test should also apply to taxes related to the provision of, or the authority to provide, health care items or services, and to the payment for the items or services. 59 Fed. Reg. 43,156; 43,160 (August 13, 1993); RI Ex. O.

Rhode Island argued that HCFA's regulation is inconsistent with the statute. Rhode Island suggested that the 85% test applies to each of the bases in paragraph 1903(w)(3)(A) of the Act for finding a tax to be health care related.⁽⁵⁾

The plain language of the 85% provision, however, supports HCFA's regulatory interpretation, since the provision addresses only when "a tax is considered to relate to health care items or services." While it refers back to clause (i), clause (i) clearly distinguishes alternative bases for considering a tax to be health care related. One alternative is if the tax is related to health care items or services. Another alternative (indicated in the statute by the conjunction "or") is if the tax is related "to the provision of, the authority to provide, or payment for, such items or services."

Indeed, paragraph 1903(w)(3)(A) also includes as a health care related tax under alternative clause (ii) any tax that "is not limited to such items or services but provides treatment of individuals or entities that are providing or paying for such items or services that is different from the treatment provided to other individuals or entities." The regulation at 42 C.F.R.

� 433.55(c) implements clause (ii) and states:

A tax is considered to be health care related if the tax is not limited to health care items or services, but the treatment of individuals or entities providing or paying for those health care items or services is different than the tax treatment provided to other individuals or entities.

Thus, we reject Rhode Island's position that 85% of the burden of the fees at issue must be on providers of health care items or services in order to consider the fees to be health care related taxes. Rhode Island's position is inconsistent both with the plain language of the statute and with HCFA's implementing regulations. Only if HCFA seeks to classify a tax as health care related on the basis that it is related to health care items or services is the 85% test relevant.

3. Whether the purpose of the provider tax provisions is relevant in determining whether a tax is health care related

In its appeal brief, Rhode Island observed generally that--

withholding FFP based on the amount of licensing fees collected by Rhode Island under longstanding state regulatory and licensing systems does not advance any Medicaid program interest, nor is it necessary to protect against any of the financial impacts that underlay the efforts to regulate state use of health care related taxes.

RI Br. at 18. Rhode Island argued that excluding the licensing fees at issue from the disallowance calculation "is powerfully supported by the absence of any programmatic objective or purpose that would be served by their inclusion." According to Rhode Island, reducing FFP to states "based on their choice of revenue generating strategies, is a significant dilution of state sovereignty, and strains intergovernmental relations in the federal system." RI Br. 18-19.

HCFA responded that these arguments seem to try to equate the purpose and intent of the 1991 Amendments with the definition of "health care related tax." HCFA argued that, under the statutory scheme, some health care related taxes are prohibited and others are permissible, but subject to a limit during the phase-in period. According to HCFA, it would be illogical to use only taxes of the type that Congress intended to prohibit to calculate the limit.

HCFA also argued that--

if the statute were interpreted such that the types of health care related taxes would be severely limited to only those imposed directly on hospitals, nursing homes and doctors, that would invite rather than curb wholesale manipulation and result in circumvention of the goal to limit state use of health care related taxes to generate federal financial participation. The patient or the Medicaid program ends up as the bottom-line payer of taxes and fees placed on nurses, pharmacists, health care item suppliers and distributors rather than on hospitals, nursing homes and pharmacies. The goal of limiting the effect of health care related taxes on FFP could not be enforced if the states could avoid the statutory limit by selectively imposing health care related taxes without any FFP reduction penalty.

HCFA Br. at 6 (footnote omitted).

Rhode Island acknowledged that the limit at issue here applies to permissible taxes--broad based health care related taxes that are uniformly imposed and not subject to a hold harmless provision. Rhode Island questioned, however, how limiting "health care related taxes" only to those imposed directly on health care providers would invite "wholesale manipulation" and "circumvention" of the goal to limit state use of provider taxes to generate FFP. Rhode Island argued:

If the entities taxed--nursing service agencies, pharmacists, health care suppliers and distributors--are not recipients of payments under the Medicaid program, we fail to see how not treating taxes imposed on them as health care related would result in "wholesale manipulation" or would enable states to draw FFP improperly.

RI reply at 4. According to Rhode Island, the fact that HCFA agreed that the licensing fees at issue are "longstanding licensing fees whose purpose was far removed from concerns about Medicaid reimbursement," means that "there is no policy that would warrant stretching the statutory definitions to include these fees solely for the purpose of avoiding some non-existent 'manipulation'." RI reply at 4-5, quoting HCFA Br. at 6.

Neither party's arguments regarding the purposes of the provider-tax provisions are fully persuasive. Limiting "health care related taxes" to those imposed directly on providers would not be consistent with the plain definition of those taxes in the statute and implementing regulations. Nor would limiting "health care related taxes" to those that could be manipulated to increase FFP be consistent with the statutory scheme, which includes as "health care related taxes" permissible as well as impermissible taxes. The taxes considered permissible were presumably those Congress considered to be ones not subject to improper manipulation. While the temporary imposition of a limit on permissible taxes reflected some concern by the Administration about whether the statutory provisions would effectively avoid such manipulation, it clearly would be inconsistent with the statutory scheme to interpret "health care related taxes" to include only those that HCFA could demonstrate could be manipulated.

Moreover, as the regulatory history indicates, the provisions at issue here do not interfere with state sovereignty. RI Ex. O, 58 Fed. Reg. at 43,158. States are still free to impose whatever taxes they wish. The consequence is simply less FFP for Medicaid expenditures than states otherwise might receive if those taxes are impermissible or exceed the limit while it is applicable. If Congress had thought it needed to define health care related taxes narrowly to avoid interfering with state sovereignty, we doubt if it would have chosen words such as "related to" or included several alternative bases for considering a tax to be health care related.

On the other hand, HCFA's argument that "the patient or the Medicaid program ends up as the bottom-line payer of taxes and fees placed on nurses, pharmacists, health care item suppliers" sets out a test that is clearly too broad, as Rhode Island argued. Many kinds of taxes (such as a general sales tax) may ultimately result in an increase in the costs of health care items or services, yet do not necessarily fit the definition of a "health care related tax." HCFA cannot properly substitute a general fear of increased program costs for a reasonable application of the statutory and regulatory definitions adopted to implement the provider tax provisions.

In sum, we conclude that a tax may be health care related even if not subject to manipulation to increase FFP. We further conclude, however, that HCFA may not classify a tax as health care related solely on the basis that the patient or Medicaid might end up as the "bottom-line payer."

C. Analysis of the specific fees at issue

1. Drug and narcotic licensing fees

The State Auditor General identified as revenue from a health care related tax in SFY 1993 $127,257 from Receipt Account Number 11-12-340, Pharmacy Licensure. RI Ex. H, Schedule 3. Rhode Island associated this amount with revenue under Chapter 5-19 of the Rhode Island General Laws.⁽⁶⁾ Rhode Island argued that this Chapter governs licensing of individual pharmacists, pharmacies, wholesalers, and distributors. Rhode Island presented a table estimating revenues for SFY 1993 for new applications and renewal licenses from each of these groups. Rhode Island's table shows total estimated revenues of $149,200, whereas the State Auditor General report shows actual revenues of $127,257. Rhode Island did not dispute that the total actual revenues were in fact $127,257. Rhode Island explained that its estimates are "the best information available to the State about the incidence of the fees, and are sufficient to show that most of the fees-- almost 90 percent--were collected from pharmacists, wholesalers and distributors, who are not health care providers as that term is used in the 1991 statute." RI Br. at 9. Rhode Island supported its assertion that this is the best information on the incidence of the fees with an affidavit by a principal analyst with the Rhode Island Department of Administration/Office of Budget, who was previously employed as the Chief of Budget and Finance for the Rhode Island Department of Health. RI Ex. J.

Rhode Island also asserted that pharmacists are employees of pharmacies or other licensed entities and that wholesalers and distributors do not provide health care items or services to individuals. Rhode Island supported these assertions with an affidavit by the Associate Director for Health Services Regulation, Rhode Island Department of Health. RI Ex. I, � 3.

HCFA did not dispute Rhode Island's assertion that its information accurately reflects what percentage of the fees under Chapter 5-19 were collected from what individuals or entities. As mentioned above, however, HCFA disputed Rhode Island's assertion that pharmacists, wholesalers, and distributors are not health care providers for purposes of the provider tax provisions. HCFA also disputed Rhode Island's position about the effect of any finding that less than 85% of the fees were imposed on pharmacies. HCFA argued alternatively that the fees are related to the authority to provide health care items or services. HCFA cited Rhode Island General Laws section 5-19-20, which provides:

No person, co-partnership, or corporation shall conduct and maintain any open shop or store for the purpose of retailing, compounding, or dispensing drugs, medicines or poisons, without first obtaining and having in force from the board of pharmacy a license to do so, the license to be issued to the pharmacist registered by the [Board of Pharmacy] . . . .

RI Ex. C.

As discussed above, HCFA did not provide any convincing rationale for why it "deems" pharmacists, wholesalers, and distributors to be health care providers. HCFA's regulations imply to the contrary that these individuals and entities are not health care providers, since they are entities related to health care providers. Pharmacists are employees and do not receive payment for the items provided to the patients who are the pharmacy customers. Wholesalers and distributors are at most suppliers of health care items to providers.

On the other hand, for the reasons explained above, Rhode Island is mistaken to the extent that its arguments imply that only if the 85% test is met will a tax be considered to be health care related. Clearly, the licensing fees imposed on pharmacies are related to the authority to provide drugs to patients. Rhode Island did not deny that prescription drugs are a health care item or service, and the HCFA regulations clearly identify them as such. 42 C.F.R. � 433.56(a)(7). Therefore, these fees qualify as health care related taxes under the regulatory provision at 42 C.F.R. � 433.55(a)(2), to which the 85% test does not apply.

Moreover, with respect to the registration fee on pharmacists imposed under Chapter 5-19, this fee also falls within the description of a fee "related to" the authority to provide prescription drugs to patients. Since the pharmacy may not be licensed to provide drugs unless it has a registered pharmacist to whom the pharmacy license may be issued, registration of the pharmacist is a prerequisite to the pharmacy's authority to provide drugs to patients. Contrary to what Rhode Island argued in its reply brief, treating the pharmacist registration fee as a health care related tax on the basis that it is related to the authority to provide drugs does not prove too much. Rhode Island argued that HCFA's rationale would apply to any tax related to the authority to operate and therefore would encompass taxes such as a tax on an accounting firm or a building maintenance firm. The rationale for considering the registration fee to be health care related tax is that it is related to the authority to provide a health care item to patients. This is far more narrow than a general authority to operate.

Thus, we conclude that both the pharmacy licensing fees and the pharmacist registration fees qualify as health care related taxes for purposes of the provider tax provisions, but the fees for wholesalers and distributors do not. Thus, we uphold the disallowance to the extent Receipt Account Number 11-12-340 includes revenues from pharmacy licensure or registration fees from pharmacists, but reverse the disallowance to the extent that account included revenues from wholesalers or distributors. Based on Rhode Island's table, we find that 79% of the total revenues for SFY 1993 under Chapter 5-19 is for fees paid for pharmacist registration or a pharmacy license.⁽⁷⁾ Assuming that the total revenues under Chapter 5-19 were included in Receipt Account Number 11-12-340, then 79% of $127,257 (or $100,533) was properly included and the remaining revenues of $26,724 ($127,257 - $100,533) were not.⁽⁸⁾

2. Radiation fees

The State Auditor General identified as revenue from a health care related tax in SFY 1993 $68,840 from Receipt Account Number 11-12-372, Radiation Sources, and $28,017 from Receipt Account Number 11-12-375, also called Radiation Sources. RI Ex. H, Schedule 1. Rhode Island associated these amounts with revenue under Chapter 23-1.3 of Rhode Island General Laws. R.I. Ex. D. That Chapter sets up a state radiation control agency. Section 23-1.3-5 requires the state radiation control agency to provide "for general or specific licensing of by-product, source, special nuclear materials, artificially produced radioactive material and naturally occurring radioactive material, or devices or equipment utilizing such materials." It also authorizes the agency to require "registration or licensing of other radiation sources" or of "any person engaged in the business of installing or offering to install radiation sources or engaged in the business of furnishing or offering to furnish radiation source services or service . . . to any agency licensee or registrant." The agency is authorized to assess annual fees in connection with its licensing, registration, and inspection activities.

Rhode Island asserted that, at the administrative level, "the regime established by section 23-1.3-5 is divided into two components." RI Br. at 11. Rhode Island identified the first component as a "fee collected for the general or specific licensing of radiation sources." Id. Rhode Island provided a table that it said showed the estimated fees under this component. Rhode Island identified the total fees for this component as $54,680. Rhode Island estimated that $5,100 of these fees "was collected from persons not involved in the provision of health care--i.e., analytical x-ray facilities, particle accelerator facilities, industrial radiography, radiation protection services, and cabinet x-ray facilities." RI Br. at 12. Implicitly, Rhode Island acknowledged that the other facilities from which these fees were collected (for example, hospital radiology facilities and chest/extremities facilities) should be treated as health care providers for purposes of the provider tax provisions.

Rhode Island identified the second component as licensing fees collected from users of radioactive materials. Rhode Island asserted that it had collected an estimated $35,830 from such licensing fees in SFY 1993. Rhode Island asserted that "approximately $23,600 of these fees were collected from entities not involved in health care." RI Br. at 13.

Rhode Island submitted an affidavit from the Chief, Office of Occupational and Radiological Health, Rhode Island Department of Health, in support of its assertions. RI Ex. K.

Rhode Island argued that the two components should be considered in the aggregate and that, so considered, "the amounts attributable to non-health care providers well exceed fifteen percent of total revenues under" section 23-1.3-5. Rhode Island further argued that "nothing in the fee structure affords different treatment to health care providers and non-health care providers as classes." RI Br. at 13. While Rhode Island's table indicates, for example, that a hospital radiology facility paid a fee of $500, as compared to a fee of $60 for a cabinet x-ray facility or a dental facility, Rhode Island attributed this difference to the relative sizes of the facilities.

In response, HCFA noted that HCFA had calculated the disallowance "after the State Auditor identified the amounts of taxes and licensing fees that were health care related." HCFA Br. at 13. HCFA argued that nothing in Rhode Island's brief or the supporting affidavit "demonstrates that radiation fees paid by businesses that do not provide health care items or services were erroneously tabulated as health care related taxes by the State Auditor." Id.

Rhode Island replied that HCFA's response misses the point completely because Rhode Island did not argue that the disallowance should have included such fees paid by non-providers. Rather, Rhode Island said, Rhode Island "pointed to the existence of non-provider taxpayers to support its position that the tax is not a health-care related tax" because more than 15 percent of the tax is paid by non-providers. RI reply at 13, note 6.

Based on our analysis of the record, we find that Rhode Island did not establish that the total fees should be aggregated for purposes of applying the 85% test and that, in any event, the fees from the receipts accounts here were properly treated as health care related taxes on the basis that health care providers are treated differently from other entities for purposes of these fees.

We first note that Rhode Island provided no explanation of the difference between the amounts it identified as collected for fees under section 23-1.3-5 and the amounts identified as revenue from radiation sources by the State Auditor General. While we do not treat the State Auditor General's determination that the revenues were from health care related taxes as determinative, that finding is entitled to some presumption of validity. Rhode Island should have at least better explained the relationship between its estimated figures and the State Auditor General's figures.

With respect to the 85% test, Rhode Island's assertion that the two "components" should be aggregated for this purpose is not supported by the record. The affidavit submitted by Rhode Island (which uses words slightly different from those in Rhode Island's brief to describe the two components of fees at the administrative level) divides the fees into "registration of radiation sources, and the licensing of users of radioactive materials." RI Ex. K. The authority to assess "registration" fees is a separate authority under section 23-1.3-5 from the authority to assess "licensing" fees. Moreover, both receipt accounts identified by the State Auditor General are called "Radiation Sources" on the schedules used by the Auditor General. Since the affidavit, the State law, and the accounts distinguish registration fees for radiation sources from licensing of users of radioactive materials, we see no reason to aggregate them for purposes of the 85% test.

Rhode Island's own table of fees in the "radiation source" category shows that more than 85% of the fees in that category were collected from entities that Rhode Island acknowledged were health care providers. RI Ex. J. Thus, the radiation source registration fees are a health care related tax related to health care items or services under 42 C.F.R. � 433.55(a)(1), based on the 85% test.

Even if the receipt accounts at issue included revenues from both registration of radiation sources and licensing of users of radioactive materials, and the fees should be treated in the aggregate as Rhode Island indicated, this would not end our inquiry. As we concluded above, the 85% test applies only with respect to whether a tax is determined to be health care related on the basis that it is related to health care items or services. Alternative bases include that the tax provides treatment of individuals or entities that are providing items or services that is different from the treatment provided to other individuals or entities. 42 C.F.R. � 433.55(c); � 1903(w)(3)(A)(ii) of the Act. Rhode Island's argument that health care providers are not treated differently from other entities with respect to the fees imposed under section 23-1.3-5 is not persuasive. The table submitted by Rhode Island suggests that the registration fee amount is based on the type of facility, rather than the size of the facility. Ex. J, � 4. Some of the facilities provide x-ray services to patients and some do not, and they are treated differently. For example, a hospital radiology facility's fee is $500, which is substantially higher than the $60 fee for most other facilities. Id. Nothing in the affidavits supports Rhode Island's argument that the fees are higher because of the relative size of the facilities. Contrary to what Rhode Island's argument suggests, it does not matter that the difference is not defined using the term "health care provider." The relevant question under the statute and regulations is whether the treatment of entities providing health care services is different from the treatment of those who are not.

Therefore, we conclude that the revenues from both Radiation Sources receipts accounts were health care related taxes, properly included in calculating the disallowance.

3. Nursing service agency fees

The State Auditor General identified as revenue from a health care related tax in SFY 1993 $13,607 from Receipt Account Number 11-12-383, Nursing Pool Registration Fees. RI Ex. H, Schedule 1. Rhode Island associated this amount with revenue under section 23-17.7-3 of the Rhode Island General Laws. RI Ex. F. That Chapter provides for the licensing of "nursing service agencies." A "nursing service agency" is defined as "any person, firm, partnership, or corporation doing business within the state that supplies, on a temporary basis registered nurses, licensed practical nurses, or nursing assistants, to a hospital, nursing home, or other facility requiring the services of such persons with the exception of home nursing care providers, home care providers and hospices licensed in this state." Id. This definition goes on to state: "for all purposes a nursing service agency shall be considered an employer and those persons that it supplies on a temporary basis shall be considered to be employees and not independent contractors . . . ."

Rhode Island argued that a nursing service agency is not itself in the business of providing health care and is not a health care provider within the meaning of the provider tax provisions. Rhode Island argued that the nursing service agency is supplying services to providers (like hospitals) and therefore is an entity related to a health care provider, not a health care provider. In support, Rhode Island submitted an affidavit by the Assistant Director for Health Services Regulation, stating that nursing service agencies are "an employment service, and do not provide health care in any form to individuals." RI Ex. I, � 2.

As mentioned above, HCFA stated that it "deems" a nursing service agency to be receiving payments for the provision of health care items or services and therefore to be a health care provider. HCFA Br. at 6, n.1. HCFA also argued alternatively that the licensing fee for a nursing service agency is related to the authority to provide health care items or services. HCFA asserted that a "hospital cannot use temporary nursing staff from a company that furnishes such temporary staff unless that company meets the state law requirement that it become specifically licensed as a nursing service agency." HCFA Br. at 12. HCFA further asserted:

The hospital staff is providing health care services whether the staff works directly for the hospital or for a nursing service agency. If the staff works for a nursing service agency, then the nursing service agency is receiving payments related to health care services and its licensing fee is related to the authority to provide health care items or services.

HCFA Br. at 12.

While we find that the fees at issue are health care related taxes as the State Auditor General and HCFA found, we do not agree with HCFA's rationale. HCFA's position on why a nursing service agency should be considered to be a health care provider ignores the implications of HCFA's regulatory definition of an "entity related to a health care provider." If the hospital's permanent employees (staff) are not treated as health care providers, it is difficult to see why an agency providing temporary staff should be treated as a health care provider.⁽⁹⁾

Moreover, since nothing requires a hospital or other facility to hire temporary help from a nursing service agency as a prerequisite for providing services, the fees are not related to the authority of the hospital or other facility to provide services.

Based on our examination of State law and HCFA's regulations, however, we conclude that the fees at issue are "related to the provision of . . . a health care item or service" within the meaning of 42 C.F.R. � 433.55(a)(2). The statement in the affidavit by the Assistant Director of Licensing that the nursing service agency is merely providing an "employment service" is not consistent with Chapter 23-17 of the Rhode Island General Laws. That Chapter states that its purpose is--

to provide for the development, establishment, and enforcement of standards:
(1) For the licensing of nursing service agencies; and
(2) To promote safe and adequate care for individuals receiving nursing and nursing related services.

The Chapter authorizes the Department of Health to set licensure standards and contains provisions related to training, competency evaluation, supervision, and criminal records of nursing service agency employees. The Department of Health is authorized to enforce the standards through inspections and investigations. Thus, one purpose of the fees is to ensure the quality of the services provided by hospitals and other facilities contracting with nursing service agencies for temporary help.

Thus, we conclude that the nursing service agency fees were health care related taxes properly included in the disallowance calculation.

4. Professional regulation fees

The State Auditor General identified as health care related taxes $631,745 of the total of $978,926 in SFY 1993 revenue from Receipt Account Number 11-18-348, Miscellaneous Profession Fees. RI Ex. H. The $631,745 included fees associated with the following professions: audiology/speech pathology; chiropractor; nursing/RN LPN; nursing assistant; nursing home administrator; occupational therapist; optician/optometrist; physical therapy; physician assistant; podiatrist; and psychologist. RI Ex. H, Schedule 2.

Rhode Island asserted that 1) professional regulation fees are also collected from practitioners of a variety of other occupations in the state (such as acupuncturists, athletic trainers, barbers, clinical social workers, and plumbers); 2) all professional regulation fees are collected by the Division of Professional Regulation of the Department of Health under a comprehensive, centralized system; 3) all of the fees collected by the Division of Professional Regulation should be considered in the aggregate; 4) more than 15% of the professional regulation fees, considered in the aggregate, were collected from non-health care providers; and 5) therefore, the fees should not be considered to be a health care related tax. Rhode Island submitted an affidavit by the Associate Director for Health Services Regulation to support its assertion that the system of regulation by the Division of Professional Regulation is a "comprehensive, centralized system." RI Ex. I, � 4.

HCFA responded that, although the Administrator of the Division of Professional Regulation acts as agent for various boards, separate statutes define the powers and duties of the boards related to the professions for which fees were included in the disallowance. HCFA Br. at 10, note 2. HCFA argued that there is no basis for considering the licensing fees for all of these professions in the aggregate with those of other professions regulated by the Division.⁽¹⁰⁾

Rhode Island replied that HCFA's position ignores Rhode Island's evidence about the nature of its system. Rhode Island argued that "aggregation is proper where a single entity is ultimately responsible for the professional licensing fees collected from various professions." RI reply at 12. Rhode Island cited a statement in the preamble to the final rules implementing the provider tax provisions, to the effect that a state may "add health care providers to an already existing non-health care related tax without penalty as long as it meets the 85-percent test." RI reply at 12, citing 58 Fed Reg. 43,156, 43,160 (Aug. 13, 1992), RI Ex. O. Rhode Island argued:

HCFA seems to espouse the technical view that a state would be able so to add health care providers only by amending a preexisting statutory provision rather than by adding a new provision. There is no sound reason for such a distinction, and as long as the license fees are a part of a single system . . . they should be treated as a single tax in applying the provider tax rules.

RI reply at 12-13 (footnote omitted).

We disagree with Rhode Island that HCFA's position is based on a technical view or a meaningless distinction. The fact that separate State statutory provisions govern licensure for each profession is highly relevant in determining whether to treat the revenues in the miscellaneous professional fees account as deriving from one single tax or from many taxes. The State law supports a conclusion that the fee for each profession is a separate tax since the fees for various professions differ in amount and purpose. The role of the Administrator of the Division of Professional Regulation as agent for the separate boards responsible for overseeing each profession is not sufficient to transform the fees into a "single tax." Moreover, the duties and powers of the Administrator, the Director of the Department of Health, and the relevant boards of examiners vary under the individual State law provisions, which undercuts Rhode Island's position that all of the fees are part of a "single system." HCFA Exs. 2-11.

The mere fact that the fees were put into the same receipts account does not mean they should be considered as deriving from the same tax, since each of the statutory provisions has a "Receipts" section that provides for the revenue to go to the general treasury. Indeed, each "Receipts" section refers to the "proceeds of any fees collected pursuant to the provisions of this chapter" and, for each profession, there is a separate chapter. HCFA Exs. 2-11. This structure supports HCFA's treatment of the fees for each profession as a separate tax.

The preamble language relied on by Rhode Island assumes the existence of a "tax" and an extension of application of that tax to added entities. Each of the statutory provisions here, however, creates a new fee, differing in purpose and amount, as well as in the type of individual on whom it is imposed. Moreover, the preamble to the final rule also explained the waiver provision under which licensing fees that vary will be treated as permissible taxes if the amount is not more than $1,000 annually per provider and the total amount raised is used in the administration of the licensing program. The preamble specifically rejected the comment that the licensing fees should be aggregated for purposes of applying this test.⁽¹¹⁾ 58 Fed. Reg. at 43,162; RI Ex. O.

Thus, we conclude that the State Auditor General and HCFA properly treated each of the licensing fees at issue as a health care related tax and did not need to aggregate all of the professional fees, as Rhode Island argued, for purposes of applying the 85% test. Moreover, since each of the fees is related to the authority to provide a health care service, each fee would qualify as a health care related tax under 42 C.F.R.

� 433.55(a)(2). As we concluded above, the 85% test does not apply to this basis for determining that a tax is health care related.

5. Respiratory care fees

The State Auditor General identified as health care related taxes $3,920 in SFY 1993 revenue from Receipt Account Number 11-18-357, Board of Respiratory Care Fees. RI Ex. H. These fees were governed by Rhode Island General Laws section 23-39-5. RI Ex. G. Rhode Island argued that fees collected from licenses issued to respiratory care practitioners should have been aggregated with other fees collected by the Division of Professional Regulation since the Board of Respiratory Care is within that division. RI Br. at 7, note 2.

For the reasons explained above, we conclude that each of the fees governed by separate statutory provisions was properly treated as a separate tax and did not need to be aggregated. We also agree with HCFA that this is a fee related to the authority to provide a health care item or service and is therefore a health care related tax, irrespective of whether the 85% test applies.

Thus, we conclude that the $3,920 in respiratory care fees was properly included in calculating the disallowance.

For the reasons stated above, we conclude that HCFA properly calculated the limit for SFY 1993 under 1903(w)(5)(A). We further conclude that all of the fees at issue were properly treated as health care related taxes, with the exception of the fees on wholesalers and distributors of drugs. If revenues from fees on wholesalers and distributors were included in calculating the disallowance, HCFA should reduce the disallowance in the total amount of $26,724. If HCFA determines that such fees were not included, and Rhode Island disputes this determination, Rhode Island may return to the Board on this limited issue, within 30 days of receiving HCFA's determination.

1. Rhode Island explained its corrected calculations in a note in its reply brief. RI reply at 2, note 1.

2. For a more detailed history of the legislation, see HCFA Ex. 12, at 2-3.

3. Rhode Island did not dispute that its "State base percentage" was lower than 25% and that therefore HCFA properly used 25% instead of the "State base percentage" in calculating the limit.

4. HCFA's regulation at 42 C.F.R. � 433.52 includes the following definitions:

Entity related to a health care provider means--

(1) An organization, association, corporation , or partnership formed by or on behalf of a health care provider;

(2) An individual with an ownership or control interest in the provider . . . ;

(3) An employee, spouse, parent, child, or sibling of the provider . . . ; or

(4) A supplier of health care items or services or a supplier to providers of health care items or services.

Health care provider means the individual or entity that receives any payment or payments for health care items or services provided.

5. Rhode Island stated:

The statute says that the 85 percent standard applies "under paragraph (a)(1) of this section," which embodies the entirety of the definition of health care related tax.

This statement misquotes the statute, however. In fact, paragraph 1903(w)(3)(A) says: "In applying clause (i), a tax is considered to relate to health care items or services if at least 85% of such tax falls on health care providers."

6. Rhode Island included in its appeal file copies of this and other Rhode Island laws. The versions included are from the codifications from various years subsequent to SFY 1993. HCFA did not argue that there was any relevant change between these codified versions and what was in effect in SFY 1993. Similarly, HCFA included in its appeal file copies of some Rhode Island laws codified after SFY 1993, but Rhode Island did not argue that there is any relevant difference between what HCFA submitted and what was in effect during the relevant period.

7. As noted above, HCFA did not contest Rhode Island's assertion that Rhode Island's table of estimated revenue was the best information available about the percentage of the fees collected from each type of individual or entity, even though the total estimated revenue was different from the actual amount collected. The table in the affidavit shows that a total estimated revenue of $149,200 (erroneously stated as $141,200 in Rhode Island's brief). RI Ex. Ex.J, �2. The table shows total revenues of $117,600 from pharmacists or pharmacies, or 79% of the total estimated revenues of $149,200.

8. Rhode Island's argument clearly implied that the revenue in the account included revenue from all four of the sources mentioned, and HCFA did not argue to the contrary. Yet, the account is identified as "Pharmacy Licensure" in the State Auditor General's papers. RI Ex. H. If only the fees for licensing pharmacies were included in this account, then the entire $127,257 was properly included in calculating the disallowance.

9. Contrary to what HCFA's argument implies, the issue regarding whether an entity is a health care provider is not whether the payment is "related to" any service that might be considered a health care service, but whether the entity is receiving payment for the service provided. The payment for inpatient or outpatient hospital services is made to the hospital, not to the nursing service agency. The payment to the nursing service agency is similar to the salary paid to a hospital employee. Under Chapter 23-17, the nursing service agency is licensed to supply nurses, nurses assistants to hospitals and other facilities, not to provide nursing services to the public and to receive payment from the public.

10. HCFA also argued in the alternative that each of the fees at issue is a health care related tax on the basis that it is related to the authority to provide a health care item or service. While HCFA appeared to acknowledge that a nursing home administrator (one type of individual on whom a licensing fee was imposed) is not a health care provider, HCFA noted that a nursing facility may not provide health care unless the administrator is licensed. Rhode Island did not dispute this assertion. Thus, the relationship of the nursing home administrator to the nursing facility is like that of the pharmacist to the pharmacy, where licensure of the individual employee is a prerequisite to the authority of the provider to provide the items or services.

11. Rhode Island misused this test to argue that, since none of the fees at issue (other than certain fees on users of radioactive materials) exceeded $1,000, including these fees in the disallowance does not advance any Medicaid interest and is not needed to protect the program. The waiver test, however, simply sets out circumstances in which a tax will be treated as a permissible tax. It does not mean that the tax would not be included in determining whether the limit on permissible taxes is exceeded.