Connecticut Department of Social Services

Date: 1999 April 16

The Connecticut Department of Social Services (Connecticut) appealed a determination of the Health Care Financing Administration (HCFA) disallowing $5,121,857 in federal financial participation (FFP) claimed by Connecticut under title XIX (Medicaid) of the Social Security Act (Act). HCFA had previously determined that Connecticut's collection of health care related taxes for state fiscal year (SFY) 1992 and SFY 1993 exceeded the limits for those years established under section 1903(w)(5)(A) of the Act and had disallowed a total of $55,793,027 in FFP. HCFA subsequently amended these determinations, disallowing an additional $5,121,857 in FFP. Connecticut had not appealed the previous disallowances, but appealed the disallowance of the additional amount.

Connecticut argued that HCFA's additional disallowance is based on an interpretation of section 1903(w)(5)(A) that is inconsistent with the language and purpose of the Act. Specifically, Connecticut argued that HCFA erred by failing to include Medicaid administrative costs in the amount multiplied by 25% to calculate the limit applicable to each year in question. Connecticut also argued that the fact that HCFA had originally calculated the limits by including administrative costs in the multiplication factor means that the additional disallowance was based on a policy change. According to Connecticut, HCFA's interpretation is entitled to less deference than usually accorded an agency interpretation because it has not been consistent and because HCFA has never provided a logical explanation for its interpretation, in light of the language and purpose of the statutory provision.

For the reasons stated below, we reject Connecticut's arguments and uphold the disallowance. We conclude that it is consistent with the language and purpose of the Act to interpret section 1903(w)(5)(A) to include only medical assistance costs (and not administrative costs) in the multiplication factor used to calculate the limit. We further conclude that this interpretation of section 1903(w)(5)(A) is entitled to deference because it has been consistently reflected in the Medicaid regulations promulgated by the Secretary. Moreover, Congress has never acted to override this interpretation. Accordingly, we uphold the additional disallowance.

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).

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 during the phase-in period as a precautionary measure so HCFA and Congress could observe whether the provisions of section 1903(w) would work as intended. Connecticut (CT) Exhibit (Ex.) 3, � 5; CT Ex. 5, 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).

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).⁽¹⁾

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 health care related taxes that are not permissible. 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).

The regulation does not conflict with the statute or its history

Connecticut argued that HCFA's regulation conflicts with the 1991 Amendments and their legislative history. According to Connecticut, HCFA should have used total Medicaid expenditures, including administrative expenditures, in calculating the limits.

The regulatory interpretation of paragraph 1903(w)(5)(A) was previously addressed by this Board 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. A (slip op.). Both the Board and the district court held that the regulation reasonably interprets 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 amounts expended under the State plan" is modified 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 different result. 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.

The Board subsequently considered the issue further in Rhode Island Dept. of Human Services, DAB No. 1682 (1999). In that decision, the Board rejected Rhode Island's argument that the regulatory interpretation conflicts with the Act because Congress intended the multiplication factor in paragraph 1903(w)(5)(A) to be the same as the denominator in the fraction used to calculate the "State base percentage" under paragraph 1903(w)(5)(B). The key reasons the Board rejected this argument were:

• The phrase "total amount expended under the State plan" is modified in paragraph 1903(w)(5)(A) by the phrase "as it would be determined under paragraph (1)(A)" but is not so modified in paragraph 1903(w)(5)(B).

• The calculation of the "State base percentage" differs from calculation of the limit because it is based on estimates from the best available data.
• Under the regulatory interpretation, both the 25% and the "State base percentage" are multiplied by the total amount expended as medical assistance. This makes sense because the resulting limit is used to determine whether there should be a reduction under paragraph 1903(w)(1)(A) in the amount of FFP that would otherwise be paid under paragraph 1903(a)(1) for medical assistance expenditures.
• The legislative history cited by Rhode Island, if anything, supports the regulatory interpretation of paragraph 1903(w)(5)(A).

Connecticut explained in its brief that significant parts of its arguments were adapted from Rhode Island's briefs. We reject those arguments for the reasons summarized above and explained in DAB No. 1682, at pages 5-8, and incorporate those reasons here by reference.

The regulatory interpretation should be applied here

Connecticut made several arguments framed slightly differently from those of Rhode Island. Connecticut argued that HCFA changed its policy, and, therefore, the regulatory interpretation of section 1903(w)(5)(A) is entitled to less deference than usually accorded to an agency interpretation. Connecticut pointed out that, when HCFA originally calculated the limits for Connecticut for SFYs 1992 and 1993, HCFA had included both medical assistance and administrative costs in the multiplication factor. Thus, Connecticut argued, the additional disallowance at issue here reflects a change in administrative policy. When HCFA responded that it had informed Connecticut of its interpretation well in advance of the additional disallowance, Connecticut did not dispute this. Connecticut instead clarified that, regardless of when HCFA changed its policy, Connecticut's point is that HCFA's interpretation is entitled to less deference because it has not been consistent. CT Br. at 13, citing New York City Health and Hospitals v. Perales, 954 F.2d 854, 858, 863-864 (2d Cir. 1992), cert. denied, 506 U.S. 972 (1992).

Connecticut also placed more emphasis on the purpose of the limit and argued that HCFA had never provided "any explanation as to why this interpretation makes sense in the context of the overall statute, the purposes it sought to achieve, or the circumstances of its enactment." CT Br. at 13. Connecticut argued that it is necessary for HCFA to "articulate a logical basis for [its] decisions, including a rational connection between the facts found and the choices made." CT Br. at 14, citing Skubel v. Fuoroli, 113 F.3d 330, 336; Motor Vehicle Mfrs. Ass'n of the United States, Inc. v. State Farm Mut. Auto Ins. Co., 463 U.S. 29, 43 (1983).

First, we note that 42 C.F.R. � 433.70(a)(1)(ii) has consistently provided for including only medical assistance expenditures in the multiplication factor used in calculating the limit on broad based health care related taxes during the phase-in period. The

interim final rule published on November 24, 1992 contained the same wording as the final rule published August 13, 1993. CT

Exs. 6, 8.

As Connecticut pointed out, the preamble to the interim final rule contained an example of how to calculate the transition period limit under 42 C.F.R. � 433.60 that included both medical assistance and administrative expenditures in the multiplication factor. The preamble to the final rule explained that this was an "inadvertent editorial error" through which administrative expenditures were mistakenly included in the multiplication factor rather than in the denominator used in determinating the "State base percentage". 58 Fed. Reg. 43,156, 43,169; CT Ex. 6. Moreover, a state could not reasonably rely on the example as reflecting HCFA policy since it conflicted with the plain wording of the regulation.⁽²⁾

The fact that HCFA regional officials originally used a calculation consistent with Connecticut's position and the preamble example does not mean that that calculation was based on official policy, which later changed. Indeed, even though we refer to the regulations as HCFA regulations, they were promulgated by the Secretary. HCFA regional officials would not have the authority to override the Secretary's regulation.

Connecticut acknowledged, moreover, that this Board is bound by applicable laws and regulations. See 45 C.F.R. � 16.14. Connecticut argued that, "when a regulation is contrary to the governing statute, the Board's obligation is to apply the statute." CT Br. at 15, citing Mohasco Corp. v. Silver, 447 U.S. 807, 825 (1982); Espinoza v. Farah Mfg. Co., 414 U.S. 86, 94-95 (1973). As we have previously explained, however, we see no conflict between the statute and regulations here.

With respect to Connecticut's argument regarding agency failure to articulate a basis for its interpretation, we note that HCFA has explained that its interpretation is based on the wording of paragraph 1903(w)(5)(A) of the Act, specifically, the reference to paragraph (1)(A) on calculating FFP in expenditures for medical assistance. Connecticut argued that this reference was meant merely to incorporate the reductions set out in paragraph (1)(A). The plain wording of the reference supports a different conclusion, however. The reference is to the "total amount expended under the State plan . . . as it would be determined pursuant to paragraph (1)(A) regardless of (1)(A)(iv)." If Congress had intended merely to incorporate the reductions listed in clauses (I)-(iii) of paragraph (1)(A), it could have simply referred to those specific reductions, rather than to the total amount "determined" under paragraph (1)(A).

Moreover, this Board, on behalf of the Secretary, has discussed in its decisions why the interpretation is consistent with the purpose of the limit. For example, we have previously noted reasons why it makes sense to use medical assistance expenditures for a limit on broad-based health care related taxes. Provider services are claimed as medical assistance expenditures under section 1905(a) of the Act, and revenues from such taxes in excess of the limit are used to reduce FFP in medical assistance expenditures.

Connecticut asserted that the purpose of "grandfathering in" states cannot be effectuated without recognizing how the 25% figure in paragraph 1903(w)(5)(A) was chosen. Connecticut relied on statements to Congress by the then HCFA Administrator about how many states would be affected by the 25% and would have a greater State base percentage. These statements are ambiguous, however, with respect to the key question here: 25% of what? Connecticut offered no proof that the statement was based on calculations using 25% of total expenditures for both medical assistance and administrative costs.

In addition, in discussing the purpose of the limit, Connecticut relates it to the transition period ending no later than July 1993 (depending on when a state legislature met), rather than to the phase-in period ending September 30, 1990. Even considering issues beyond the purpose of the limit on broad-based provider taxes in 1903(w)(5)(A) during the phase-in period, however, we would find statutory support for the regulatory interpretation, for the following reasons:

• The "grandfathering in" provisions during the transition period take the form of exceptions to use of impermissible taxes and donations to reduce the amount of medical assistance expenditures during a fiscal year under paragraph 1903(w)(1)(A). This would suggest that it was revenues related to medical assistance expenditures being grandfathered in. Indeed, the taxes and donations collected from providers and treated as impermissible were ones that HCFA had said should be used to reduce (offset) Medicaid payments made to the providers paying taxes or making donations to the state. Payments to providers are claimed by a state as medical assistance expenditures.
• Paragraph 1903(w)(1)(B) contains a separate 10% limit on use of certain donations from providers as the federal share of administrative costs.

While the State base percentage calculation uses both medical assistance and administrative costs and it is related to the concept of "grandfathering in" certain states during the transition period, we have previously pointed out that this provides no definitive evidence of congressional intent since the State base percentage is calculated using estimated figures, from the best available data.

Finally, there is a further basis, beyond deference to administrative construction of a complicated provision, to conclude that the Secretary's regulatory interpretation effectuates congressional intent. While the district court concluded in Kentucky that the regulatory interpretation was entitled to deference, part of that court's reasoning was that, if Congress had intended a different result, it could have overridden the regulatory interpretation. The court found this significant, noting that Senator Bentsen had made a statement to the effect that he planned to monitor the agency implementation of section 1903(w) and that Congress had spoken quite forcefully in the past when the Secretary acted contrary to its intent. HCFA Ex. A at 21. Congress has still not spoken in the nearly two years since the court's decision in Kentucky.

For the reasons stated above or incorporated by reference from our earlier decisions, we uphold the disallowance of the additional $5,121,857 in FFP, based on HCFA's determination of the extent to which Connecticut exceeded the limits on broad based health care related taxes during SFYs 1992 and 1993.

1. HCFA determined, and Connecticut did not deny, that the State base percentage applicable to Connecticut is not greater than 25%.

2. Connecticut did not argue that it had relied on the preamble example as HCFA's interpretation and somehow changed its position in reliance on that interpretation. Indeed, the record shows that, even calculating the limit as Connecticut said it should be calculated, Connecticut exceeded the limit by over $55 million over the two fiscal years at issue here.